The Disadvantages to Drop-Shipping

There are four major disadvantages to drop-shipping products as a retailer online. The first is inventory: your supplier may not have an accurate online accounting of inventory and you may end up selling an item your supplier cannot send to your customer.

The second disadvantage is timing and control: your supplier may be slow to ship for various reasons and you have little control over the speed of shipping or the accuracy of the shipment itself. Slow shipping is one of the biggest complaints of customers online. Shipment accuracy brings us to the third problem with drop-shipping: returns.

Making returns of drop-shipped items, for whatever reason, is a huge hassle for the seller - especially if that retailer wants to hide the fact that he/she is drop-shipping to the customer. Often this means the seller takes a "hit" in profits and receives the return themselves, then negotiating with the supplier for a return.

The biggest of the disadvantages to drop-shipping is pricing. Drop-shipped items are usually at a higher price-point compared to true wholesale pricing (pricing based on bulk purchases). So many sellers may find themselves out-priced by those who inventory instead of drop-shipping.

While for many retailers online, drop-shipping is the way to do business most effectively, many find that it has too many problems for their particular situation.

The Advantages of Inventory

The above disadvantages to drop-shipping are nullified when the retailer instead chooses to inventory ("stock") items they are selling. Many find that, when properly managed, inventory items can have huge advantages over drop-shipping: the largest of which is usually pricing.

Buying from a supplier in bulk nearly always results in lower prices per item than does single-item purchasing and/or drop-shipping. Many suppliers charge per-shipment drop-shipping charges on top of this higher price point. Others use this extra charge as a way to make up for their extra effort to ship single items.

For instance, on my site AWWReseller.com, the book "Work From Home At Any Age" is priced as a single item (including drop-shipping) at about $2 more than it is for bulk purchases of several books at once. This makes up for the effort I have to go through to track the inventory for single-item changes as well as the time it takes to package a single item versus several (the time is the same, but my profit is higher for several versus one).

The Disadvantages to Inventory

The largest disadvantage to inventorying products for resell is the risk you take that some of those items in your inventory can't be sold. While most suppliers will accept returns of unsold product, there is usually a "restocking" or similar charge involved (usually around 20%).

The other big worry for sellers who inventory is space. Most online sellers (retail or auction) are working from their homes and so have a limited amount of space to inventory products for their business. Many feel "forced" to drop-ship due to this limitation.

Inventory and Tracking

Regardless of your reasons for doing so, if you choose to inventory items to resell, you'll need to track your inventory of those items. Whether you have one or several products, keeping your inventory records accurate is extremely important for business purposes and possibly for tax reasons as well.

U.S.-based businesses use GAAP (Generally Accepted Accounting Practices) rules to define how they track inventory. Public companies traded on the stock market usually use a financial accounting model (based on total worth of inventory, rather than number of units) to track inventory. Private companies generally use cost accounting functions which track inventory based on what it costs to purchase, store, and track the inventory itself.

Without getting into the complexities of inventory tracking, it's important to understand that tracking inventory correctly can be as simple as just keeping track of the number of items you have or as complex as tracking total costs (cost of goods plus cost of storage space plus cost of utilities plus insurance costs, etc.) for each item. A small, home-based business can usually use the simple "I have this many of that item" method and never have any problems. Larger businesses, however, are better off keeping track of all costs associated with inventory and selling.

Regardless of your methods, you'll want to make sure you do an occasional audit to make sure that your records match the actual physical items you have on the shelf. This prevents you from selling an item you don't actually have in stock.

Conclusion

Whether or not you choose to inventory products to sell or use drop-shipping services is a very personal decision made according to your particular business' needs. If you do decide to inventory products, you should make sure you understand the requirements for doing so, as outlined above, and start off on the right foot to avoid problems later on.