August 16, 2016    6 minute read

Drop Shipping – An Unachievable Ideal?

Starting up in Startups    August 16, 2016    6 minute read

Drop Shipping – An Unachievable Ideal?

In the contracting and increasingly unpredictable UK economy, coupled with the creeping cost of higher education as well as a fiercely competitive job market, young entrepreneurs are increasingly diverging from traditional overcrowded post-graduate careers, in search of job stability, self-governance and financial rewards that start-up success stories often boast.

Entrepreneurs are wary that the UK’s turbulent post-Brexit economy may not foster suitable conditions necessary for prosperous start-ups, as well as the significant financial risk. However, young founders are still searching for that idealistic risk-free, low start-up cost, yet profitable business venture. Some have argued that this bold criterion of the visionary start-up could appear in the form of a drop shipping based online retail store.

So what is drop shipping?

Drop shipping is essentially an unorthodox retail fulfilment model that allows the retailer to sell stock that they do not physically hold. Instead of purchasing and gambling on the success of large quantities of inventory, retailers partner with various drop shipping suppliers. Retailers advertise the stock of a third party, usually a wholesaler, at a marked up retail price. Once a retailer makes an order, the wholesaler purchases the product at the wholesale price, then ships the product directly to the customer. The benefit being that the retailer never actually has to handle or process the product; additionally both the wholesaler and retailer achieve their maximum profit on each product.

What are the benefits of drop shipping?

There are clear advantages of operating a drop shipping system. In 2009, City University of Hong Kong, Kowloon, and University of Maryland, professors W. K. Chiang and Y. Feng published a study that concluded that the average online retailer using drop shipping could create 5.8% more profit than stock holding retailers. Other significant benefits of the drop shipping model include the relative non-existent start-up costs. Ecommerce stores can be set up without sacrificing thousands of pounds, whereas conventional retailers are required to spend large sums of capital on premises and inventory. Crucially, the drop shipping retailer model only requires expenditure when a customer has paid for their order, rendering it virtually void of risk. Furthermore, online retailers that stock via drop shipping can be run from almost anywhere in the world with an internet connection. Moreover, the internet is a seemingly endless market. This scale enables drop shippers to stock an extensive and diverse range of products without any added costs or risks that conventional retailers would face. Drop shipping retailers often surf trends such as The Olympic Games, TV series, Movies. This versatility allows profit maximisation without gambling on stock levels.

A plethora of advantages has made drop shipping a very lucrative and successful business model to a huge variety of retailers. However, for all its advantages, drop shipping is not a perfect business model. The lack of responsibility, ease and convenience come at a cost.

So drop shipping is perfect?

Unfortunately, despite the theoretical prowess of drop shipping, in reality, drop shipping is not without flaw. In spite of the sea of benefits, there is an unquestionable avalanche of practical disadvantages to drop shipping.

Low Profit Margins

Drop shipping is essentially the margin between manufacturing/wholesale price and retail price. Products such as high-end electronics and branded goods are only realistically capable of yielding a five to ten percent maximum profit. Because of this, retailers tend to rely on low-priced accessories that can be purchased from the manufacturer and sold for way over a hundred percent profit. Despite the high-profit margin, it is incalculably unlikely that retailers can sell enough volume to make notable sums of money.

A World Of Competition

As previously mentioned, the internet is a seemingly endless market. Thus there is an endless amount of competition, and quickly profitable products saturate the market. Thus retailers are forced to sacrifice their high-profit margins to attract consumers, sometimes selling at near wholesale value.

Lack Of Quality Or Brand Control

Unable to physically handle or physically process the product, drop shipping retailers are at the mercy of manufacturers and wholesalers. Online superstores such as AliExpress have become a favourite source for drop shippers, attracted by the low prices, despite the accompanying risk of low quality. Entrepreneurs are continually deceived by unreliable images, descriptions and weights of products. Despite their complete lack of involvement, the responsibility to the consumer ultimately lies with the retailer.

Availability

When sourcing from various warehouses, suppliers who are also supplying other merchants, stock levels fluctuate on a daily basis. Despite efforts to keep as in sync as possible, these efforts don’t seamlessly fit into place; retailers can occasionally expect to find products are out of stock after an order has already been placed.

Customer service And Shipping Issues

To drop ship profitably, the cheapest source must be located. Theses wholesalers and manufacturers traditionally ship from countries such as China, typically resulting in a month-long wait on deliveries. In this period, it is all too common for customers to request refunds. Furthermore, if a customer orders multiple products that are sourced from various wholesalers, the customer must pay individual shipping costs on each product, drastically increasing total costs and repelling cost driven consumers.

Procedural Difficulties

Retailers deal with multiple suppliers, due to the unorthodox nature of drop shipping, there are no a standardised procedures for anything such as order forms invoices, and billing. In reality, maintaining multiple drop ship suppliers from around the world prove to be slow, inefficient, costly and error prone. Without a universally automated management procedure, there is arguably no significant scope of growth for drop shipping retailers.

Crucially, in theory, drop shipping is not clear about the distinction between wholesalers and manufacturers. Despite the relative ease of negotiating agreements to supply with wholesalers, products drop shipped from wholesalers already have an inflated price, eating into already slim margins. Whereas products drop shipped from manufacturers are substantially cheaper. However, manufacturers traditionally trade in bulk, with guaranteed repeat customers, seldom drop shipping for retailers.

Is drop shipping worth it?

As explained, drop shipping is by no means an easy way to build a successful start-up. There are many favourable advantages. However, these advantages come with various intricacies that must be carefully negotiated. Websites such as Dropship.com and Shopify as well as applications, such as Magento and oberlo, simplify drop shipping by automating pivotal procedures such as order processing and billing. Despite the cost, the automation and structure these applications provide are invaluable. Contrary to common opinion, specialisation in a niche market could prove to be the key to a profitable start-up. By reducing their focus, first-time entrepreneurs can narrow the target market, reducing advertising and marketing costs. Specialisation enables entrepreneurs to learn the basics, before diversifying. In totality, drop shipping is the perfect model for students or first-time entrepreneurs to develop their understanding of eCommerce, in an ever digitising global economy.

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