The field of business is a competitive environment that awards innovation and efficiency. Entrepreneurs continuously create new business ideas and models to stay ahead of the competition. Some individuals develop unique products to produce sales while others come up with creative models that allow them to take advantage of technology and existing businesses. One of these models is the drop shipping business. This business model has become popular during the last few years and found success despite the effects of the coronavirus pandemic. Drop shipping is a manufacturer-reliant business that allows individuals to act as the middle man between suppliers and customers. This research paper will aim to assess the benefits of a drop shipping model for the manufacturers, entrepreneurs, and customers involved.
Drop Shipping Definition
The drop shipping business model is a new form of entrepreneurship that allows store owners to sell products online without possessing the physical products. Researchers define the model as an outsourcing practice, a supply chain, and a contract between retailers and suppliers (Haskel and Mulolli 2017). This business model requires close communication between the store owner or drop shipper and the supplier. In a drop shipping model, the store owner will market the products online and receive customer orders. Upon the reception of the orders, the store owner will forward the information to the supplier. The supplier will then facilitate the packaging and delivery of the product. The model is a streamlined process where products directly move from the supplier to the customer (csponline 2017). The drop shipping model allows store owners to sell a large inventory of products without the need to rent storage spaces and handle logistics.
Since store owners do not need to spend on storage spaces, delivery vehicles, and additional manpower; they can focus more on marketing and sales operations. The model allows entrepreneurs to save resources and time (csponline 2017). Storage facilities require rent, utilities, and renovation expenses which an entrepreneur could take years to earn back. Unfortuitous events like bad weather, flooding, and other calamities can damage the facility and stored products. There are also safety standards that government institutions require businesses to meet. This causes additional expenses that business owners can easily avoid through drop shipping.
In a drop shipping model, a sole proprietor can be enough to manage the business. Since drop shippers do not need a physical store to operate, an individual can easily create an online website or a social media page to use as their storefront. A drop shipping business will involve constant communication between the drop shipper, supplier, and customer. Since drop shippers do not possess physical products, they will need to rely on the service efficiency of the suppliers. For suppliers or manufacturers, they have to rely on drop shippers to provide complete information to avoid wrong deliveries and unnecessary expenses. Due to this, manufacturer-owned and retailer-owned drop shipping structures tend to differ in product price and profit.
The Drop Shipping Process
To better assess the various benefits of the drop shipping model, it is imperative to understand the process involved in each transaction. The drop shipping model is a result of people’s reliance on the Internet. Due to this, entrepreneurs can establish online-based businesses that allowed fully online transactions. Customers are willing to purchase products from online stores without the need to examine the items. In the drop shipping process, the first step is for an entrepreneur to establish an online page that will act as the storefront. The online page can be a standalone website, a social media page, or an account in a drop shipping application. Most drop shippers utilize more than one storefront to maximize the product reach. Some will create a social media page and also establish an account in popular applications. Since the drop shipping market is online-based, this strategy allows entrepreneurs to strengthen their presence in the competitive environment.
What is drop shipping and how does it benefit various businesses and their clients?
After establishing an online storefront, store owners will need to create various strategies to attract their customers. Drop shippers commonly use social media advertisements on Facebook, Youtube, and Instagram for their marketing. Online services like Shopify, Oberlo, and Printful provide drop shippers access to certain markets. Most of these services require drop shippers to pay subscription fees in exchange for better product reach and publicity. Successful store owners utilize these subscriptions to maximize a service’s benefits and get ahead of their competitors. Most drop shipping marketing strategies will be online-based due to the market’s behavior. Social media, online applications, and website spaces are the common and effective marketing mediums for drop shippers.
With the drop shipper’s various marketing strategies, they should be able to receive an order on their online page or application. The customers’ orders will contain purchase information such as total price, delivery fee, delivery address, estimated delivery date, and product quantity. The drop shipper will then forward the information to the manufacturer. Once the manufacturer receives the order information, they will then begin with the order’s packaging and delivery. In most cases, the drop shipper’s responsibility ends once the manufacturer receives the order information. However, some drop shippers may contact the customers to give them updates on the delivery as well as answer follow-up questions.
