Drop Shipping - Benefits and Risks

If you are looking to start an e-commerce business, finding a reliable drop shipping companies would be your primary concern. In order to find the right company, we should understand the this process and the risks it may involve. In this article, you will get to know the basics of it as it is very important for any e-commerce business along with the benefits and risks involved in it. This way you will not only understand this process but will be able to maximize the benefits involved in it and minimized the risks.

It is a process in which retailer's transfers customer orders and shipment details to either the wholesaler or a drop shipping company, who then ships the good directly to the customer. Retailers do not keep goods in stock and the difference between the retail price and wholesale price is a profit for retailers. However in some cases retailers earn an agreed percentage of sales in commission, paid by the wholesaler.

Some retailers provide only a catalog or a website of their customers to inspect an item similar to those that they can purchase. However in some cases retailers may keep display items to display in store to give the customer a confidence about the product they would be buying. In order to hide this fact that the product is delivered via wholesaler and to keep the wholesale source secret, some retailers that drop ship merchandise use "private label shipping" or "blind shipping"

Now let's talk about some benefits and risks involved in it:

Benefits:

As there would be only one warehouse pick, pack and ship the product, it eliminates some duplication of efforts. This approach can minimize the total shipping and inventory management cost which subsequently reduces the price to the customer.

It also helps to eliminate the upfront inventory and a positive cash flow cycle. Now you must be wondering how a positive cash flow cycle can occur here. It can take place as the seller is paid when the purchase is made using a credit card or credit terms and there is a time frame in which the seller has the customer's money but has not yet paid the drop shipping company to deliver the goods.

Risks:

As there are some benefits, some risks are involved in drop shipping too. For instance, it has featured prominently in home based business scams or internet-based scams. They normally promote it as a lucrative work from home opportunity, easy money-making opportunity or making money online opportunity to sell a directory of businesses from which they can order drop shipping products to be delivered to the customers. In most cases, these businesses are not wholesalers but middlemen between retailers and wholesalers, with no product of their own to sell. These middle men often charge higher prices that leave low profit for retailers

Back-ordering is another big risk involved in drop shipping business. It may take place when a product is sold out and seller places a shipment demand with a wholesaler. Back ordering may come with a long wait to deliver a product as wholesalers wait for new products to be manufactured or to get it into a stock, which may leave unsatisfied customers for retailers. It is the business owner's job to be aware of the quantities that the wholesalers has available but reputed wholesaler always keep retailers updated about the inventory.

If you will keep the above mentioned points in your mind, you will be able to find a reliable drop shipping company for your e-commerce business.