Drop Ship Value
Drop Ship Services: What are they worth?
You may have heard people say that it is too hard to make money through drop shipping. But what you may not know is that thousands of retailers sell millions of dollars of merchandise every month though drop shipping and make a handsome profit doing it.
In fact, many of the largest retailers in the world (like Sam's Club, Costco, and Amazon) utilize drop shipping as a method to fulfill their customers' orders. 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.
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.
- 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.
- Drop fees may increase your expenses. (A drop-fee is a handling fee charged per shipped order.)
- 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 Paul's Candle Shop should provide you with the guidance you need to make the calculations for your own business.
Paul's Candle Shop
Paul just opened his own online candle shop and is weighing the decision of whether to utilize a drop ship product source with his business or obtain stock from bulk distributors and sell from his own personal inventory.
To make a good business decision, Paul 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, Paul jots down a list of areas in which a drop ship supplier could save him time:
- No need to create product images and descriptions.
- No need to pick orders.
- No need to package customer orders.
- No need to deliver packages to FedEx, UPS or USPS.
Based on the products that Paul plans to sell on his web store he needs to determine on average how much time he can save on each of these activities. Paul comes up with the following estimates:
- 1500 minutes saved by using the supplier's product images and descriptions. (10 minutes per product listing with a total of 150 products).
- 5 minutes minimum picking and packaging each order.
- 40 minutes per day driving products to the shipping outlet.
Total time savings for Paul:
- An upfront time savings of 25 hours (150 products at 10 minutes each).
- An average daily savings of 1.3 hours (assuming 7.5 orders a day plus 40 minutes commuting to a shipping outlet).
Now Paul must determine how much he feels his time is worth. Applying the simplest approach possible, Paul uses his last job as a measuring stick, where he averaged $15 an hour. Now Paul 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 Paul needs to determine his 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 Paul will be about his decision. According to Paul's ballpark figures, he estimates the following savings:
- $200 per month on warehousing.
- $120 per month on pre-payment of inventory.
- $0.60 per order for packaging materials.
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, Paul knows that his drop ship supplier charges a $1 drop fee per order. Second, Paul loses some discounts he could have had if he purchased his inventory in bulk. He estimates that will cost him about 5% of his wholesale price. With an estimated average cost of goods per order around $10, that will cost an extra $0.60 per order.
Paul must also account for the loss of control over shipping times. Paul estimates, conservatively, that one out of 20 orders may end up shipping later than his customers will find acceptable. Paul anticipates he'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 he sends that will end up costing him 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.
Paul estimates the loss in potential branding to be nominal, so he simply applies an arbitrary amount of $0.05 an order. Any scalability setbacks seem irrelevant to Paul right now, so those costs are determined to be zero.
Finalizing our ROI calculations
Here Paul compiles all of the costs and savings information he has gathered and normalizes them on a per day basis, assuming that he will average 7.5 product orders a day.
|Paul's Candle 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|
|Pre-payment of inventory||$4.00|
|Costs per Day|
|Bulk discount loss||($3.75)|
Based on Paul's analysis he will save an extra $20.67 each day—or about $620 a month—he runs his site by using this particular drop ship product wholesaler. Plus he also will have the upfront one time savings of $383 in time listing the products on his site. In Paul's situation, it makes sense for him to work with the drop-ship source provider.
In the example it made sense for Paul to use a drop ship supplier. However, the important point is that a true cost analysis needs to be performed and include the time value savings that drop shipping offers. While it may not be a beneficial decision for some retailers financially, it may be an absolute "yes" decision for other retailers. Each retailer has unique core competencies that they must keep in mind while considering what's best for them.