Drop shipping does have its downside. For example, it creates customer service challenges as orders can get mixed up, inventory levels change, and product returns become complicated.
Profit margins for drop shipped items are often razor thin too. For example, I work with a manufacturer of apparel that charges an additional $10 per item drop-ship fee on top of the item's cost and any shipping charges. This brand's products often sell for about $59.99, with a cost of around $30. So a product sold from inventory has about $29.99 in margin while a product sold via drop shipping is at $19.99. If a retailer offers free shipping on orders above $50, an additional $5 to $10 of profit is also gone. Add an average return rate, payment card fees, and the cost of pay-per-click advertising, and there may not be a lot left.
With these potential challenges, drop shipping may work best in conjunction with inventorying some products.
In a dropshipping thing, the retailer does not receive, stock, store, pull, pack, or ship products. All of these tasks are time things, which means drop shipping saves time. In a ecommerce business where the storeowner may also be the shipper, this additional time will be available to actually sell products, which should benefit the company. In larger operations, the timesavings may result in a reduction of labor costs.
If you've been interested in starting your own internet business but you've been trying to avoid the hassles of things like developing and producing products, tracking your inventory, setting up warehouse space, and maintaining a confusing shipping/receiving infrastructure, then drop shipping may be your answer. It allows you to sell quality, brand-name products on your website for a hefty profit, while someone else looks after product development and order fulfillment. Although the process can be a boon to internet entrepreneurs, you should know the advantages and disadvantages to this business model before getting started.
In addition to not having to worry about shipping products yourself, there are a few other advantages to this business model. First, it saves you the cost of building your own inventory. If you're like most people starting a small business, you don't have a ton of extra money lying around, so the last thing you want to do is tie up your cash in inventory that you may or may not be able to sell.
Second, no inventory also means no leftovers. If the product you sell suddenly becomes outdated, obsolete or just plain untrendy, you aren't the one with a room or warehouse full of stock nobody will buy. Many online retailers find themselves having to offer deep discounts--and taking huge losses--on old products just to get them out of their homes or warehouses to make room for more inventory.
Third, you'll be able to add new products to your site almost instantly. Since you don't have to worry about stocking inventory, if you find your customers clamoring for a particular product, it's not unrealistic to expect you could add the item to your site in just a few days.
Have you noticed there are literally hundreds, if not thousands, of sites selling huge mish-mash selections of inexpensive gift items . . . things like plastic gnomes and porcelain figurines? That's because there are a few very large drop shipping companies that import these items and then recruit websites to sell them on their behalf. Unfortunately, this is not the way for you to go if you're getting started with drop shipping. There are already a lot of giant gift sites out there--and way too much competition for you to reasonably expect to be successful at it.