The Pros & Profits of Running an Online Drop Shipping Business

The biggest challenge of running any retail business is inventory management. Whether an online store or brick-and-mortar, problems with inventory management can drive any business owner crazy – but there is a way around the challenge of buying, storing and managing inventory.

Online drop shipping provides an opportunity to take a share of the eCommerce market pie without taking on the burden of inventory management. A drop shipping business allows you to enjoy all the benefits of running an eCommerce store without the need to manage inventory, shipping or last mile delivery.

Unraveling the Mystery of Online Drop Shipping

Here is a quick walk-through of how drop shipping works. You, as an e-retailer, must partner with a wholesaler or a distributor of products. All of the front-end tasks – setting up your eCommerce website, nurturing leads and acquiring customers – are done on your end.

In drop shipping, the manufacturer or distributor pitches in when it is time for order fulfillment. They are responsible for packing, shipping and ensuring delivery of the goods to the customer’s doorstep. At no point in time do you physically handle the product as an e-retailer. In other words, you are an intermediary between the manufacturer and the end consumer. You have to pay a handling fee to the drop shipping manufacturer/wholesaler to help you deliver the package at the customer location. This is over and above the wholesale price of the products that you are purchasing.

As for the payment, the customer pays you for the product. In turn, you pay the drop shipping supplier the agreed upon amount as handling charges or drop shipping fees. In short, drop shipping is a supply chain management method which doesn’t require stocking or owning the inventory.

How profitable is drop shipping?

It is difficult to measure the profitability of drop shipping with an exact amount or percentage. But, there are several intangible benefits that you can attain from drop shopping, including:

  • Quick launch
  • Cost and time savings
  • Greater retail agility
Quick Launch

Drop shipping, as a business model, has limited entry barriers compared to other business models or start-up ideas. It can be quickly launched on a shoestring budget and requires only a few basics to get started:

  • An eCommerce website on any choice of platform
  • A dedicated domain name and hosting for it
  • Digital marketing and automation tools
  • Drop shipping partnerships with manufacturers, wholesalers, retailers and/or distributors

A basic knowledge about taxation, web designing and business management would also help you go a long way in becoming an efficient drop shipper.

Cost and Time Savings

Building an eCommerce website can cost $10,000 and upwards. There are also additional costs you will have to incur to set up a complete eCommerce store and run it successfully – staff salaries, warehouse rent and freight charges to name a few. With drop shipping, some of these costs are eliminated. You’ll still have to invest in essentials like an online website where you can nurture leads and collect orders, an inventory management system and a platform to communicate/ collaborate with drop shipping suppliers, but you can work from a home office and earn an RoI that is higher than running an online store.

Drop shipping largely requires the administration and front-end work of securing orders and communicating them to the manufacturer/distributor. The entire pick-pack-ship responsibility lies with the distributor. This arrangement saves time and effort which is probably one reason why more than 27% of retailers have added drop shipping to their operations mix.

Greater Retail Agility

The U.S. retail industry takes a hit of $50 billion annually due to dead inventory pile up. As a drop shipper, however, you only sell what is physically available which eliminates the possibility of dead stock piling up. Cloud-based inventory management systems provide a real-time picture of stock levels which help in configuring the product display in your ecommerce store and you have the freedom to easily switch the kinds of products you want to drop ship from time to time.

Summary

If done right, drop shipping not only provides handsome profits, but also several other benefits that a traditional ecommerce business may not provide – stress-free working, retail agility, and time and cost-savings, to name a few.

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