This Drop Shipping model was invented especially for small businesses that do not have enough of capital for starting own well running business. The risk of inventory is low as the money that needs to be paid is minimal. This model is also very suitable for businesses that do no have or cannot afford warehouses and storages.
There are two Drop Shipping systems that I will name system A and system B. Both systems are combined of three segments; customer, e-commerce site and brandXYZ, however, the links between these segments are for each system different. In this case, the e-commerce site is Asos.com and for brandXYZ I chose Michael Kors.
In system A, when a customer purchases an item from Michael Kors on Asos.com, Asos.com will order this item from the official store of Michael Kors. Michael Kors will send the item to Asos.com, and Asos.com will repack the item and wrap it into their own package. Subsequently, Asos.com will send the desired item to the customer. See Appendix A, Figure 1 for the diagram of Drop Shipping method, system A.
Drop Shipping Model System A, My Diagram
In system B, when a customer purchases an item from Michael Kors on Asos.com, Asos.com will also order this item from the official store of Michael Kors. Once Michael Kors has the item ready, the store will send this item directly to the customer, skipping the ‘middleman’ segment being Asos.com. See Appendix A, Figure 2 for the diagram of Drop Shipping method, system B.
Drop Shipping Model System B, My Diagram
Benefits
This model minimizes financial risks due to low inventory. There is no need for warehouse or storage space since retailers using this model demand particular item from the manufacturer/wholesaler once a customer places an order. Retailer not using this model might worry about the items that are not being sold, as they are not desired anymore possibly since it is no longer trendy or in fashion. However, retailer using Drop Shipping model does not have to worry about this at all as there is nothing in stock. The transportation costs are also lower since there is no need for large trucks bringing new items.
The retailer using this model is able to sell wide variety of different products, which means that there is a higher chance of meeting customer’s needs. Due to this model, retailer is able to offer and sell products that would have never been possible due to no storage space such as large furniture items.
According to Andrew Youderian and his article Drop Shipping: The Easiest Way to Sell Online, the four main benefits of Drop Shipping Model are; “1. You Don’t Need Buckets of Money; 2. Convenience & Efficiency; 3. Mobility; 4. It’s a Trusted Model” (Youderian, 2012). These four benefits that Youderian states are correct and that is why this model is so popular and worldwide used nowadays.
Drawbacks
The most important aspect to keep in mind is finding good and reliable wholesalers. Wholesalers are suppliers therefore; the retailer is dependent on them. Unreliable wholesalers can easily damage the reputation of the e-commerce site and retailer. E-commerce sites using system B of Drop Shipping method do not have any control over the final packages that are delivered to customers and that can be a disadvantage. First of all, the retailer cannot make sure how well the packing is done since there is no physical contact between the ordered product and the retailer. Package may arrive damaged from the supplier, whoever, the blame of the customer will automatically be put on the retailer e-commerce site.
Regardless of system A and system B, e-commerce sites are dependent on how long it will take for the supplier to obtain ordered product, if the product is available and so on. Suppliers may negatively influence customer behaviour that can harm the e-commerce site retailer (if package is delayed, customers may loose trust in the e-commerce site and no longer be loyal customers).
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