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Does Drop Shipping Works? Understanding it From Manufacturer perspective.

January 24, 2019

Does Drop Shipping work for Online Sellers?

 

     One of the most frequent questions I receive from the audience. It is a hot topic for the manufacturers and supplier as well. 

 

     It works. In fact, drop shipping (DS) history runs deep in eCommerce history. It did create millionaires in International marketplaces, DS from China.

 

But many failed also, like any other business. 

 

      One of the best DS selling points is that as a seller, you have no need to come out with money to buy any stocks, as you use other people stock and money to run a business in marketplaces. 

 

     Sounds too good to be true? Its all for the seller to get rich only?

 

     Haha, this business model is not just good for sellers, it is good for the manufacturer as well.

 

     There are many articles on DS from the sellers perspective.  Let's do it differently for this article. Let's understand from manufacturer angle to understand why DS is here to stay.

 

     1. First, let's look holistically on this simplified supply chain comparing CS to a normal supply chain.  Undeniably in the drop shipping supply chain, there is an advantage of removing the cost of shipping the product from Manufacturer warehouse to Seller Warehouse and the cost of storage of in Seller Warehouse until the product is sold to consumers. If the product can reach from manufacturer warehouse to them, its definitely cheaper.  The cost saved translate to higher competitiveness.

 

     2. There is always the risk of "Channel Stuffing" which is loading channels (seller warehouse) with stocks. Some are genuine to prepare for the hike of the festive season. But many is for short term targets.  
     
      Worst case is if the production team uses such artificial sales in planning, the company might invest and ramp up the production of the unpopular product. In the end, the markets will be flooded with too much-unwanted stock, and everybody suffered. 

 

      Thus DS allows the manufacturer to be in the consumer markets directly, and forecast market needs more accurately for their products. Thus manufacturers will be able to forecast and utilize their resources more efficiently.

 

       3.  Everyone sales which come to Interview will always claim their Superman. It's their job. But if you are lucky some of them are really Superman. If you are unlucky, most of them are fake, and at the end, the company is saddled with extra headcount. It's a significant cost and emotionally negative activity to ask them to leave. 

 

     DS remove this risk. If the seller is a superman, the sales will justify the income the seller gets. No obligation from manufacturers side. You can have thousands of drop shipper sellers and every one of them is justifiable as their cost is related directly to the sales they generated. Wah! having everybody work like mad for you without fix salary is always an employer dream. 

 

     4. DS reduce debts issues. DS manufacturer ship after your seller receive an order and pay you in CASH. Cash is gold. If a manufacturer sells in bulk to hypermarkets, normally payment term is very long. Many businesses had closed shop because they couldn't manage their cash flow with too many receivables. 

 

 

      5. Thanks to Malaysia marketplaces like Lazada and Shopee, the shipping charges are much lower than shipping outside the marketplaces. Some marketplaces even offered zero commission, no payment gateway fee, and free shipping. Additionally having multiple sellers drop shipping increase the number of listings on these marketplaces and increase the chances of visibility to consumers. It spread the risk as if one store was closed, may other store are still in business. 

 

     6. It is also reduce DS shipper resources on customer support. Normally the task of customer management was done by the sellers. As customer satisfaction is tied to their store sales and reputation directly, sellers are motivated positively to treat the customer well. In comparison to hiring a customer service which cannot felt the thrill of 5 Star review and increase sales from customer review, DS sellers is a good alternative. 

 

 

 

     7. As Jack Ma said, small is beautiful. If you had only a few Big Customers, your leg will shake when one them say "Bye-Bye". But if you have thousands of drop shipper, some of them leaving doesn't matter. It spread your dependency on just a few customers and that gives a manufacturer more options and option is power in negotiations. 

 

    There are other benefits like translation, new market penetration and blah blah by I think you got what I mean.

 

     DS is an attractive and viable business model for manufacturers, and many DS platforms are making big money now. It is not just for sellers. 
     
     So if you are thinking about becoming a DS seller, normally you will think:- so good meh? no need to find capital also can do business and get reach. Is it a scam to sell me something?

     

    First, there are always going to be a scam. Same as DS. Some is purely focusing on your membership fee or etc.  Some are multi-level marketing or pyramid scheme to get more members. So please do due diligence before you decide to be a drop ship seller, ensure that your product is competitive realistically. 

 

 

 

     Rule of thumb, if the membership is expensive and, it's a red flag. If the product is sold at a high price and not competitive compared to the competitors, it is another red flag.  

 

     Please, they will claim that this is expensive because of great quality & great brand. They will try to sell you the story put some Italian brand on it, and produce some certificates and even show you some cheques/print screen of great sales to motivate you to believe the story. It is another red flag. They even offer free websites and other attractive options for you to join the club. 

 

     However, not everyone wants to scam you. The key is to differentiate scammers for real businesses. For me, I always get the samples and compare bluntly with the competitor product.

 

     And if you think the deal is so good that you can't miss it, it is more crucial to ask others like your friends or relatives to tell you their true opinion.  An over-optimistic person tends to justify all the red flags unreasonably. 

 

     Now after you able to identify a scam and believe it is workable, it's still not a sure win.

 

     There are many disadvantages to DS. The first and foremost, your time and effort is not free. It is a cost. Do you want to keep doing DS without any sales?

 

      But then it will be boring to prolong this blog by listing all the disadvantages.

 

     So I am going to share the disadvantages and how I try to overcome it in my adventure  - a real story with real listings.

 

But in the next blog. hehehehe

 

Cheers. 

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