Drop Ship Services: What are they worth?
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 drop shipping. 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 drop ship 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 drop ship wholesaler service is the most cost-effective option for your retail business must look at a cost benefit analysis.
Exploring the benefits of a Drop Ship Wholesaler
Whether you’re just getting started in the retail business or are running an established business, a drop ship service offers several benefits, including the following:
- Drop ship setup fees are minimal as some only charge on an annual basis.
- Your supplier stores and manages inventory.
- Your supplier packs and ships products directly to your customers.
- You pay your supplier only after your customer pays you.
- You can test the market with little or no risk.
You can focus more time and resources on dollar-productive activities, such as marketing, advertising, and product research, rather than on inventory management, packing, and shipping.
With a drop ship 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.
Assessing the Drop Ship Drawbacks
Although many retailers find that drop ship services provide them with an excellent product sourcing solution, it is by no means a perfect solution. Drop shipping comes with several drawbacks, including the following:
- You lose some control over shipping times, packaging processes, and package branding.
- Your supplier may run out of a hot-selling product.
- Shipping fee for single product is relatively higher.
- You can’t take advantage of bulk discounts.
Calculating the cost-advantage of using a Drop Ship Provider
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 drop ship supplier and compare them to the costs of using a drop-ship supplier.
The following example of Susan’s Lingerie Shop should provide you with the guidance you need to make the calculations for your own business.
Susan’s Lingerie Shop
Susan just opened her own online Lingerie shop and is weighing the decision of whether to utilize a drop ship product source with her business or obtain stock from bulk distributors and sell from her own personal inventory.
To make a good business decision, Susan realizes that he must account for savings and costs in terms of both time and money.
Calculating the Savings of Using a Drop Ship Supplier
First, Susan jots down a list of areas in which a drop ship supplier could save time for her:
1. No need to create product images and descriptions.
2. No need to pick orders.
3. No need to package customer orders.
4. No need to deliver packages to FedEx, UPS or USPS.
Based on the products that Susan plans to sell on her web store she needs to determine on average how much time she can save on each of these activities. Susan comes up with the following estimates:
1. 1500 minutes saved by using the supplier’s product images and descriptions. (10 minutes per product listing with a total of 150 products).
2. 5 minutes minimum picking and packaging each order.
3. 40 minutes per day driving products to the shipping outlet.
Total time savings for Susan:
1. An upfront time savings of 25 hours (150 products at 10 minutes each).
2. An average daily savings of 1.3 hours (assuming 7.5 orders a day plus 40 minutes commuting to a shipping outlet).
Now Susan must determine how much she feels her time is worth. Applying the simplest approach possible, Susan uses her last job as a measuring stick, where she averaged $15 an hour. Now Susan knows that using a drop ship 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 Susan needs to determine her 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 Susan will be about her decision. According to Susan’s ballpark figures, she estimates the following savings:
$250 per month on warehousing.
$1.20 per order for packaging materials.
Susan also note that she will not have to bear the risk of keeping unsold stock, which could be another heavy cost for her business. She estimates that the unsold stock could account for 25% of the total inventory. Dropship will eradicate this risk and translate an immediate saving of $600 for her every month [(7.5/75% -7.5) x $8 x 30days].
Calculating the costs of using a Drop Ship Supplier
Calculating the added costs a retailer absorbs when working with a drop ship company can be more difficult to determine than the savings.
First, Susan knows that her drop ship supplier charges a $38 drop fee per year. Second, Susan loses some good discounts he could have had if she purchased his inventory in bulk. She estimates that will cost him about 30% of her wholesale price. With an estimated average cost of goods per order around $8, that will cost an extra $2.40 per order.
Susan must also account for the loss of control over shipping times. Susan estimates, conservatively, that one out of 20 orders may end up shipping later than her customers will find acceptable. Susan anticipates she’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 she sends that will end up costing her 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.
Susan estimates the loss in potential branding to be nominal, so she simply applies an arbitrary amount of $0.05 an order. Any scalability setbacks seem irrelevant to Susan right now, so those costs are determined to be zero.
Finalizing our ROI calculations
Here Susan compiles all of the costs and savings information she has gathered and normalizes them on a per day basis, assuming that she will average 7.5 product orders a day.
| Susan’s Lingerie 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 |
| Saving on the cost of unsold stocks |
$20.00 |
||
| Warehousing |
$8.33 |
||
| Packaging fee |
$9.00 |
||
| Subtotal |
$56.71 |
||
| Costs per Day | |||
| Drop fees |
($0.14) |
||
| Bulk discount loss |
($22.50) |
||
| Shipping refunds |
($2.63) |
||
| Subtotal |
($25.27) |
||
| Net Savings |
$31.44 |
||
Based on Susan’s analysis she will save and extra $31.44 each day (or about $940 a month) she runs her site by using this particular drop ship product wholesaler. Plus she also will have the upfront one time savings of $383 in time listing the products on her site. In Susan’s situation, it makes sense for her to work with the drop-ship source provider.
Article is contributed by the Editor of www.lingerie-supplies.com. All rights reserved.