By: Catherine Perry
If you’re interested in starting an ecommerce business, you need to know about drop shipping. You may be asking yourself, “What is Drop Shipping?”. Well, drop shipping happens when your online store provides a product and doesn’t actually warehouse the inventory and ship it yourself. Instead, you use a third-party vendor for the order fulfillment.
With drop shipping, a customer purchases the product from you and then you, in turn, order it from the drop ship vendor and they ship the product directly to the customer. Because it is efficient and profitable, drop shipping is a great business model for small ecommerce businesses.
Here is a scenario as an example. In this example, you have an ecommerce business that sells mirrors. Let’s say your business is new and you don’t have years of sales history as a basis for estimating how much product inventory to keep on stock. If you get an order for 10 of a particular mirror and you only have 5 in stock, then you have to let your customer know that 5 mirrors are on back order. Then, you order the additional 5 mirrors from the manufacturer and you have to keep up with when the mirrors are coming in to you. Once you receive the mirrors, then you ship them. This takes a lot of time and, as we know, time is money! After a while, you find yourself very busy with the warehousing and shipping aspect of your business.
Now, let’s consider how this scenario works with a drop ship model. You don’t need to be concerned about stocking the mirrors yourself because your vendor is responsible for having the product and shipping to your customer. When you receive the order for the 10 mirrors from the customer, then you order from the vendor. The vendor, in turn, ships them directly to your customer. Your time is spent doing other things–like working on your sales and getting more customers!
The elimination of keeping inventory has many benefits. Here are five benefits of the drop shipping model that we think you should consider when starting an ecommerce business.
Benefit #1: Minimal Initial Investment and Risk
When you use the drop ship method you have minimal initial investment and risk because you don’t have to warehouse inventory. The third-party vendor manages that aspect of the supply chain. You don’t spend the money or bear the risk of actually holding inventory and you don’t have to invest in the space required for storing inventory. Do drop ship vendors charge a fee for shipping their products to your customers? Yes, most do, but is is minimal compared to caring bulky and expensive inventory. When choosing to work with drop ship vendors this greatly reduces the overhead costs of starting and running an ecommerce business. Overhead costs for running a small, successful ecommerce business using drop shipping can be just a few hundred dollars a month.
Benefit #2: Positive Cash Flow
The drop ship business model gives you a positive cash flow cycle from the start because you are paid directly by the customers when they order. A customer pays you when he/she purchases a product from your website so you have immediate payment. Then, when you order from the vendor, you pay them the wholesale amount. The result is positive cash flow for you!
Related Article: 5 Benefits of Owning a Home-Based Internet Business
Benefit #3: Good Margins and Positive Profit
You mark up the wholesale prices from the vendor when you price your products, which results in the ability to have good margins and positive profit. There are many different ways to arrive at your markup, and you should definitely do your research on this, but average margins on drop ship products can be 25-50%. If you price the items right and have the shipping costs covered, then you have profit.
Benefit #4: Increased Ability to Scale
Your relationship with third-party drop ship vendors means you have the benefit of their inventory levels. If you have an unanticipated increased demand of a product, then you can handle it quickly through drop shipping as you have an increased ability to scale. Your vendor, who is supplying the product for you, has promised to fulfill orders on your behalf and should have plenty of products in inventory.
Benefit #5: Work from Anywhere
With a drop ship ecommerce business, you can work from anywhere because you aren’t tied to stocking and shipping inventory yourself. By relying on the vendor to hold inventory and fulfill the orders, you can base your ecommerce business at any location. Because of this, you can feel the freedom of running your business from wherever you happen to be!
RELATED ARTICLE: Owning an Internet Business Allows You to Work from Anywhere
Hopefully, we have shown you that the drop ship business model provides you with some great benefits for an ecommerce business. Here at Pure-Ecommerce, we use drop ship vendors for all of the ready-made and custom websites we offer. Please download our FREE Drop Shipping eBook to learn more about this exciting way of working!