Published on October 05, 2013 How to choose a stock strategy for your online business
Drop shipping or Holding Stock? How do you decide?
If you’re planning to start selling online, one major decision you need to make is what you will do about stock. Will you hold a small amount of inventory? Will you buy in stock on demand? Or will you get stock sent directly from suppliers to your end customers (drop shipping)? What you decide to do will play a big part in the type of shopping cart website that you need, your accounting and tax processes, and your marketing strategy.
One thing that many businesses overlook when they are starting up is that your choice of stock strategy can influence all parts of your marketing approach. This is because how you choose to hold stock will affect both stock availability and delivery times, and this needs to be considered in relation to what your competitors are doing.
Choosing the inventory strategy for your online shop
The best place to start when selecting a stock strategy for your shopping cart website is to look at what happens already in your market. After all, the whole point of building a successful online business is to find a gap in the product range and service delivery of the present market, and tailor a package of product selection and marketing offering to capitalise on that gap in the market. You do need to be guided by what existing competitors do, but if you just copy the service delivering and offerings of a competitor and compete only on a lower price, you will ultimately be copied or trumped by someone else with a lower cost structure than you. Price competition only really works when you have a much lower way of producing or delivering products to market than a competitor – if you are a manufacturer or have an exclusive import arrangement for a brand for example.
So, take a look at who’s selling the product(s) you plan to sell in the online marketplace and ask yourself the following questions:
- How quickly are they delivering items to customers? Most courier companies or Australia Post/USPS can deliver items anywhere in Australia/USA in 10 days or less, so if they are offering shipping and delivery times faster than this then chances are that they are holding these items in stock or buying from a local distributor.
- What are their prices relative to their costs of production? Although you won’t know the exact cost structure of a competitor, your own research into the costs of production of this item will give you a good indication of what type of mark up each competitor is putting on their products? Can you see any common themes?
- How much are they charging for shipping? If they are offering free shipping but then their prices seem to be inflated by the shipping cost they might be employing a free shipping strategy as a deliberate marketing approach. If they are offering free shipping, check to see if they are offering free shipping across all products in their store, or just for selected “featured” products
- Read their about us and delivery pages. Do they mention that items will be sent from a different warehouse or location from where their business is located? If they aren’t a multi-brand business that consolidates all stock in one location, or using a merchandising and dispatch company to send out their products and accept returns, then they might be sending items directly from suppliers (this is called drop shipping). You might also be able to determine from their Returns page where and how stock is returned by comparing their returns address (if published) to their contact us location – are they in the same state? some town? same postcode?
Your next port of call is to research what people are saying about these competitors. Look on places like any industry forums or on Facebook. Are there any comments about them having slow shipping, being out of stock all the time, expensive shipping or low quality products? If comments are largely positive then the strategies being used by competitors may be largely working, if comments are heavily negative then use this to make your own judgements about what you should do with stock.
Stock Strategies for your shopping cart website – your shortlist
By this time, you’ll have a good idea of what is working or not working for your industry and what customers are saying about them. Your basic choices for a shortlist of stock strategies will be:
- Hold all of your store’s items in stock.
- Hold some of the store’s items in stock (e.g., hot sellers or small items) and buy in slower selling, bulky or larger items on demand.
- Buy stock and hold it at an off site storage location (like a secure stock storage shed or at a merchandising/dispatch company).
- Drop ship your items directly to end customers (without invoices, etc.).
To determine what’s best for you, in addition to your competitor strategies you should also take into account your own business situation.
Choosing the best strategy for your business – what business are you in?
If you are selling a high value item from a home business, then you might not want to hold it at home, due to the increased overheads in home insurance, security, and risk of people finding out you hold the stock at home and becoming a target for burglary. The other reason you might not want to hold stock at home, might be the physical room it takes up. Even small items must be stored, and will deteriorate over time if not kept in the right conditions. Do you have the right type of home or area to store your stock? You should also consider whether the suppliers you have selected for your stock have minimum order levels and if so, what these are. Are these acceptable and economical for you?
On the other hand, if you do have a secure, safe, clean area to hold stock and can get the appropriate security and insurance arranged at an affordable price, then holding stock opens up the options of fast and free shipping which could give you an advantage in the market if your competitors are not holding large amounts of stock or drop shipping from suppliers.
Insights on drop shipping
Drop shipping can be an effective way to run an online business as well, because it allows you to hold no stock at all which is very cost effective. You can list more products in your shopping cart store and only have to order them from your suppliers when someone buys them from you. The downside of drop shipping, is that your supplier might be out of stock when an order comes in, or your products might take longer to get to end customers. Some providers also charge a premium to offer a drop shipping service as they have to do more work to prepare the package for dispatch without providing any information about where the package came from or how much it cost you.
If you do decide to use drop shipping, Ozcart™ can be a very effective way of managing your products because:
- Ozcart™ packages are not limited by the number of products. You are limited only by generous disk space and monthly traffic limits, so you can fit in as many products as you can within the space you are allocated. If you get close to the limits on your plan, can upload smaller images for example to fit in more products.
- Ozcart™ websites can automatically notify your suppliers when an order comes through. You can assign all of your products to suppliers and when an order is paid for, an email can be sent directly to this provider to request that they fulfill the order and charge you appropriately. If a customer orders items from multiple suppliers, an email can be sent to just the relevant supplier with just the products that they ordered. They don’t see the other things that the customer ordered so there’s no confusion.
- Shipping can be set up to be calculated based on shipping costs from suppliers. You can pre-define shipping options for each of the different drop ship product providers. For example, you can set up Australia Post for items ordered from suppliers the East cost of Australia and a courier company for orders from your supplier on the West Coast of Australia. The same is achievable in any country. On checkout, the cart will automatically add up the total cost of shipping based on the costs from the different suppliers. Customers can be given a choice for each provider or everything can be lumped into one summarised shipping cost – the choice is yours.
Linking your marketing and stock strategies
Whatever option for inventory management that you choose, make sure that you carefully consider the implications for your marketing strategy so both your marketing and product strategies gel together in a cohesive way. Planning your whole marketing approach in advance with respect to your competitors and what they might do, can give you a real edge in growing and outselling your existing competitors with your online store.
Whatever type of stock strategy that you choose, Ozcart has the tools to help you keep track of it – whether you count the total number of items, the number of items per combination of colour/size/shape, etc., or don’t count it at all. You can update the stock levels in the administration panel of the site and export them at any time to a spreadsheet at stock count time, for tax or for analysis. And if you’re a B2B wholesale shop, Ozcart has even more useful features for managing your business.