Time and time again it's said from web store retailers, eBay sellers, online auction gurus, and a host of others: "You can't make any real money with Dropshippingping. The prices and fees that drop-ship suppliers charge eliminate your profit margins."
Yet, there are thousands of retailers (including Sam's Club, Costco, and Amazon) who sell millions of dollars of merchandise every month and make a handsome profit doing it. For them, a Dropshipping product source increases their profit margins by slashing the amount of time and money they have to spend on managing inventory and packing and shipping products themselves.
The business case for determining whether a Dropshipping wholesaler service is the most cost-effective option for your retail business must look at a cost benefit analysis.
Whether you're just getting started in the retail business or are running an established business, a Dropshipping service offers several benefits, including the following:
With a Dropshipping provider, you boost profits in several ways—cut costs, increase sales, save time, and reduce risk, and you can do it all with less manpower.
Although many retailers find that Dropshipping services provide them with an excellent product sourcing solution, it is by no means a perfect solution. Dropshippingping comes with several drawbacks, including the following:
When you're making a business decision, your choices basically boil down to whatever makes the most sense…or, more accurately, what makes the most dollars and cents. Calculate the savings of using a Dropshipping supplier and compare them to the costs of using a drop-ship supplier.
The following example of Paul's Candle Shop should provide you with the guidance you need to make the calculations for your own business.
Paul just opened his own online candle shop and is weighing the decision of whether to utilize a Dropshipping product source with his business or obtain stock from bulk distributors and sell from his own personal inventory.
To make a good business decision, Paul realizes that he must account for savings and costs in terms of both time and money.
First, Paul jots down a list of areas in which a Dropshipping supplier could save him time:
Based on the products that Paul plans to sell on his web store he needs to determine on average how much time he can save on each of these activities. Paul comes up with the following estimates:
Total time savings for Paul:
Now Paul must determine how much he feels his time is worth. Applying the simplest approach possible, Paul uses his last job as a measuring stick, where he averaged $15 an hour. Now Paul knows that using a Dropshipping program wholesaler will create a one time savings of $383 ($15 x 25 hrs), plus a daily average time value savings of $19.50 ($15 x 1.3 hrs).
Next Paul needs to determine his savings in other aspects of his business. Savings such as warehousing cost, costs of purchasing inventory upfront, and packaging costs. Calculating these can be a messy process. Exact numbers are not absolutely necessary to make a decision, but the better an estimate is the more confident Paul will be about his decision. According to Paul's ballpark figures, he estimates the following savings:
Calculating the added costs a retailer absorbs when working with a Dropshipping company can be more difficult to determine than the savings.
First, Paul knows that his Dropshipping supplier charges a $1 drop fee per order. Second, Paul loses some discounts he could have had if he purchased his inventory in bulk. He estimates that will cost him about 5% of his wholesale price. With an estimated average cost of goods per order around $10, that will cost an extra $0.60 per order.
Paul must also account for the loss of control over shipping times. Paul estimates, conservatively, that one out of 20 orders may end up shipping later than his customers will find acceptable. Paul anticipates he'll need to refund those customers the cost of shipping in order to maintain a high level of customer service. Accordingly, for every 20 orders he sends that will end up costing him an average of $7.00 in refunded shipping fees. This ends up adding an extra $0.35 per order to cover the potential shipping refunds.
Paul estimates the loss in potential branding to be nominal, so he simply applies an arbitrary amount of $0.05 an order. Any scalability setbacks seem irrelevant to Paul right now, so those costs are determined to be zero.
Here Paul compiles all of the costs and savings information he has gathered and normalizes them on a per day basis, assuming that he will average 7.5 product orders a day.
|Paul's Candle Shop's Cost/Benefit Analysis|
|Savings per Day|
|Min. Saved||Time Value (per hr)||Total|
|Picking & shipping||37.5||$15.00||$9.38|
|Driving to carrier||40||$15.00||$10.00|
|Pre-payment of inventory||$4.00|
|Costs per Day|
|Bulk discount loss||($3.75)|
Based on Paul's analysis he will save and extra $20.67 each day (or about $620 a month) he runs his site by using this particular Dropshipping product wholesaler. Plus he also will have the upfront one time savings of $383 in time listing the products on his site. In Paul's situation, it makes sense for him to work with the drop-ship source provider.
In the example it made sense for Paul to use a Dropshipping supplier. However, the important point is that a true cost analysis needs to be performed and include the time value savings that drop shipping offers. While it may not be a beneficial decision for some retailers financially, it may be an absolute "yes" decision for other retailers. Each retailer has unique core competencies that they must keep in mind while considering what's best for them.