Let¡¯s first talk about the true benefit of drop shipping. The main reason small businesses can get into the drop shipping business is there usually are no upfront inventory costs to buy which in turn results in a positive cash flow. This positive cash flow occurs because the seller more often then not is paid when the purchase is made. The seller then turns around and pays the manufacturer, distributor or wholesaler using a credit card or if negotiated properly gets credit terms where goods are not paid for 30-60 days. So the seller has the customer¡¯s money, but does not pay for the goods immediately and this is commonly referred to as ¡°cash float¡±. Not owning the inventory gives the drop shipper the ability to sell thousands of products, whereas in traditional brick and mortar retailing, these sellers are limited to the inventory they actually purchase.
But as in any business, risks are involved in drop shipping. The biggest risk is the seller sells a product from their online store that the supplier has sold out. Now you need to deal with customer service issues and as anyone doing business on the Internet knows, online customers don¡¯t want excuses, they only want their products. So your supplier now makes you look inept as a drop shipper. Another risk is you are relying on a third party shipper to deliver the goods to the customer. Shippers lose goods and they damage goods. Customers don¡¯t care who the shippers are, because as far as they are concerned, the drop shipper is responsible. Now you have another customer service nightmare, figuring out where the goods have actually ended up. A third risk is the quality of the merchandise is not what the customer perceived it would be and now you are stuck with taking back a return. Where, then does the return end up? Your spare bedroom or the vendor who shipped it originally?