Money On The Margin

Money Today,

Do you want to own a profitable e-commerce business? Starting a full-fledged online retail store can be a daunting task involving investment in inventory, warehouse and logistics to procure and deliver products.

How about an online business where all that you need to do is collect payments? Sounds too good to be true? Thanks to the drop-ship business model, it is a possibility.

Online businesses are flourishing in India. While existing e-commerce players are scaling up operations by adding products and services, new portals are successfully claiming a pie of the $10 billion Indian e-commerce market. The market still has the capacity to absorb many more players.

“The number of Internet users in India crossed 100 million last year and it is still growing by leaps and bounds. According to some projections, it is expected to cross 230 million in 2015, almost 20 per cent of the population.

Currently, e-commerce penetration is very low in India if we compare it with that of the rest of the world. This is an advantage for e-commerce as it allows the players to explore untapped Indian markets and get absorbed,” says Dinesh Agarwal, founder and chief executive officer, IndiaMART.com, a business-to-business marketplace.

SELL AND BUY
In this growing market, a lot of manufacturers are willing to drop-ship, or send products directly to an end-consumer on receiving an order from a retailer (seller).

As a seller, you identify and contact suppliers or manufacturers for products you want to sell. After finding a suitable supplier who drop-ships, the products are listed for sale on your site, classified sites such as Olx.in, ClickIndia.com and Quickr.com, deals aggregators such as SnapDeal.com and online marketplaces such as eBay.com, Infibeam.com and Naaptol.com.

The retailer does not require to stock products as orders are shipped to the end-buyer directly by the supplier, who gets paid by the retailer. Some drop-shipping companies even dispatch products with the branding of the seller. You can find them on business-to-business portals such as Alibaba.com and IndiaMART.com.

As you are free to fix resale prices for the products, the margin between the prices offered by the supplier and the retail price will be your profit. Of course, there will be some costs in managing the retail business. So the profitability in this business depends on your ability to find reliable suppliers offering sufficiently low prices.

“Though drop-shipping is not a new concept in India, it is still gaining momentum and penetrating deeper into markets. It is popular with larger e-retailers who want to minimise investments in stocking up inventories. Apart from bigger players, several niche e-retailers are also using this model extensively,” says Dinesh Agarwal.

A drop-ship based business also offers greater flexibility and allows the seller to test new markets without having to worry about unsold inventories. This should help identify niche products.
Drop-shipping helps manufacturers as well.

“Many brands and large manufacturers are not geared for retail sales. So they use the services of ‘trading assistants’ to manage the logistics for them. This could involve the provision of services such as listing and customer service or even stocking products and shipping them out,” says Deepa Thomas, head, partnerships, eBay India, an online marketplace.

On eBay.com, trading assistants are sellers who serve as the connecting link between manufacturers and buyers. They list the products online, handle sales queries, payments as well as shipping of products in exchange for a fee for each sale.

This model is very similar to the drop-ship business model, except that the actual product fulfillment (or delivery of the item) is also done by the seller in the former model.

WHY USE DROP-SHIPPING?
>> Low start-up cost
>> Buy products after receiving orders
>> No need to invest in inventory
>> Shipping handled by supplier
>> Easier to experiment with products and markets
>> Limited risk exposure
>> Start working from home
>> List large number of products

ENSURING SUCCESS
A drop-ship based retail business requires a comparitively small investment and is exposed to low risk. You can start selling through online marketplaces without any initial cost of set up, but success requires a lot of effort and time spend on marketing on the Internet.

“The investment is more about time than money. New online retailers need to research a strong market with an opening for drop-shipping. They also need to take the time to build a website (if you stay away from established marketplaces) and get it ranking in search engines or use other methods of pulling traffic to their site,” says Simon Slade, chief executive officer of SaleHoo.com, a New Zealand-based online platform facilitating trade between retailers and drop-shipping companies.

PRODUCT MIX
Some products and categories are more popular in the drop-ship circuit.

“The market trend shows that drop-shipping envelopes products mainly from categories such as computer accessories, beauty products, clothing, cellphones, toys and books. We expect that the spectrum will become wider in the future,” says IndiaMART.com’s Agarwal.

