How to Kill Your Margins, Take Home Less Money, and Put Yourself Out of Business Quickly
This is a guest post by Michael Maher. Michael is a visionary entrepreneur with an insatiable curiosity for knowledge and new ideas. He has successfully run an e-commerce company for the past 7 years and is a consultant for other businesses. By providing business owners with a customized plan to navigate the e-commerce world with exciting on-brand content, digital marketing strategy, and implementation guidance, these owners are benefiting firsthand from his failures and successes. Check out his blog at Mattersofthecart and follow him on Instagram and FB @mattersofthecart.
Is drop shipping too good to be true? In my experience, anything that seems too good to be true always is. And this scenario is no different.
Let me be clear. Drop shipping is a great way to add a new revenue stream on top of your existing business structure. Will you get rich quick? No. Is it great for people just getting in the game? Eh. If it’s your only source of income to start with, will your business be viable? Probably not.
What is drop shipping?
Drop shipping refers to e-commerce logistics where items are shipped from a warehouse that is not yours. You list the item, a customer buys the item, you send an email to the warehouse, then the warehouse bills you and ships the item. Basically, you get to sell an item without physically having the item in your hands.
Now I’m going to sell you on why drop shipping is so great.
Benefits of drop shipping
Probably the biggest attraction to drop shipping is the ability to sell a product without buying it outright. Inventory is typically your main expense when running an e-commerce product-driven business. Sitting on inventory that doesn’t turn over quickly, ideally every 2-3 months, can wreak havoc on your budget, especially with high dollar items.
If you drop ship, you don’t have to worry about items being on your shelves for too long, hence the great curb appeal of the concept.
After shipping costs, labor can start to add up. When drop shipping, you don’t have to pay someone to package up your product or for the materials.
Last of the theoretical selling points is the ability to work remotely. I’m sure you’ve seen ads or blogs talking about “How To Start Your Own Business and Work Anywhere In the World.” While this is technically true, that is a fantasy, which is why I’m now going to talk you out of ever drop shipping.
Why you shouldn't drop ship
How do you make money with products?
Most people would say sales, but the correct answer is your margins.
Drop shipping can be costly
If sales are high but your costs are also high, your take-home revenue with be slim to none.
I know these are seemingly basic principles, but this foundation is necessary to stay focused on all the minutiae of running your own ship.Inventory can be tricky with drop shipping, but most manufacturers send out weekly, or even daily, inventory lists, allowing you to update your listed quantities accordingly. In that case, the only real negative
Inventory can be tricky with drop shipping, but most manufacturers send out weekly, or even daily, inventory lists, allowing you to update your listed quantities accordingly. The only real negative is cost; and it’s in bright red.
You pay the cost for the item, which could be cheaper if you stocked and bought in bulk, and then you pay shipping. You’ve lost control over your rates, unless you have negotiated rates and are allowed to use your own account, so now you’re at the will of the warehouse. You can’t be sure if there is a markup but it’s very possible. After all that cost, there is usually some kind of fee charged per order. It may not make a difference if your product costs $2000 and your Net take away is higher, but on a $15 product you will more than likely lose money.
Drop shipping may take a long time to deliver
To add icing on the cake, there can be additional delays in shipment if your email with an order takes several days to make it to the actual dispatched truck. Your email may have to course through an orders department, an account rep, and then the purchasing department for approval. Then, they send an invoice with a shipping rate, and may ask for your approval. I've seen it happen where only then will purchasing give the rep the go-ahead to process the order, and it’s then forwarded to the warehouse. The warehouse, depending upon their workload, will package the item for shipment and set it aside for pickup. It could go out same day, but if pickups have already occurred, it’ll be another business day until it gets picked up.
This entire process could be anywhere from 2 - 5 business days. Remember that after all this, the item is just now leaving the warehouse. It could take up to two weeks, depending upon size and shipping method, to actually reach your customer.
There are always two sides of a coin
There are definitely times where drop shipping can work in your favor, but I want to caution that it very well might tip the scales towards a loss.
What products do well with drop shipping?
I want to walk you through some products so you get an idea of what items will work best with this fulfillment method.
Large, expensive, and heavy items will have a higher cost but also a higher retail value. If your space is small, these can be cumbersome to stock and it’ll most likely eat away at your cash flow.
For instance, imagine a dresser drawer unit costing you $300 but selling at $600. Let's say 10% of the purchase goes to selling fees, $75 to shipping, and there is a $15 drop shipping fee. Your take home is $150 or a margin of 25%. Drop shipping makes sense here
With a smaller item you’ll undoubtedly have less cost involved, but even if your margin is high, the shipping and drop shipping fee will eat away at any potential profitability.
Say you sell a small reindeer figurine that costs you $10 and you can sell it for $40. At first glance, your prospects look good. But with the 10% fee, $7 to ship, and the $15 drop ship fee, you take home is $4 or 10%. You would need to sell 3 of these in order to make enough to buy another one. You’re now on the scenic route to draining your bank account.
My recommendation; add this form of revenue to an already healthy bottom line, but exercise caution.
I’m not saying do it in moderation. You must put in the hard work to build a solid and successful business, and then when your cash flow is up, add drop shipping in (after you do your research) as a tool to increase revenue and Net profit. If this is your first revenue stream for your business, step away and fast. Healthy margins are what truly drive businesses and with small margins, you have little opportunity for growth.