Ecommerce

Can you sell
online without
keeping an
inventory?

Drop shipping is a fairly common practice in the world of e-commerce. Like any other business model, drop shipping certainly comes with its own share of advantages and disadvantages.

This article was revised and updated in October 2019 to reflect current tastes.

Unlike a traditional distributor, merchants who base their business on drop shipping do not actually stock or deliver the products they offer. They rely on a supplier that takes care of packaging and shipping their customers' orders.

To help you determine if drop shipping is a business model that suits your ambitions, this article touches on its broad outlines, covering both the positive and negative aspects.

Advantages

Minimize financial risks

Drop shipping is a very interesting model for those who are looking for an easy project to start and who want to minimize the financial risks or who don't have a lot of money to invest.

By leaving the responsibility for keeping an inventory to a third party, you avoid having to spend in advance to purchase a reserve of merchandise. What's more, you don't have to worry about potential unsold stock and you are freed from the responsibility of maintaining a warehouse and employing people for shipping and handling. This allows you to offer a wider variety of products. If your suppliers sell products in demand, you can display them on your website with no additional risk for you.

Easier to manage

In terms of daily operations, in general it's easier to manage a business based on drop shipping than a classic store. Since entrepreneurs who rely on a drop shipping model don't really have to worry about logistics, they can invest most of their time and money in customer service and marketing.

Work from anywhere

Also, since the business is not linked to a specific physical location, entrepreneurs can manage their business from anywhere, as long as they have a way to stay in contact with their suppliers and customers. Therefore, this is an ideal business model for someone who wants to move about at their will or who travels a lot.

Disadvantages

Profit margins can be thin

Obviously drop shipping has its disadvantages as well, the primary one being that the profit margins are generally rather low. This is explained by the fact that the unit price suppliers offer to drop shipping stores is higher than the price offered to distributors who purchase large quantities at a time.

Competition can be rough

Also, given that it is relatively easy to set up an online store, a large number of drop shipping stores often do business with a same supplier and offer exactly the same products. This leads to a particularly ferocious competitive environment that has the potential to cut into an already thin profit margin.

Little control over operations

Next, leaving the responsibility for keeping an inventory and sending orders with the supplier does have its advantages, but it also means that retailers have very little control over crucial aspects of their business. When the supplier makes a mistake or fails to manage their inventory, it is the merchant's reputation that is affected.

How to go about it

It takes two things to sell online through drop shipping:

Finding a good supplier is probably the biggest step. It is essential to carefully analyze the options before making a choice, since the Internet abounds with ill-intentioned people who pretend to be suppliers in order to rip off emerging retailers. Recognizing these scammers is an art in itself, but there are a few tricks for unmasking them:

• If you want to sell a specific product, it may be a good idea to check with the manufacturer if the supplier is authorized to sell the product concerned.
• No honest supplier should charge monthly fees to have the privilege of doing business with it. However, it is normal to charge drop shipping fees to compensate for the time spent packaging and shipping orders.

In terms of setting up an online store, there are several viable approaches. To have maximum control over the store's image and the customer experience, the best thing is to have a customized website. To do this, you can work with an integration team and build everything from scratch, or adopt a solution that offers a basic template that can subsequently be customized. However, all of these options obviously involve loosening your purse strings.

By making a few compromises, you can get a web storefront for free or at little cost. For example, you can open a free account on Amazon and use it for drop shipping sales.

Is it worth the money?

Selling by drop shipping can certainly be beneficial, particularly for entrepreneurs who don’t want to invest all their savings to start up a business or who want to focus their efforts on implementing a solid marketing strategy rather than taking care of the logistical details. However, the small profit margins and competitive environment mean that it will probably take some time before the business becomes really profitable.