Drop shipping is a fulfillment model wherein online retailers market products and take orders from shoppers, but third-party suppliers (drop shippers), which are often product distributors or brokers, fulfill those orders. The retailer does not inventory, handle, or ship any of the drop-shipped products.
There are a number of reasons to try drop shipping. In fact, I addressed some of these in 2011, in “5 Reasons to Consider Drop Shipping.” The list below augments the earlier one.
1. Low Overhead Costs
When an online retailer employs drop shipping, overhead expenses can be very low.
There is no need to warehouse products. The business doesn’t need to carry inventory. For a very small ecommerce operation, this might mean that you won’t have to stack boxes in a storage unit or your garage. A mid-sized or larger ecommerce business might save thousands of dollars a month in warehouse lease payments and utility bills.
A drop-shipping retailer may also avoid labor expenses since there is no need to employ folks to pick, pack, and ship orders. There is also no need to purchase packing materials.
It is not unrealistic to run a small, successful ecommerce drop shipping business for a few hundred dollars a month in overhead.
2. Scale Quickly
Drop shipping suppliers, the companies that actually have the products and have promised to fulfill orders on the ecommerce retailer’s behalf, should have plenty of inventory.
Inventory is one of the primary benefits these sorts of companies offer. So when a retailer enjoys a spike in demand, drop shipping should make it possible to scale quickly.
For example, when Amazon Studios released the film Elvis & Nixon in 2016, there was increased interest in the historical meeting between the King of Rock and Roll and the then president of the United States.
This in turn, may have generated increased sales for a Nixon and Elvis t-shirts. If a t-shirt retailer had only a small quantity of the shirts on hand, that retailer may have sold out and missed an opportunity. But, if the shirts were print-on-demand from a drop-shipping provider, the retailer could satisfy every order.
3. Increase Customer Lifetime Value
Drop shipping may help some ecommerce retail businesses increase or improve average customer lifetime value.
Getting new customers is among the most difficult and most expensive ecommerce marketing activity. Once a retailer has a customer, it makes sense to try to sell to that customer repeatedly.
But if an online store only carries a handful of products, it may be difficult to make second or third sales, especially if the products sold are not consumables. This is where drop shipping can help.
With drop shipping, it is possible to carry a very broad range of products. In turn, these additional products give an online store more items to market to existing customers — think email marketing — which in turn may mean that more customers will return for a second or third purchase. When this happens, the store has effectively boosted customer lifetime value with its wider product offering.
4. Little Financial Risk
Because drop shipping often comes with low overhead and low start-up costs, it can be very low risk.
In fact, it is possible to create a relationship with a drop shipping service, pay for a software-as-a-service ecommerce platform, and do some basic pay-per-click marketing for less than $500 a month.
As small businesses go, drop-shipping-powered ecommerce is pretty low risk.
5. Work from Anywhere
When a drop shipper handles inventory and order fulfillment, a retailer is not tied to any location. A small ecommerce business can be based anywhere.
If you’ve read Tim Ferriss’ The 4-Hour Workweek, you may recognize that an ecommerce drop shipping business can be the business that you start and run in relatively few hours a week from wherever you happen to be.
The First 5 Reasons
As mentioned at the beginning, this list of reasons to consider drop shipping is a follow-up to an earlier article, which also offered five good reasons to consider drop shipping for your ecommerce business.
These first five reasons were as follows.
- Broad product offering. Drop shipping allows merchants to offer many more products for sale than what might be feasible if that merchant had to inventory everything.
- Come to market more quickly. With a drop shipping business, you can be up and selling in hours, not weeks.
- Explore new lines. Drop shipping gives merchants a way to test new products without having to purchase inventory.
- Reduce your investment. With drop shipping, you do not need to invest in inventory up front.
- Saves time. In a drop shipping arrangement, the retailer does not receive, stack, store, pull, pack, or ship products. All of these tasks are time consuming, which means drop shipping saves time.