Practical Ecommerce

5 Reasons to Consider Drop Shipping

Drop shipping is an order fulfillment strategy where the retailer does not keep products in inventory, but relies on wholesalers or manufacturers to actually ship orders to customers. This arrangement has several advantages that make it attractive to online merchants.

When a customer places on order for a drop shipped product online, the retailer receives the order and payment for the order, and then either automatically or manually contacts the wholesaler or manufacturer, issuing a purchase order for the item and providing instructions for shipping directly to the customer. The wholesaler or manufacturer ships the product, and the retailer earns a profit.

There are at least five good reasons that almost any ecommerce retailer should consider drop shipping. Unfortunately there are some “gotchas” to consider too.

1. A Broad Product Offering

Drop shipping allows merchants to offer many more products for sale than what might be feasible if that merchant had to inventory everything.

Imagine a retailer who sells specialty coffee and tea both online and in a boutique. The physical store might have limited space for storing espresso machines, so that the retailer may only offer one or two models in store. But online, if the retailer has drop-shipping arrangements in place with several espresso machine makers, that retailer might offer dozens of different options.

Having a broad range of options can also help marketing, since each product page can be a landing page, entry in a comparison-shipping engine, or additional page for Google or Bing to index. These additional products are a way of introducing a greater number of potential customers to the store.

2. Come to Market More Quickly

While it takes just as long to post a drop-shipped product to an ecommerce platform as it does a product that is in inventory, drop shipping may help a merchant come to market more quickly.

Drop shipping eliminates wait times when products are shipped from the distributor or manufacturer to the merchant. In some cases, this can be a few weeks. With drop shipping, a merchant can start selling the moment the product is published on the ecommerce site.

3. Explore New Lines

Drop shipping gives merchants a way to test new products without having to bring in inventory.

For example, imagine a retailer that sells tack — saddles, bridles, and other equine-related products — for what is called “Western” style riding. Occasionally, this online retailer gets requests for “English” style saddles or riding apparel. A drop shipping agreement with a supplier of “English” gear would allow the retailer to explore how well those products would sell, without committing hard dollars to the test.

4. Reduce Your Investment

An underlying theme in points 1 to 3 has been that merchants employing a drop shipping strategy don’t have to keep products in inventory. Quite simply, since drop-shipping agreements generally do not require any upfront investment, a retailer can significantly reduce its investment in products.

This also means that some ecommerce start-ups don’t need as much money as one might think to get up and selling.

5. More Time

In a drop shipping arrangement, the retailer does not receive, stack, store, pull, pack, or ship products. All of these tasks are time consuming, which means drop shipping saves time.

In a startup ecommerce business where the storeowner may also be the box packer, this additional time will be available to actually sell products, which should benefit the company. In larger operations, the timesavings may result in a reduction — or stabilizing — of labor costs.

The Downside of Drop Shipping

Drop shipping does have its downside. For example, it creates customer service challenges as orders can get mixed up, inventory levels change, and product returns become complicated.

Profit margins for drop shipped items are often razor thin too. For example, I work with a manufacturer of apparel that charges an additional $10 per item drop-ship fee on top of the item’s cost and any shipping charges. This brand’s products often sell for about $59.99, with a cost of around $30. So a product sold from inventory has about $29.99 in margin while a product sold via drop shipping is at $19.99. If a retailer offers free shipping on orders above $50, an additional $5 to $10 of profit is also gone. Add an average return rate, payment card fees, and the cost of pay-per-click advertising, and there may not be a lot left.

With these potential challenges, drop shipping may work best in conjunction with inventorying some products.

Summing Up

Drop shipping is an order fulfillment strategy where products ship directly from a wholesaler or manufacturer to the customer; the retailer acts as a marketing and customer service organization. There are at least five good reasons to consider using this technique, although drop shipping may work best when it is blended with other fulfillment strategies.

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Armando Roggio
Armando Roggio
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Comments ( 17 )

  1. Fulfillrite November 21, 2011 Reply

    Your article makes valid points on how drop shipping would help someone who’s looking to start a business who doesn’t want have to deal with any inventory. in most cases someone who wants his business to grow, & wants higher profit will either consider self or outsourcing order fulfillment.

    Here’s a few factors on how fulfillment differs from drop shipping. I wouldn’t use the word "consider’, since I don’t see a lot of similarities between them that make a fair comparison. Fulfillment is your own self managed operation, over drop shipping which is not.

    Here are some key differences:

    Profits:

    Generally Speaking with drop shipping you only receive a percentage of the sale, or you pay a flat fee. Over using a fulfillment center or self fulfillment where the product & profits are all yours to keep. A fulfillment center works with you as a team to save money & help grow together.