Benefits of Drop Shipping
Benefits to Drop Shippers or Store Owners
The drop shipping business model greatly benefits the drop shippers more than the suppliers and the customers. The model provides the drop shippers with a profitable business with low risks due to the low capital requirement of drop shipping. This low capital requirement allows entrepreneurs to worry less about their venture’s success (Ferrerira 2020, as cited in Hawlader 2021). As mentioned earlier, a drop shipping business will only require an online storefront and a drop shipper-supplier relationship. Establishing an online storefront is inexpensive and multiple suppliers are willing to transact with drop shippers. Since store owners can easily meet these prerequisites without large expenses, the drop shipping model becomes a low-cost investment. Additionally, the model lowers the risk of investing in fixed assets which reduce liabilities (Haskel & Mulolli 2017). Drop shipping does not require store owners to rent out storage spaces nor purchase machines, vehicles, and other equipment for logistics. With these reduced expenses, drop shipping allows individuals with a limited financial capacity to enter the market.
However, drop shipping’s low-cost investment can lead to a saturation in the competitive environment. Drop shipping’s low-cost and low-risk characteristics mean that any individual with adequate technological and business knowledge can enter the competition. This leads to a low barrier to entry and increases one of Porter’s Five Forces, the threats of new entrants. A high threat of new entrants can mean that an industry can have an overabundance of competitors which can significantly divide the market. Currently, the drop shipping industry faces issues like drop shipping scams, fraudulent chargebacks, and fraudulent purchases (Bradley 2020). This is due to the low barriers to entry that allow individuals with ill intentions to establish fake storefronts and deceive both customers and suppliers.
Aside from the low-cost and low-risk investment, drop shippers can offer a wide variety of products and brands to the market. While traditional stores need to allocate space for their products, drop shippers do not have to worry about inventory storage which allows them to provide an assortment of products (Haskel & Mulolli 2017). Drop shippers rely on manufacturers for the products’ inventory and delivery. This allows them to offer products of any size and quantity from their supplier, provided that the items are available. Since drop shipping stores are online-based, entrepreneurs can easily add products to their catalog. Drop shippers add items to their catalog by creating a dedicated page for the product and posting important information like images and features. Also, the benefits of a wide variety of products include the ability to offer items from other brands. Drop shippers can have multiple suppliers for the same product type which allows them to be flexible and avoid running out of stocks. This wide range of product availability and supply is due to the storage-less nature of drop shipping.
The wide range of products makes drop shipping businesses a popular choice for online shopping. This wide range of products provides retailers with high bargaining powers that benefit both drop shippers and manufacturers (Shi, Sun, & Cheng 2020). The retailer’s high bargaining power allows them to influence product prices. The wide assortment of products and the low fulfillment fee enable them to offer lower prices than traditional stores. Drop shippers can also set high prices which gives them more profit. However, this method will only work if product prices are high throughout the market. Despite this bargaining power, manufacturers still earn from drop shipping since the retailers will pay the wholesale price regardless of the market price. It is also important to note that the wide range of products and reliance on the manufacturer limits the online business’s branding capabilities (csponline 2017). The drop shippers do not influence product quality and packaging requirements as these factors rely on the manufacturers. This makes most drop shipping stores look generic and potentially limits the business’s growth. Drop shippers will need to develop creative branding strategies to establish their brand and stand out from the competition.
Since the drop shipping model does not require a physical store, drop shippers can operate anywhere with an Internet connection. They can respond to orders and complete transactions from their home, offices, and other places. This makes drop shipping businesses a good source of extra income for some individuals. The ability to operate remotely also allows drop shippers to sell products to and from foreign countries. Experienced drop shippers can establish relationships with foreign manufacturers and offer their products to the local market. This allows drop shippers to sell foreign products without spending on taxes, tariffs, and other fees. In a regular drop shipping model, the manufacturer or the customer will be responsible for the delivery costs. This will extend on fees regarding exports. Drop shipping’s remote characteristics greatly benefit the drop shipper since they do not need to pay fees for international transactions.
Drop shippers’ ability to operate remotely is an advantage that has minimal negative effects. Its main issue is its contribution to the industry’s low barrier to entry. While working remotely benefits the store owners, it increases the risk of fraudulent transactions from foreign countries. International manufacturers that offer low-quality products may target new entrants and supply them with sub-optimal items. New entrants may find it difficult to take action against international manufacturers and choose to ignore the issue instead. This allows fraudulent suppliers to continue operation and cause issues in the industry. The low barrier to entry and its contributors further increases the number of fraudulent transactions in the industry.
