If you’ve considered starting your own eCommerce business, it can be difficult to know where to begin. For those with limited space to run a business from the comfort of their home, it is important to figure out where to store your products and how to access your inventory. Traditionally, retailers will rent warehouses in order to store products.
However, there is now an alternative business model available for eCommerce stores, which is drop shipping. Here, we’ll cover what drop shipping is, how it works, as well as the advantages and disadvantages of the model to give you a better idea of whether it could work for your business.
Drop Shipping Explained
As an order-fulfilment method, drop shipping allows the seller to purchase inventory as and when from a third party such as a wholesaler or manufacturer.
The main difference between drop shipping and standard retail practices is that the seller does not own the stock or inventory as a drop shipper. They simply act as a middleman between the manufacturer and the customer. Drop shipping essentially relies on the supplier to deal with inventory warehousing, order fulfilment, and shipping, removing the stress of stock management from the seller.
Comparison of Drop Shipping & Traditional eCommerce Retail
How Does Drop Shipping Work?
There are two popular approaches when looking to adopt a drop shipping model of business.
Firstly, you can seek out either one or multiple wholesalers located in the US via a supplier database. There are several supplier databases online such as Worldwide Brands and AliExpress, so you should not have much trouble finding a suitable supplier on your own.
Alternatively, you can use an app or online site to connect with different suppliers, saving you the hassle of researching various databases. The app DSers is one example of an application to help independent business owners find sellable products, but there are numerous similar versions on iOS or Android app stores.
Once you have found an appropriate manufacturer or wholesaler, all you will be required to do as the seller is check the details are correct on every order and forward the details to them. The product or package will then be shipped directly from the supplier to the customer wherever they may be.
Advantages Of Drop Shipping
There are a variety of reasons why drop shipping has become such a widespread business model and continues to increase in popularity. Drop shipping is commonly seen as a hassle-free way to get an eCommerce business up and running. Discover more advantages below:
- Easy to start: With the requirement of dealing with physical products removed, it is much easier to start and sustain an eCommerce business with a drop shipping model.
- Flexibility: All you really need to run a successful drop shopping eCommerce business is a stable internet connection. You can therefore run your business from almost anywhere in the world.
- Minimal upfront capital: One of the best things about drop shipping is that you do not need to invest a lot of money in stock, instead you buy the products once a sale has been made by the customer.
- Scalable: Leveraging drop shipping suppliers allows you, as the seller, to expand your business seamlessly without concern of added strain.
Disadvantages Of Drop Shipping
However, drop shipping does not come without its downsides. Like most things, flexibility and convenience come at a higher price, making drop shipping unsustainable for some sellers. Learn about the negatives associated with drop shipping in the list below before jumping into an eCommerce business:
- Slim profit margins: Many businesses have set up drop shipping models due to the convenience that comes with it. Competition for such products is therefore higher which can hurt profit margins if you’re not careful.
- Inventory complexities: When managing your own stock, it is easy to keep track of your inventory. However, with a supplier who is also fulfilling orders for other sellers as well as you, the amount of inventory available can change on a daily basis.
- Limited customisation: Another disadvantage is that drop shipping does not allow sellers to customise their products with their own branding how they might like. Instead, products will likely have the supplier’s branding.
Sales Tax and Nexus in Drop Shipping
Sales tax is a crucial aspect of running a drop shipping business, and understanding how it works can help you avoid costly mistakes and stay compliant with tax regulations. Here’s a breakdown of how sales tax applies to drop shipping and the concept of nexus.
How Sales Tax Works for Drop Shipping Businesses
Sales tax is a consumption tax levied on the sale of goods and services. For drop shipping businesses, sales tax obligations can be more complex because you’re acting as an intermediary between the supplier and the customer.
Here are some key points to consider:
- Taxability of products: Different states or countries may have varying rules about which products are taxable. Some regions may exempt certain types of goods from sales tax, while others may tax them.
- Supplier’s role: In a drop shipping model, the responsibility for collecting and remitting sales tax can depend on whether your supplier is located in the same jurisdiction as your customer. Typically, sales tax is collected at the point of sale based on the delivery location of the customer.
- Nexus: Start by assessing physical nexus, which can be established through activities like having a warehouse or office in a state, or employing staff there. Next, evaluate economic nexus by tracking your sales and transactions to see if you exceed state thresholds for sales volume or transaction counts, which often require you to collect sales tax.
Wrapping Up
Drop shipping offers a flexible and low-barrier entry into the eCommerce world, but it comes with its own set of challenges and considerations. By understanding how drop shipping works, weighing its advantages and disadvantages, and staying on top of drop shipping sales tax, you can navigate this business model more effectively. Properly managing these aspects will help you build a successful drop shipping business while ensuring compliance and optimizing your operations.