RSS Feed
Traditional Wholesale Trading Vs Drop Shipping
Drop shipping differs from traditional wholesale trading in
that it is a form of ‘just in time’ shipping. Basically, drop shipping means
that the online seller will order the product from the wholesaler as and when
customer orders are received. The seller simply receives the order and passes
on delivery information to the wholesaler for delivery. The customer pays the
seller, the seller pays the wholesaler and the seller earns the profit from the
difference between the sale price and the cost price. So, the product does not
pass through the hands of the seller at any time, and goes directly from the
wholesaler to the customer in the drop shipping model.
The traditional wholesale trading method implies that the
seller orders a stock of the product from the wholesaler and maintains this
stock to service customer demand. The physical possession of the product is the
differentiating element. This clearly has a cost associated with it. Firstly,
there are storage costs, which can be daunting if the product occupies a large
amount of space. Secondly, there will be shipping costs from the wholesaler to
the seller. Additionally, there is the cost of carrying unsold stock for a long
period of time that eats into profits from sold goods.
So suddenly, drop shipping seems like a great idea. But drop
shipping has its drawbacks too. In most cases, especially if you are a small
business, you will pay the full MSRP, which will squeeze your profit margins.
Additionally, you may have little or no information on the status of your order
from the wholesaler, affecting customer service levels. Since you are
essentially passing on the cost of carrying inventory on to the wholesaler, you
will be charged for it. But, on the upside, you will only need to pay when you
receive customer orders.
Reliability is an issue when drop shipping – as a seller,
you will be able to control and track your product’s delivery much better if
you hold inventory. In case of drop shipping orders, the seller relies on the
wholesaler’s delivery system, which may be surprisingly lax. Finding a reliable
wholesaler is a critical task on its own.
If you are worried about the label on the box that is
shipped to the customer, you may be pleasantly surprised to find that many
wholesalers will include your packing slips and labels when they ship to your
customers.
A couple of hybrids exist that are useful to know about:
Buying from local wholesalers and hiring fulfillment houses. An alternative to
carrying inventory and drop shipping is to buy from nearby wholesalers when you
receive an order and ship it out immediately. Amazon started this way, but it
works best for small start up businesses. The other option is to make a deal
with a fulfillment house. This is an intermediary service that offers to
maintain small amounts of inventory, assemble, order fresh stock, pick, pull,
pack and ship out your product in accordance with your instructions and using
your packing materials. A fulfillment house may provide a shopping cart online
and customer call center, depending on the scale of operations. They will
charge a fee based on various factors – amount of storage capacity etc, and may
charge a small percentage of commission on sales. This model may work best if
you are a seller of high margin items.