Niche retail websites selling apparels, baby products, fashion products, etc, are performing pretty well. It can be easily seen from the recent increase in the number of specialised online retail websites.
Apart from finding the right niche, pricing of your products is also important for success in the online space. While the price has to be competitive enough to attract customers, it should also allow substantial profit margin. In your quest to find a cheap manufacturers or suppliers, you cannot ignore their reliability as they comprise one of the most important links in your business chain.

“You must engage with trustworthy manufacturers and drop-shippers who have the will and wherewithal to service you and your customers. This will ensure minimal operational flaws and better customer satisfaction and help establishing your brand in the market,” says Agarwal.

SaleHoo.com’s Slade also emphasises the importance of finding the right drop-shipper. “In terms of infrastructure, a strong relationship with a supplier is as important as a platform that is free from too much competition to sell the items (which is why individual websites are preferred over marketplaces such as eBay.com),” he says.

As finding the right products, trustworthy suppliers and putting products on sale is a time-consuming process, several online platforms, such as SaleHoo.com, Doba.com, Shopster.com and WorldWideBrands.com offer paid services to help you start selling products offered by drop-shipping companies. Most offer free trials.

Marketplaces like eBay.com provide greater access to buyers, but you also have more competition from other sellers.
“Drop-ship retailers are coming away from marketplaces where the drop-ship model struggles and are moving towards owning their own website, which gives them more control over their business and their market,” says Simon Slade of SaleHoo.com.

Several companies, including Indian firms, also provide turnkey e-commerce portals to start a store on your own website. Such online services are available for Rs 1,000-5,000 per month.

DEAL BREAKERS
The drop-ship business model for retailing is also not totally free of risks. One of the biggest disadvantages with this model is the high cost of products when compared with bulk purchases in the market.

“Often drop shippers need to add $2-$5 to the cost of each item they sell in order to cover their costs of dispatching the item. For some online sellers, this can make it difficult to compete with other sellers who buy in bulk and get cheaper prices per unit,” says Slade.

Even in this type of e-retailing, you are dealing directly with customers. You have to face the challenge of earning their trust, providing support, quality products and timely delivery. Your customers expect quick resolutions of queries and issues, which might require you to be available on phone and email for long and sometimes odd hours.

Selling products offered by a drop-shipping company also means you do not have direct control over inventory. If the product goes out of stock with your supplier, the responsibility to deliver on time will rest on you.

“In case, the drop shipper runs out of inventory, you need to take responsibility and communicate delays or cancellations to the customer,” says Dinesh Agarwal of IndiaMART.com.

Return of products is quite common for online retailers. When selling through a drop-shipper, it can be a slightly tricky situation. You must have a clear plan on who the buyer return the product to how the money is refunded.

Selling with Google

The Internet search giant Google has a dedicated shopping search engine showing products from various merchants worldwide. It also allows users to find merchants available near their locations. You can use Google shopping search to get more sales for free by investing some time to set it up and update your product details.

You will need a Google account to get your products listed in Google Shopping (http://www.google.com/merchants). Setting up the Merchant Centre will not take more than a few minutes. Once you add your business contact details, you can start listing your products manually, through a product listing file or through an automated data feed from your website.

Selling tips: It is important to keep your title and product descriptions as interesting as possible. As it is important to rank high for driving customers to your website and your products, you must encourage your buyers to leave reviews of products they buy on various review websites. Success is all about putting in the required effort.

Despite the challenges of starting a drop-ship based retail store, it remains one of the easiest ways of entering the e-commerce space, which has great opportunities in a relatively new yet huge market like India. Once you have gained some experience and have had success, you can start maintaining an inventory and handle the shipping for bigger profits and better control over your own business.

WHY AVOID DROP-SHIPPING?
>> High cost of products due to retail purchase
>> Lack of control over product quality and deliveries
>> Lower margin compared with bulk purchase of products
>> Risk of supplier running out ofproduct inventory
>> Return of products and refunds pose logistical problems and affect profits