If you are an internet retailer looking to expand your offers without any additional outlay for inventory, you really should examine the drop shipping business model as a means to do this. The drop shipping business model is one where an entity (generally the manufacturer or wholesaler) makes a decision to allow retailers to order in quantities of as little as one item at a time – and further allows the retailer to specific a shipping address for each order . For the retailer, this means you can offer the entire line of products of one or more manufacturers / wholesalers without ever investing a penny in additional inventory. So instead of being able to offer just a few "best selling" items, you can now offer many more items. It no longer becomes important if an item sells really well or just occasionally as its cost to you now is just a slow on your web store. There are no holding costs like when you inventory items.
Let's take a look at what the drop shipping business model is and how it works.
The easiest way to think about a drop ship business model is to think about your own retail web based or mail order business. In many ways they work the same. An order with payment comes in, is processed and then shipped to the purchaser. In both your environment environment and in the drop ship environment, the person receiving the package is your customer. The only difference to the customer is that in the one instance, the product is shipped directly from your location and in the other instance, the product is shipped from another location.
Here is how a drop ship program works mechanically.
- You develop a relationship with a drop ship company and integrate their offerings into your product catalog.
- You receive an order from your customer.
- You then log onto your account at the drop ship company and place the order with them – supplying your customer's address as the shipping address for the item.
- The drop ship company then packs and ships the item and updates their order system to show you when the package was shipped.
That really is the whole process. Your total time investment to work with the drop ship company is taking the time to enter orders into their order processing system. You do not get involved in any packing or shipping.
Elements of a good drop ship program
Drop ship companies vary broadly in what they offer and how they operate their business. Things you want to find in a drop ship company include the following:
- You want to find a company that always has their inventory in stock. There is nothing more frustrating to your customer than to place an order for something only to be told it is back ordered for three weeks. If the drop ship company does not maintain a current inventory of all its offers all the time, you want to be sure they have a real time updated inventory list and that your catalog can be integrated with this inventory list to mark the proper status of each item.
- You want a company that ships fast. You do not want your customers waiting forever for their items so be sure that the drop ship company ships all orders quickly. As a corollary, you want to get your orders to them quickly so that there is no additional delay in shipping because you took a few days to inform them of an order.
- You want to be sure the drop ship company guarantees delivery of the order. If a customer contacts you to report the order was never delivered, you want to be certain another one gets shipped to them at no charge to you or the customer. It may be that the drop ship company will require you to pay an insurance fee for this guarantee or it may be that they do not. In either case, be sure you have a 100% delivery guarantee promise from them.
- You want to be sure that the company offers an easy to use order placement and status verification system. You should be able to go online to place your orders and verify when they have been shipped.
- You want to be sure that the company does not include any of their own literature / catalogs with the order and that they do not maintain a mailing list of your customers. You work hard for your customers and you should benefit from the expense of acquiring those customers.
- You want to make sure the pricing structure allows you to profit. Many drop ship companies will offer you discounts that are almost as good as their wholesale rates and some will even match their tier one wholesale rates.
So is the drop ship business model the right way for you to expand your business?
There are many factors to examine when deciding if a drop ship business model is right for your retail business. Many of them have been discussed in the bullet points above but there are two other factors to examine in making this decision.
- Is this degree of separation between you and your customers OK? When you ship directly to your customers, you have the opportunity to include inserts with the order – catalogs, sale notices, etc. You will generally lose this ability when drop shipping.
- Does the fee structure work for you? When you ship via this method, you will pay shipping charges and in some instances a per item / order drop ship fee. What you need to examine is if the profit structure is sufficient for you once you subtract out the total cost of the order – including payments to the company and any fees – like credit card processing fees – that you incur. Also, you need to consider that if you carry products from multiple companies, you will be paying shipping charges to multiple companies if a customer orders products that must be fulfilled from multiple places. This also will affect your profit per order.
By examining all the elements above, you will be able to decide if the drop ship business model is right for your retail operation. As long as you take the time to find and work with reputable companies, it is a great way to add to your product catalog and bottom line profit with no risk on your part. If you are thinking of expanding your business operations this year, you should give this model a serious look before you invest thousands in inventory that you need to store and sit on until it moves.