If you already have an online store or are considering one of the many ways you can earn money by retailing products online, you’ve probably heard the term dropshipping. My intention here is to help you estimate the costs of using a dropshipping supplier versus the time savings and other tangible savings you’ll accumulate by capitalizing on their services.
Diane’s ROI Calculation
Diane is planning to open her own shop selling baby items online. She wants to start out featuring diaper bags. As she works out a business plan, Diane must decide whether to find diaper bags she can dropship or look for products she can purchase in bulk, store in her own inventory, and sell and ship.
Once Diane has determined what options are out there and identified a dropshipper with acceptable products to use for her estimations, she is ready to calculate her return on investment based on both scenarios mentioned above.
Knowing that dropshipping will largely pay off in time savings – which is an important part of the equation – Diane estimates the following:
- 750 minutes saved in product listings – by using the supplier’s product images and descriptions, she’ll save about 15 minutes per product listing on a total of 50 products.
- 10 minutes saved in handling (preparing and packaging) per order.
- 50 minutes saved in travel – that’s a per day time cost driving products to and from the shipping office.
Which amounts to:
- An initial time savings of 12.5 hours (50 products at 15 minutes each).
- An average daily savings of 1.67 hours (assuming 5 orders a day plus 50 minutes going back and forth to a shipping office).
Now Diane must determine how much her time is worth (to perform the same exercise, you can simply use the hourly rate you were paid for your last job, or check out The Simple Dollar or Pick the Brain for more thoughts on that calculation). Diane averaged $20 an hour with her most recent employer, so she’ll go with that. Right off the bat, Diane knows that wholesale dropshipping will create an initial (one-time) savings of $250 ($20 x 12.5 hrs), plus a daily average time value savings of approximately $33 ($20 x 1.67 hrs).
What Other Savings Potential Exists for Diane?
There are space and materials costs in keeping a personal inventory of products. Diane does a little research to get figures as close as possible for her estimate on the items below and identifies the following savings:
- $250 per month on warehousing
- $100 per month on inventory pre-payments
- $0.75 per order for packaging materials
Diane feels pretty confident that her savings estimates are in the right ballpark, but she also needs to estimate what fees and other “costs” are involved if she uses the dropshipping service.
- Fee per order – most dropshippers charge a – you guessed it – “drop fee” for each order. Diane’s diaper bag supplier charges $1.00 per order.
- Lost discounts. By purchasing inventory, Diane would receive bulk discounts. With drop shipping, she will need to pay the full wholesale price for her products, which means she’ll miss out on what she estimates to be a 5% discount, or about $.75 per order for her $15 product.
- Shipping refunds. By going with a dropship supplier Diane will forfeit control over shipping times. If she promises to ship items within a certain time frame and the drop shipper does not come through, or if every once in a while an item takes an unreasonable amount of time to get to the customer, she plans to refund the cost of shipping to keep her customer happy. Diane decides to base her calculation on one refund every four days (or every twenty products, if she meets her expected goal of 5 products per day). At that rate, she’ll need to charge an extra $.50 per order to recoup over the sale of twenty orders what’s lost in issuing a $10 refund, which matches the shipping cost to the customer for her product. (Find out more about having a return policy and common pitfalls to avoid.)
The Final Tally
So – what does this all add up to per day, assuming five orders a day?
Diane has the potential to save $37.50 per day, or approximately $1,125 per month, using a dropshipper, plus her initial one-time savings of $250 in time not spent creating product listings.
Will your savings mirror Diane’s? Probably not. They may be greater or they may be smaller, depending on your product, your options for inventory space, what kind of pricing you can secure, and largely on what you estimate an hour of your time to be worth. Regardless, it is valuable to perform this kind of cost-benefit analysis on dropshipping your product versus retailing it directly.
Diane chooses to work with the dropshipping supplier she has identified but will monitor the relationship closely to ensure that she’s not issuing more refunds than she expects. After all, consistent evaluation is the best way to ensure that any business linkage is still working for you.