Leaders in the e-commerce world are praised for their innovative ideas, bold entry into new markets, and sharp vision into the future of their industries. However, just because a business has the foresight to capitalize on trends, doesn’t mean it can predict which ones will translate into sales. The most successful web-based businesses carefully plan their strategies to minimize risk, maximize profits, and protect against pitfalls.
One of the most important decisions online retailers face is whether to maintain inventory onsite, or operate with a drop-shipping model, outsourcing inventory management—and the risks that come with it. In this blog, we’ll compare the benefits and drawbacks of drop shipping vs. maintaining inventory. We will also look at ways to protect against the risks that come with each strategy.
What is drop shipping?
Drop shipping is a method of commerce that allows retailers to sell goods to customers, even if they don’t stock those items themselves. Instead of purchasing products from manufacturers or wholesalers and then selling them to customers, companies that employ drop shipping reverse the process. They market products online under their company’s brand or store name, and take orders from customers first. Then, they buy products from a supplier and arrange to have them shipped directly from the manufacturer to the end-user.
Drop shipping has become a popular business model because it carries less risk than warehousing items, and allows retailers to run on much lower overhead compared to maintaining inventory. Here are some of the benefits and drawbacks of drop shipping.
Benefits of Drop Shipping
Lower Startup Costs & OverheadSince you don’t have to pay for space to stock the items you sell, you’ll pay less to start and run a drop shipping-based business.
Lower RiskIf you buy hundreds of bikinis and they don’t sell before the end of the summer, you’ll be faced with an expensive problem. But if you only advertised the swimsuits online and never stocked them, it will only cost you a few clicks to remove them from your shelves, and restock for fall.
More FlexibilityIf your storefront is only a virtual one, it’s much easier to work from home, set your own hours, and go on a vacation. Drop shipping gives you the flexibility to run your business on your terms.
Cons of Drop Shipping
Slower Order TimesSince you will not ship orders directly, you won’t have as much control over shipping times. This may result in slower arrival of shipments to your customers.
Slower Customer ResponseWhile you do have control over how quickly you respond to customer requests, you may not be able to answer their questions about shipping or manufacturing right away. Customers will have to wait for you to get answers from your supplier, which may take some time.
Lower Customer SatisfactionIf the above factors aren’t carefully managed, you could experience lower customer satisfaction rates. Clear communication and attention to customer concerns can go a long way toward avoiding and resolving satisfaction issues.
Out-of-Stock ItemsThe only thing more frustrating than stocking an item that does not sell, is not stocking an item that does sell. Companies who drop ship orders to customers may experience problems with supply, such as out-of-stock or backordered items. Traditional retailers know what they have in stock and what they do not, but with the drop-shipping model, there is some risk that a supplier may suddenly run out of an item, after you have already sold it.
Limited Product SelectionSome manufacturers won’t agree to drop ship your product, and will only sell to distributors, limiting your available inventory. However, there are plenty of companies who will be more than willing to accommodate your drop-shipping request.
Higher Prices from SuppliersRetailers who stock items in their stores and warehouses pay less to acquire them, because they have established relationships with manufacturers. Companies who employ drop shipping won’t have access to the special deals and discounts reserved for distributors.
High CompetitionBecause of the low cost of entry and overhead, and the other benefits mentioned above, drop shipping has become attractive to retailers, and many individuals and companies are entering the playing field. This means customers can easily shop around online, making the market very competitive.
Lower MarginsBecause of high competition, companies that use drop shipping are constantly pressured to lower prices, which can mean very tight margins for profitability.
Lower Confidence from InvestorsWhile drop shipping can result in low startup costs, it may also reduce the amount investors may be willing to pay. If they see that your company is dependent on a third party for stocking and shipping, they may shy away from making large investments.
Drop Shipping vs. Maintaining Inventory
Now that we’ve learned the benefits and drawbacks of drop shipping, let’s compare them to the standard industry model of maintaining inventory.