Benefits to Manufacturer
While most of drop shipping’s benefits are towards the retailers, manufacturers can also capitalize on the growing industry. According to Li et al. (2019), manufacturer-owned drop shipping structures lead to low wholesales and retail prices. This is because manufacturers can dictate the wholesale price which in extension, influences the retail price. In this structure, the profits of the retailer and manufacturer will depend on the unit fulfillment fee. The fulfillment fee is the overall cost of storing, packaging, and delivering a product. In the drop shipping industry, the manufacturers are responsible for the fulfillment fee. A lower fee can increase both manufacturers’ and retailers’ profits while a high fulfillment fee will decrease them. Since manufacturers can influence the fulfillment fee, they can establish advantageous wholesale prices that benefit them and the retailers.
A manufacturer-owned drop shipping structure allows suppliers to influence pricing and potentially reduce fulfillment fees. In this type of structure, manufacturers can benefit more unlike in a retailer-owned model. In a retailer-owned structure, manufacturers can receive a decrease in profit due to high fulfillment fees. This is because a manufacturer cannot influence the wholesale price in ratio with the fulfillment fee in the retailer-owned structure. This leads to lower profit from wholesales. With retailer-owned structures being more popular in certain channels, manufacturers will continue to observe a decreasing trend in profits (Li et al. 2019). However, drop shippers must note that certain channels may benefit more in a manufacturer-owned structure to maintain a healthy supply chain.
Aside from increased profits, drop shipping allows manufacturers to focus on production instead of product marketing and sales. Some researchers define drop shipping as outsourcing inventory to another party (Chen et al. 2011, as cited in Haskel & Mulolli 2017). However, individuals can interpret this in another way. Drop shipping can be a manufacturer outsourcing their marketing and sales. The drop shippers act as the sales team of manufacturers and earn commission from completed transactions. Drop shipper-manufacturer relationships are rarely exclusive which allows manufacturers to deal with multiple drop shippers. This can lead to a large acting sales team that markets and sells manufacturer products. This pseudo outsourcing practice will provide manufacturers with more sales and brand recognition.
However, manufacturers may require larger storage spaces to ensure that they have enough products for their drop shipping partners. Multiple drop shippers can lead to an influx of orders that can increase fulfillment fees and reduce profits. Still, this is dependent on the manufacturer and the product they offer. Some manufacturers revealed that drop shipping services produce additional sales that cover the delivery costs (Haskel & Mulolli 2017). Certain product types with high fulfillment costs can lead to losses if drop shippers are unable to regularly sell products. Manufacturers will also have existing brick-and-mortar retailers that will compete against drop shippers for product supplies. This increases the need for larger storage spaces to ensure that there is enough supply.
Other Benefits of Drop Shipping
Since drop shipping businesses rely on technology and the Internet, the industry has created opportunities for application and web developers. Drop shipping requires the drop shipper to own an online page, website, or account in an application. While most individuals can create a standard online page on social media platforms, establishing a website or developing a drop shipping application requires technological expertise. Web and app developers have developed services like Shopify, AliExpress, and Oberlo that allow drop shippers a platform to post and sell products. Aside from helping drop shippers, developers earn from these services through their subscription plans that provide additional benefits to the users. As the drop shippers on the platform earn more profit, their best option is to purchase subscriptions and get ahead of their competitors (Garrity 2020, as cited in Hawlader 2021). Drop shipping established a new industry that allows developers to create websites and applications that helps drop shippers reach their target market.
Drop shipping also provides benefits to its market. Drop shipping customers have a wide variety of choices and can easily access products. A customer will only need to know the basic concepts of using technology to be able to navigate drop shipping applications and websites. Developers design these services to provide customers with ease of access as well as make it easier to complete transactions. Drop shipping applications and websites have search features that allow customers to type product names and easily find specific items. The services accept various forms of payments from cash-on-delivery to PayPal payments. Drop shipping applications also tend to contain directed advertisements that highlight products that a user will likely purchase. These factors ensure that customers who use the services will complete orders and occasionally return.
Drop shipping is a business model where a retailer or drop shipper relies on a manufacturer to store, package, and deliver products. The business model can be a manufacturer-owned or retailer-owned structure that results in an increased or decreased profit for both manufacturers and retailers. The drop shipping business model provides various benefits to manufacturers, retailers, and customers. The model allows manufacturers to outsource sales and marketing to drop shippers. Drop shipping services provide customers easy access to online stores and products. Drop shipping’s most notable benefit is towards the drop shippers or the retailers. The business model is low-cost, low-risk, and flexible with a low barrier to entry. These benefits show that the drop shipping business model is a profitable industry that almost anyone can enter. However, the drop shipping benefits also include disadvantages such as saturated competition and a high risk of fraudulent transactions. Despite these disadvantages; retailers, manufacturers, and customers can benefit from the business model and avoid fraudulent transactions through careful navigation and security awareness.
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