Things To Consider When Considering Drop Shipping

For many new entrepreneurs just breaking into the online retail business

, drop shipping sounds like the perfect solution with potential to create instant millionaires. But, like all supply-chain management models, things are not all roses. Here are a few things to consider when considering drop shipping.

What Is Drop Shipping?

Before we get started, a quick definition of what, exactly, drop shipping is should be discussed. In essence, it's a product-supply method that involves the retailer not pre-ordering any products, but rather simply forwards customer orders to the wholesale supplier who then ships the order directly to the retail customer.

Advantages

The obvious advantage is that you -- the retailer -- don't spend any money until you've actually received an order and have been paid yourself. The reduction in risk is a primary advantage because you never have to worry about dealing with unsold inventory nor the cost of warehousing products.

Another great advantage is that you can offer virtually any product you want, whether it's a hot seller or not. If you only sell 20 of a particular item per month, it might not be worth it to you to carry it in bulk. But with drop shipping you can still grab those customers -- few as they may, and who could become repeat customers -- if you're able to offer that one rare item that nobody else does.

Considering that many of the Web's largest online retailers use this model to fulfill a majority of orders, it may seem like there is no reason to not use it. So what is there to consider?

Cost of Goods Sold

Wholesalers typically offer discounts for bulk purchases. The more you buy, the greater the discount. But when you drop ship, you are placing smaller individual orders which must all be packaged separately and shipped out to different locations. This increases the cost of doing business for the wholesale supplier, which then gets pushed on to you in the form of a higher cost per item.

Loss of Inventory Control

Whether you have an item available for purchase or not is now fully dependent on your supplier's inventory. If they are out of stock on an item, you can't ship out any orders.

So drop shipping has obvious advantages and disadvantages. It's not for everybody, not anymore than bulk purchasing and warehousing is for everybody. Consider the pros and the cons of any particular supply-chain management technique before diving in blind.

by: Stu Wiseman

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