What is drop shipping and how does it work?

Are you looking to start a business in the UK and are looking at drop shipping? You have come to the right place, in this guide, we explain all you need to know about drop shipping so that you can make sure that you are making an informed decision.

Drop shipping explained

To give a summary, dropshipping is when a company does not keep on its premises the stock that it sells. Instead, when a company sells its stock, it directly purchases these items from a third party, and these products are then delivered directly to the customer who has bought them. This means that at any point during the process, the company sees or handles the product.

Wondering how this is different from the standard retail model? The fundamental difference is that the seller does not own an inventory or hold the stock. Rather, in the case of drop shipping, the merchant will buy the inventory from a third party company (typically a manufacturer or a wholesaler) as and when needed, in order to fulfil orders that have been made.

What are the benefits of dropshipping?

As with starting any business, there are both benefits and disadvantages when choosing it, and this will also depend on what you are expecting to get out of a business model, as well as other individual factors. First of all, let’s take a look at the main advantages of the dropshipping model.

Less need for capital: for many business owners, or those looking to start a company, one of the clearest advantages regarding dropshipping is that you are able to launch an e-commerce store without a high amount of investment. For example, with other types of business models out there, you would need to invest a considerable amount of money in an inventory up front before you would even be able to get the business off the ground. Typically, before the days of drop-shipping, the average retailer would have had to have high amounts of capital purchasing inventory.

However, with dropshipping, there is no need to buy the product, unless you have already received a sale from a customer and have received payment from them. Consequently, many people like the idea of dropshipping given the fact major up-front investment isn’t needed, meaning you can create a successful company with relatively little money involved.

Easy to start: another important factor that makes drop-shipping worthwhile for many entrepreneurs is that running an e-commerce business is considerably easier when you do not have to stress out and deal directly with physical products. For example, things you will not need to worry about include the following:

  • Having to manage stock levels
  • Having to continuously order more products
  • Handling inbound shipments
  • Handling returns of products
  • Packing your orders
  • Shipping your orders
  • Having to consider warehouse management
  • Having to pay for a warehouse

Low overhead costs: you will find also that if you run a drop-shipping company, another huge benefit is having generally low overhead costs involved, as you will not have to take into consideration purchasing inventory or deal with warehouse management. In many cases, successful dropshipping startups can be run from home, and cost a lot less to run than other business models.

Flexibility: drop shipping also provides a lot of flexibility. This is because this type of business can be run from pretty much anywhere, meaning that the business is not location dependent. All you really need is an internet connection, and to be able to get in contact with suppliers and customers whenever you need to.

Easy to scale: generally speaking, if you are working within a normal business model, it works by a ratio similar to this: if you receive three times as much company demand, you will then have to do three times the amount of work.

planning
With dropshipping, one of the fantastic things about it is the fact you do not have to worry about planning warehouse management.

However, you can leverage suppliers with dropshipping, meaning that in a lot of cases any additional orders will be the responsibility of the suppliers themselves. This allows you to avoid having to deal with incremental work and focus on other more important aspects of your company.

What are the drawbacks of dropshipping?

Of course, no business models is without some disadvantages, which are worth taking into consideration.

Potential inventory issues: when you keep stock of all the items that you own, it is easier to keep track of what items are currently in or out of stock. Not so easy with drop shipping, as you will be sourcing from multiple warehouses, who will also be sourcing products for other merchants too. That means inventory management does not always work in a seamless way.

Lower margins: another drawback for some entrepreneurs is that there are low margins, due to the highly competitive nature of dropshipping. This is in part due to one of its biggest advantages: that it is super easy to set up, and anyone can do it, which is also a negative for dropshipping too. What can often happen is that a number of merchants will create an online store selling products at extremely low prices, all with the aim of increasing revenue. People can afford to operate on very small margins as they have not had to worry about high start-up costs, to begin with.

Potential supplier errors: inevitably, mistakes happen along the way, and so you will find that if you run a drop-shipping firm, that suppliers end up making a mistake with products at some point. Low-quality suppliers, missing items or botched shipments could end up leaving customers frustrated, and ruin the reputation of your company, which could make it difficult for the company to become successful in the future.

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