Drop Ship or Stock? That is the question

To drop ship or stock items is a burning question for many small startup E-Commerce businesses these days. The intensity of feelings toward dropshippers in Australia has historically been based on a number of high-profile problem transactions perpetrated in a very public arena meaning that the first many Australians have heard about it is negative, but drop shipping is not a new idea. As a new Business Person, these are issues I have wrestled with, before making the choice that works best for me, and I have asked myself many if not most of the questions below.

Drop shipping is and has been alive and well in Europe and the USA for many years. In fact many mail order companies in the US and England actually drop ship, as it is a cheaper and more efficient way for them to sell the items they retail. There are also a number of larger Australian companies who drop ship as well.

If you are considering drop shipping, please read the information below for some thought provoking questions. These are teasers to make you consider the various issues that need to be considered when making a choice to stock or drop ship.

At the end of the day, these are basic questions that need to be asked when drawing up the business plan, to ensure the viability of any startup business. As with any business decision, it is strongly suggested that you seek qualified advice from a Small business advisor, mentor, financial planner and accountant amongst others.

What is drop shipping?

Drop shipping is effectively a means of advertising items for sale without the need for the small business owner to shell out the meager start up resources. Each business begins with an agreement formed with a larger importer/wholesaler/manufacturer that they will purchase the particular items from them at a set price plus margin.

Once an order is received, the business then redirects the order to the importer/wholesaler/manufacturer who then ships the item out to the initial customer, quite often without the purchaser being aware that it is sent from 3rd party.

Where do drop shippers source their products from?

Some retailers form relationships with manufacturers within Australia, other seek overseas sources. Drop shippers these days form agreements with wholesalers and manufacturers in England, USA, China, India and in fact all over the world.

What are the drawbacks of drop shipping?

Drop shippers are very reliant on the company they deal with being quick with turnaround. Nothing is worse for a retailer than placing an order and it still not being shipped within 1 week because they just haven’t got around to it.

Other issues include the item not being in stock and are the items as good as the advertised product? Many dropshippers never check this, so are surprised when their customers complain about the poor quality, inaccurate sizing etc.

What about payment options? Will you need to complete a Telegraphic Transfer each time you purchase an item? That could be quite costly. How about Western Union, which may not be as safe, Paypal or Paymate? What fees will be incurred or can you Direct Deposit, which will in itself add time to the transaction, while it clears. Or will you use the Credit option if it is available?

And lastly, some retailers do not check that the wholesaler they are dealing with are not also drop shipping – meaning a chain forms in who should be shipping the item.

I want to start a business and drop shipping is the only way. What should I do to protect myself?

Firstly, I would strongly suggest if you are thinking about drop shipping – where will you be retailing? One of the auction sites or on your own site? Have you checked regulations regarding importing of items into Australia if your wholesaler/manufacturer is in another country? Who pays any importation duty?

Next, if you are determined to choose this method, make a sample order to check quality, fit, colour, ability to do the job.

What about any warranty? If you are importing say an mp3 player, who covers warranty if it is from Asia – the guarantee could be voided as you are not in the original country of purchase.

Are you able to sell that product in Australia, does it meet accreditation standards?

Drop shipping looks too hard, but what are the drawbacks of stocking items?

As with any other type of risk, there is a risk in holding stock. Where will you keep it? How will you keep track of it and what about shipping?

Say for instance, you choose to retail perfumes, how will you get around the issues of shipping it, as you need a license to ship these items as they are classified as dangerous goods.

What about if you are stuck with dead stock, for months on end tying up your funds? How will you liquidate these items?