Drop shipping: what is it and should you use it?

Want to cut out the middleman and set up a streamlined online store? Drop shipping may be the way to go.

Drop shipping is a form of fulfilment where you don't actually keep any products in stock, and instead organise for products to go straight from the manufacturer or wholesaler to the customer.

At StarTrack, customers who routinely drop ship their orders include Wayfair, Ozsale and Catch of the Day. Then there are thousands upon thousands of eBay stores who rely on drop shipping to get products from overseas manufacturers to consumers.

It's a great option if your online business is in its initial growth phase and lacks the capital to invest in inventory and/or warehouse space. It works for established businesses too ... particularly if you sell larger items and the cost of shipping to a consolidation warehouse is prohibitive, or your manufacturer has holding locations close to your end customers.

How drop shipping works

Essentially, it's a five-step process:

  1. Customer places order on retail website
  2. Order is sent to wholesaler along with payment information
  3. Wholesaler packages up the order and ships it to the customer, with the retailer's contact details and branding on the delivery docket
  4. Customer receives the order
  5. If needed, the retailer handles further enquiries or returns

This standard definition of drop shipping is a different model to store-to-door shipping (where the retailer dispatches products direct from a bricks and mortar store to a consumer) and zone skipping (where products are lodged in the state of delivery either from an Australian warehouse or an overseas source).

If you use the drop shipping model, you're still in charge of creating and maintaining an eCommerce website – and everything that comes with it, including marketing, sales and customer service. The big difference is that you don't stock any inventory, and thus don't worry about logistics and freight.

Advantages of drop shipping

Set up shop without much capital

Can bypass set-up costs like buying inventory and leasing warehouse space. That said, you'll still need enough startup capital to create a winning website; and you'll need the time to research reputable suppliers and negotiate drop shipping logistics. Also, be aware some suppliers ask for an initial pre-order.

No supply chain headaches

Once you've established a relationship with a drop shipper, you don't need to worry about warehousing, order fulfilment or freight – unless you need to negotiate new shipping rates or are dissatisfied with the drop shipper's service levels. Instead, when it comes to supply chain, you need to think about things like integration of your eCommerce system with the drop shipper's warehouse management system, and the creation of a customer-friendly returns policy.

Easy to grow

Drop shipping gives you more agility. Instead of having much of your capital tied up in warehousing, logistics and freight, you can re-invest profits into growing your business, testing new products, and reaching more consumers.

Buying power

If you establish an ongoing relationship with your manufacturer, you may be able to negotiate a volume seller discount on the cost of items and the cost of shipping – which could have a significant positive impact on your profit margin. Remember that drop shippers add a small mark-up to inventory to cover the costs of holding it in their warehouses for you, so any discounts you can negotiate are sure to help the bottom line.

What you need to know

Lesson #1: Do your research

If there's one big lesson for online retailers that want to go down the drop shipping path, it's to do your research. Think carefully about what products will sell, and shop around to see if your niche has much competition. Then, take your time in finding a reputable, trustworthy supplier that will become a solid partner in your business.

Lesson #2: How do you handle returns?

No-one else can handle shipping, delivery and customer service better than you. You're putting your faith in another company to distribute goods to your customer, and relying on their freight services. This may include the crucial last mile. At the very least, establish a clear returns policy and build the cost of this policy into your business plan

Lesson #3: Know that it's a tough market

You're up against many other online sellers, and to remain competitive you need to keep your prices down. Because of this, margins are usually low and you need to either find a niche product or invest a lot of time to make it work. With this in mind, look at ways you can save – through things like eCommerce integration and automation of the systems that 'talk' to the drop shipper.

Lesson #4: You can't rely on a single supplier

Unless you're very lucky, you'll need multiple suppliers offering a range of products in your niche area. Selling fishing gear? The rods may come from Acme Rods, while the sinkers may come from Acme Metal. If a customer places an order for a rod and sinkers, you can't really charge them twice for shipping, can you? While on the subject of suppliers, make sure the suppliers you work with can provide an inventory or data feed so you always know how much stock they are carrying.

Read Shopify's Ulitmate Guide to Drop Shipping