Dropship

Understanding the Cost Benefit of Drop Shipping

By Megan Howse May 23, 2018
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Before you can understand the benefits of drop shipping, it's important to know exactly what drop shipping is. By definition, drop shipping is a retail fulfillment model where products are purchased from third parties and sent directly to the customer. The retailer never actually deals with the inventory—they simply facilitate the sale.

This strategy is gaining ground in the wireless retail industry, owing mostly to the ever-intensifying demands of consumers. You want to be able to supply your customers with the exact product they want, and fast. Drop shipping helps you meet these demands, and has a number of cost benefits for your business.

  • Improved Cash Flow: Traditionally a retailer must tie up lots of cash in inventory that sits statically on shelves until it is sold and turned back into cash; drop shipping flips this model on its head. Retailers do not pay for products until the product has actually sold. In fact, the retailer has typically been paid for the product before the supplier has even been paid. This builds a lot of flexibility into the cash flow process.
  • Easier Expansions: There is a lot of uncertainty that goes into adding a product—do you have ample shelf and storage space? How crowded is your inventory? Drop hipping makes it a lot less risky for wireless retailers to switch up the product mix because it's not necessary to invest a lot in inventory. Retailers simply make a product available (online or via in-store technology), and if it does not sell they remove it from the inventory without any consequences. It becomes much easier to offer exactly what consumers want to buy the most.
  • More Lifetime Customers: Since drop shipping makes it so easy to adapt and evolve with customers, it's also easy to retain more of them. When a customer enjoys a friction-free experience over and over, they have no reason to seek out competitors. Every retailer knows that repeat shoppers provide tremendous value and drop shipping helps ensure that no one will take their business elsewhere due to slow deliveries or disappointing product offerings.
  • Gain Time and Resources: Once inventory is removed from the equation, retailers free up a lot of staff resources. Drop shipping eliminates the need to stock, ship, maintain, or otherwise manage the significant burden of physical products. That allows sales associates to focus more on selling, managers to focus more on decision-making, and stores to focus more on unique and exciting experiences.

At this point, you are probably wondering why every retailer does not commit wholeheartedly to drop shipping. The biggest reason is that margins are lower. This is easily offset, however, by increases in sales. If those sales are for products that were previously unavailable, every purchase builds on the bottom line—no matter how small the margin is.

The other reason is that drop shipping can be confusing and complex from a logistics standpoint. This is most often an issue when companies commit to a hasty strategy made up of piecemeal solutions. However, with innovative POS systems, you can integrate drop shipping with every other aspect of operations, making it simple to give customers the products they want on an accelerated timeline and all while managing their purchasing information in one centralized location. Suddenly, any store can compete with the biggest wireless retailers on the market.

iQmetrix specializes in solutions that make integrating and optimizing a drop shipping strategy easy. Want to see what revenue you're missing out on without a drop ship fulfillment solution? 

Check out the Dropship Revenue Calculator

Photo Credits: Shutterstock / Hadrian

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