As a new business owner, one of the key decisions you will make is deciding which business model to use. As your business scales up you may need to revisit this decision but for the time being it is likely your funds and your customer base is short. Drop-shipping can fast-track your e-commerce business by getting it off the ground for a fraction of the cost, but is it right for you?
Drop-shipping feels like an inevitability to many business owners. Business news pages have had a steady stream of articles covering it over the last few years, with many announcing it to be the quick and easy route to making money. Let’s break down the advantages of drop-shipping so you can make an informed decision on the direction of your e-commerce business.
What is drop-shipping?
Drop-shipping may be a reasonably new phenomenon in the world of e-commerce, but it has become popular enough to already feature in the dictionary. The Cambridge dictionary defines it as “an arrangement in which a manufacturer sends products directly to buyers at the request of businesses who advertise and sell the products but do not stock them”.
You are the shop-front, advertising the product and taking in the sales. The stock is held off-site by another business, often the manufacturer, who holds the stock and dispatches it when asked. At no point do you own the stock, but you do make a profit on it.
Not many e-commerce business owners have a large cash investment at the start. It is far more likely that your business needs to start on a shoestring budget, or that you are yet to get off the ground because of funding issues.
The number one cost of starting an e-commerce business is the stock. The larger the bulk purchase, the cheaper the item, creating more of a profit margin for your fledgling business. Remove that cost all together and you suddenly have very small start-up costs and overheads as you start trading.
Test the market
If you already have a thriving yet limited e-commerce business, you may wish to expand into more related product lines or try to branch into an unrelated area. This can be accomplished by R&D, but you could also consider drop-shipping the new product lines to see if there is a demand from your customers.
While expanding your product range enables to test the waters, it also offers further value to your existing customers. By adding new products, you are keeping them engaged and ensuring you don’t fall off their radar. It’s also quicker to launch new products, as the drop-shipper will be the one sourcing it. Your inventory can be as varied and large-scale as you wish.
Drop-shipping means you only pay for the goods after you’ve sold them. This allows your assets to stay liquid and removes the risk of a new product line failing. The economies of scale enjoyed by the drop-shipping businesses also mean the costs that rack up during an item’s journey through the supply chain are lower than they would be if you were working solo.
VAT for drop-shipping
When sending products to customers across different country borders there may be legal implications and requirements to pay taxes. With most e-commerce businesses choosing to sell internationally (why limit your potential buyers) this can be tricky to navigate. Unicorn Accounting specialise in assisting e-commerce businesses. We can help you figure out your compliance, financial and legal obligations no matter where and what you choose to sell.
Drop-shipping is time-saving
If there is one thing business owners are always short of, it’s time. Drop-shipping reduces the labour time needed to get the product from your warehouse to the customer. By removing that piece of the puzzle to an external party you will have more time to put into scaling your business.
If you are looking to bring something new to the market, then it will likely still need to be made in house. Drop-shipping is only an option for existing products. If you are creating something innovative make sure to capitalise on R&D tax credits.
You will also be responsible for someone else’s errors. No one is perfect, and if a mistake is made by the drop-shipping agent, the customer will come back to you, not them, to sort it out. Make sure you use a reputable drop-shipping company and be prepared to deal with occasional unsatisfied customers.
The profit margins on drop-shipping are small. If your business is registered for VAT, drop-shipping may be more complicated. Make sure you factor in the item’s cost, drop-shipping fees, and any delivery fees to ensure you are still making a healthy profit. If you cross the VAT threshold after commencing drop-shipping, or sign-up voluntarily, ensure you conduct some thorough analysis to adjust for the change.
What to do next
Many e-commerce business owners use a combination of drop-shipping and in-house inventory. This allows quality products with higher profit margins to be sold alongside more experimental or associated items. For example, selling tailored boxing gear alongside drop-shipped boxing DVDs.
If you’re starting out, wondering the tax implications or seeking an accountant who is able to support and scale your e-commerce business, then the staff at Unicorn Accounting are always happy to help. Using our specialist e-commerce knowledge, we can work with you to grow your business to its true potential. Get in touch today to discuss what we can do for you.
The best time to start is now.