Historically, one of the biggest issues for retail businesses has been the problem of overstock. Businesses buy too much of a product that simply doesn't sell. Not only is money lost, but also the need to store these items only increases the problem. Businesses have to resort to costly markdowns in order to move the merchandise. What if this problem could be eliminated all together? What if you didn't have to guess how many products your customers want to purchase?? What if you didn't have to pay for a single piece of merchandise up front--not until it sold?
Of course, as drop shipping businesses know, you do not have to deal with overstock or markdowns. You don't have to risk your profits on a new line of merchandise that may not sell either. Fortunately, the supply chain has evolved to remove guesswork from the standpoint of merchandising so that businesses can sell more efficiently.
The Virtual Store
Like other ecommerce stores, drop shipping businesses are not brick and mortar businesses. Their storefront is their website. Yet while some online businesses still warehouse their items and must put them on sale when they don't sell, drop shipping businesses do not warehouse the merchandise. Their supplier does. In essence, the drop shipper still chooses items to market and sell on their website, but they do not physically purchase them until their customer places an order through the website. Until that time, the supplier continues to keep the merchandise within its warehouse. Once an item sells, the drop shipper pays the wholesale price for the item, forwards the shipping costs, and the warehouse ships the item direct to the customer. The drop shipping business retains their profit.
Benefits of a Drop Shipping Model
With the Internet, retail businesses are no longer constrained by the restrictions of a physical store as their point of sale. Drop ship businesses can put their energy into ensuring that their website is easy to navigate and that merchandise is showcased advantageously to consumers. They can also steer their resources into marketing their merchandise lines over other Internet channels like social media networks.
Of course, this model isn't without its challenges. Unless the drop shipping business can effectively market merchandise online and sell it, it won't make money. Of course, it won't be stuck with a warehouse filled with stereo speakers or neon jackets, but it must sell--like any business--in order to remain viable.
Many people considering this model find that it makes sense to partner with a drop shipping service provider and become a member of this network. The network helps them link to the suppliers they are most interested in so they can sell the items they feel they can market most effectively. Because there is so little up-front risk, drop shipping is a great way for people to go into the online retail business and discover if ecommerce is right for them.