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Is Dropshipping a Viable Business Model?

Discussion in 'Dropshipping' started by JustCraig, Dec 2, 2010.

  1. JustCraig

    JustCraig

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    Drop Shipping (or Direct Fulfilment) is a simple supply chain management system which enables the retailer to advertise their suppliers products without having to physically keep goods in stock. Instead once the customer has placed an order, the retailer will forward order details to the wholesaler, who then ships the goods directly to the customer. The retailers make their profit on the difference between the wholesale and retail price.

    At first glance it may seem to good to be true, but there are drawbacks. For example Drop Shipping can cause saturation of certain products, especially on the larger selling platforms such as eBay and Amazon. You can end up with dozens of sellers all trying to sell the same products, from the same supplier, using similar pictures and descriptions. Competing sellers continually lower the price of a product in an effort to out fox their competitors and increase sales volume. Over time this can cause the market value of the product to decrease, eventually reducing the profit margin of the product to almost zero

    The other risk is the possibility that the product may sell out even though the retailer still has the item available for sale. This can result in a long wait for a shipment while the wholesaler waits for new products to arrive which as you would expect will reflect badly on the retailer, especially if you are selling on eBay or Amazon where negative feedback can ruin a sellers reputation. Also as you would expect because you are buying single units the profit margins are smaller than if you were to buy in bulk.

    Despite the negatives, the benefits of using a Drop Shipper are clear, It is a way of expanding your inventory without any financial risk or try out new product lines with minimal investment. More, importantly, a positive cash flow cycle occurs because the seller does not have to invest any money until the purchase has been made and payment received.

    Drop Shipping is something that is often recommended to new traders who have limited funding, but its not just small traders on a budget who have adopted the Drop Shipping model - far from it, in fact every major retailer in the UK use Drop Shippers to fulfil at least a proportion of their on line orders.

    The Hut Group is probably one of the largest and well known entertainment Drop Shippers in the UK. As well as successfully retailing online through it's own brands, including TheHut.com and Zavvi.com, The Group also provides Drop shipping solutions for many High Street retail partners such as ASDA, Woolworths, Argos, Tesco and WHSmith to name just a few.

    The Webb Group is another example, they provide Direct Fulfilment solutions for some of the UKs largest catalogue companies including JD Williams, Grattan, WilkinsonPlus and Studio Christmas Catalogue.

    Its not just on line retailers who use the Drop Shipping model either. Many small retailers, who typically sell in small quantities to the general public,will use this concept when they receive a large, one off order. Rather than route the shipment through the retail store, some retailers will arrange for the goods (minus the paperwork) to be shipped directly to the customer.

    There does seem to be a stigma attached to Drop Shipping companies which isn't helped by the "have a go" Drop Shippers out there who think that setting up a Drop Shipping company is an easy alternative to becoming a wholesaler or retailer. As you would expect however lack of experience, planning, investment and stock has left a sour taste in the mouths of some of their clients. This does not mean the concept does not work, it simply highlights the fact that you need to be much more careful when deciding who you do business with.

    Some Drop Ship companies will ask for an up front payment before they will even release pricing information. They will often try to entice you with images of the latest products at unbelievable prices, but as with anything if it looks too good to be true - it probably is.

    So is Drop Shipping a viable business model? As with anything you get out exactly what you put in, if you are looking for maximum returns for little effort then its likely you will come unstuck very quickly. However with the right supplier, the right sales channel and the right approach then Drop Shipping can compliment your existing business model nicely.
  2. SaleHoo

    SaleHoo

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    Nice post Craig :)

    I would consider dropshipping a stepping stone to being able to source directly from wholesalers or manufacturers. Like you said
    Cheers!

    Richelle
  3. mastersg

    mastersg

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    nice one Craig , defo a useful guide for new and upcoming entreprenuers , cheers mate
    Jah crafts likes this.
  4. Paulos007

    Paulos007

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    Certainly something that I am looking at with interest.

    Thanks
  5. cobster

    cobster

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    very useful:welldone:
  6. Simple Aquatics

    Simple Aquatics

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  7. mgroadster

    mgroadster Banned Member

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    I'm not an advocate of dropshipping, and you need to be careful who you dropship with. All I can say is, that you're probably best dropshipping with a recognised advertiser on here or otherwise you'd probably be better off droppin yer guts than dropping ship!
    DorsetBuyer and MurphyTan like this.
  8. Matilda28

    Matilda28

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    Thanks for the interesting article.

    I've got to say I am a bit wary of dropshipping to be honest.
    As many on here advocate it and theres many threads, I decided to check some suppliers out. I discovered that many f the suppliers (even some on here) sell products on Ebay in direct competition with the very people they are selling "wholesale" goods to for dropshipping. I even found one selling the stuff ever so slightly higher on Ebay than they are advertising to dropshippers. I cant see the value in that and god knows how anyone makes a real profit from it.
  9. AlwaysPresent

    AlwaysPresent

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    Excellent article, was a great read :)
  10. john1234

    john1234

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    Hello
    I think you can do such business smarter.
    When you work in this method, you actually eliminate your ability to negotiate with major suppliers, because they prefer to work with importers who buy large quantities and not individual units.
    I basically set up my own logistic center with storage and I manage my shipments
    efficiently and cheaper.

    I am looking for suppliers via Alibaba.com or maedinchina.com,
    I ask for samples from suppliers, checking its quality and then purchase an initial stock.

    I manage my store inventory in a warehouse and deliver it by chinashippingsample.com (css company)

    So in this form i sell from China directly to customers all over the world in the best quality and in the best price with free shipping.

    I build my website in India.
    TraycDiana, icameisaw, jtrag and 2 others like this.
  11. tracyp79

    tracyp79

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    Thanks for this informative post.
    Much appreciated. I used dropshippers a while back and dropped out of it sue to saturated Market and hard to sell items. I dare say there are a few that i've not found.
  12. James and James

    James and James

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    Worth adding that drop shipping can work well, but from a customer point of view it also has a possibility of going wrong if there's not good communication between the parties.

    So... always make sure that once the product is 'dropped' by your dropshipper, you are able to offer good customer service to customers by knowing things like when it's been despatched, where it is, what happens if it's missing etc.

    Problems will only get you poor reviews online.

    James
  13. Timothy

    Timothy

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    Thanks for the post. I really appreciate it. I think that I will put dropshipping on the back burner for the time being. Again, thanks for sharing.
  14. martinthegit

    martinthegit

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    Great article and well worth reading, and it has not put me off, just making me think a bit more.
  15. stone81

    stone81

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    great post, really enjoyed reading it.
  16. Ginster

    Ginster

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    really great post - I am new to all this but this post has made me want to learn more. I am a cautious person so I will do a lot of digging around before I commit to anything, but these forums are a godsend :clap:
  17. JustCraig

    JustCraig

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    Glad you enjoyed reading it :)
  18. suboa10

    suboa10

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    Great post on the realities of drop shipping, I think you need some research before you start a drop shipping business. There are a lot who do it and succeed but they put their time into researching and also got off the internet as I think the best suppliers are found if you meet them in person.
  19. bidjoshin

    bidjoshin

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    Dropshipping is a viable business trade model as it is the best option available to those who deal with selling products online especially bidding and auction websites.
  20. elnur

    elnur

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    And on what principle The Hut Group work, I ask them do they work as a Drop Shipping Company, and they said that they are a pr-company.

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