by Claudia Bruemmer

While retailers have been struggling since the recession started a few years ago, many of them are now looking for ways to increase sales without using precious capital. Drop shipping is a great way to save capital because retailers can take orders without having to stock inventory, and they can ship directly from their suppliers. The benefits are low overhead, zero investment, no warehouse and shipping overhead. Retailers can negotiate a confidentiality agreement with suppliers so their customers don’t know the difference.

With suppliers shipping directly to their customers, retailers can experiment with new products. They can branch out into new product categories without prior experience, and they can try new styles because they eliminate the risk of investing in inventory that might not sell.

Drop shipping is a real boon for start-ups in apparel, giftware, health and beauty products and many other categories. Retail merchants can try drop shipping 20 percent of their products, and then increase gradually if it proves successful. They can warehouse the products they have a high demand for and drop ship other products with less demand.

Drop Shipping Contracts. Setting up contracts with various drop shippers can be a challenge. Retailers must take into account the supplier’s payment terms and whether they have a set charge for warehousing and shipping costs versus charging a percentage of sales. There are other questions regarding whether the products are always in stock. Retailers also need to ensure their suppliers will pack things to their specifications and provide good customer service. It is important to spell out your requirements and have a person on the other end you can deal with directly.

Drop Shipping Fees. Depending on a retailer’s sales, some suppliers will charge a drop shipping fee on top of a shipping fee, while others don’t. If you are a new vendor, the supplier might want to test you, starting off with a drop shipping fee.  For small orders, suppliers usually charge from $3 to $5 for drop shipping.

The margins vary widely in different product categories, but some suppliers average 25 percent gross margins on small appliance items, for instance, and 30 percent on those stocked in the warehouse. Suppliers usually must sell at least 12 such items per month to justify stocking the item in the warehouse.

No Cash Outlay. The benefit of drop shipping for retailers is they don’t have to pay ahead for products advertised and sold. On average, they get the payment from their customers 10 to 15 days before they pay their supplier so they never have a cash flow problem. They can offer a wide selection in a lot of different categories, providing customers with anything they need without the risk.

The biggest challenge, however, is ensuring customer satisfaction. This takes a lot of coordination with suppliers to ensure orders are fulfilled to customer satisfaction. Some suppliers will pick, pack and ship an order, sending back the tracking number and shipping confirmation in 24 hours excluding weekends and holidays, while others take longer. In the beginning, it may take trial and error before finding the best suppliers.

Drop Shipping Demand. Because of the increased demand for drop shipping, some large retailers that hold inventory have become drop shippers for other merchants. They know that many merchants are tight on warehouse space and money and do not want to invest in inventory. This has been a win-win for both parties, with some retailers expanding their warehouse space to accommodate orders from smaller firms. The demand for drop shipping is high right now, and it actually exceeds supply.