Don't let your online profit get eaten by shipping costs. Here's a quick look at three shipping scenarios to help you decide which is best for your online venture.
Tens of thousands of online stores use this method and thousands of manufacturers and distributors are glad to support it. Drop-shipping has some very strong advantages and a few disadvantages.
Let's look at the advantages first:
No Inventory Costs. Purchasing product inventory ready to ship to your purchasers is expensive. In addition to the out-of-pocket costs, you need a place to store the inventory. Finally you have to pick, pull, pack, and ship the products once the order is placed. Having the distributor or manufacturer take all these costs and responsibilities lifts a real burden off your shoulders.
Drop-Shipper is Transparent. With most of your drop-shippers, especially those with whom you do a regular business, you can send them labels and forms so their package looks like it is from you. Your customer probably won't know that your hands never touched the product.
But there are two major problems:
Lower Margins. While the manufacturer may be willing to sell you product for 30% to 40% of suggested retail, if you want drop-shipping services expect to see another 10% or so off your margins. On the Internet, some categories of products are very price-sensitive, and often the "street" price is substantially under the "suggested retail" price. The difference between making money and losing it may be only a few percent. Unless you're very careful, you may end up losing money with the drop-shipping approach.
The Inventory Model
The tried-and-true retail method where you actually order a quantity of the products you plan to sell from the manufacturer or distributor and keep it in stock until you receive an order.
This has some advantages:
You Can Ship Immediately. The faster you can turn around the order, the more impressed your customer is, and the better chance you have of getting him back the next time.
You can provide excellent customer service. In case of a problem, you will have all the records at your fingertips to trace the order and make a correction.
Inventory, of course, has its disadvantages, too:
Unsold Inventory Can Tie Up Capital. When you own the inventory, you also own the risk. If a product doesn't sell, you're stuck with disposing of it at pennies on the dollar.
You Must Have An Efficient Fulfillment System. Internet retail is essentially mail order, with each shipment going out in individual parcel sizes to end users. If you've never had experience with type of fulfillment be careful because an inefficient system can lose any advantages in good customer service that keeping inventory on hand may have gained you.
A third common distribution model is the fulfillment house. A fulfillment house, the offspring of the direct marketing industry, will handle some or all of the aspects of getting the product to your customer. They will maintain inventory, order new product, assemble, pick, pull, pack, and ship, all according to your specifications and with your labels.
They will also handle the order taking, the Internet shopping cart, and provide an ordering and customer service call center if you need one. In other words, you can run an entirely virtual business, outsourcing everything to the fulfillment house, if you like. Of course, they take their cut of your profits to provide these services.
Which of these three models should you use? No one can make that decision for you. But armed with the pros and cons, you'll be able to make a thoughtful choice that will leverage the advantages and minimize the disadvantages of one of these models, and include it as part of your Internet Marketing Plan.