    End to end e-commerce solution:

    Drop shipping is about a getting the product to the customer which consists of packing & shipping.E-commerce fulfillment services is an end to solution. Starting with post purchase container unloading, warehousing, order processing/fulfillment labeling , kitting, sorting, gift wrapping, pick n’ pack,international customs, shipping, & post purchase to return shipping & RMA processing..

    Growth:

    With drop shipping your growth is somewhat limited, since at the end of the day your profits are marginal & shared. When you are using a fulfillment center your growth is limitless. It’s your product, your idea, in your control.

    Just my thoughts… feel feel to reply with your comments.

    Joe @ Fulfillrite One Product Fulfillment
    @Fulfillrite

  2. shippd November 22, 2011 Reply

    I’ve written many times here at Practical Ecommerce and on Quora about the benefits of drop shipping.

    First, there’s a common misconception that drop shipping is only for small businesses looking to avoid carrying inventory. For most major retailers, including Amazon and virtually every big box retailer, drop shipping is an integral and preferred fulfillment method.

    The benefits extend to any size business. In other words, the benefits of broad selection alone are sufficient to take a good look at drop shipping for your category.

    Second, it’s critically important to have solid relationships and partnerships with quality suppliers.

    Third, you should plan for an increase in IT investment. You must have at least basic systems and processes to track orders and keep timely product data. Failures will lead to upset customers, the primary potential downside of drop shipping. Most companies having success in drop shipping invest significantly in IT, and it’s a very worthwhile investment.

    Shippd provides a platform for retailers to connect to all their suppliers with a single connection. We’ve published a paper about drop shipping for e-commerce retailers. I’d be happy share it, just drop me a line.

  3. Bill Heilmann November 22, 2011 Reply

    totally agree with all 5 points. I would differ with your downside comments pertaining to profit margins loss of. We have over 18,000 suppliers on board our drop ship platform today with approx 120 retailers- we charge no where near the figures you cited. all of our customers are realizing very strong ROI and continue to expand their dropping shipping product categories. Otherwise you are right on all your points. Thank you.

  4. Mike Blarowski November 23, 2011 Reply

    Hey Armando, Good coverage of pros and cons of drop shipping .

    I’ve been considering it for expanding my offerings on http://www.flirtyaprons.ca just can’t wrap my head around how it would work with my free shipping on orders over $99 offer since the drop shipper would be charging shipping fees I would have to absorb.

    On the upside, adding drop ship items would increase the average cart size for sure.

  5. Dennis Worth November 23, 2011 Reply

    Armando, great article on the benefits of drop-ship!

    As both a drop-ship vendor and a retailer that carries drop-ship items, I agree with all 5 of your points.

    As for the downsides you pointed out, here’s how we overcome them:

    Yes, there are incremental costs for drop-shipping, but you can always exclude certain products from "Free Shipping" and other discount promotions–this is very common in retail. As with any program, you need to do a pro forma or ROI and determine these limitations (such as min/max retails, which promotions are profitable–and at what retails, etc.). Generally, we have found you can accept smaller merchandise margins from drop-ship products as many of the normal costs you have with your inventoried products don’t exist with drop-ship products (little/no overhead or admin costs, no photography or copywriting expenses, minimal or no item setup costs, no inventory or forecasting costs, no liquidation or clearance markdown costs, no cash tied up in inventory, etc.)

    We overcome inventory issues by providing inventory feeds as often as every 10 minutes and we sometimes subtract a few units from our drop-ship partners’ inventory feeds, especially when quantity on hand for a SKU is very low.

    In the 15+ years we have been doing drop-ship, product returns have not been an issue. We provide return labels and clear instructions via packing slip and ship notification emails, so very rarely do returns go to the wrong company (when they do, we have bulk return processes in place).

    Just my observations… I welcome any comments.

  6. Lisa Suttora November 23, 2011 Reply

    Hi Armando,

    Great article and I’m glad you covered this topic. I’ve worked with independent online merchants since 2004 to help them build their product line and businesses, and drop shipping is always one of the most misunderstood aspects of of product sourcing.

    I’m glad you explained that drop shipping is simply one channel to use for sourcing products and fulfilling orders.

    Many business owners don’t realize that you can ask any supplier if they are willing to set up a drop shipping arrangement for their products. Some will, some won’t. But you have to ask, because they don’t necessarily advertise that they will do this.

    One of the downsides of drop shipping is that a lot of people brand new to ecommerce have been told that drop shipping is like pushing the "easy button" when it comes to sourcing products.

    Unfortunately, many newbies searching the web looking for information on drop shipping are preyed upon by companies who promise Internet riches and access to thousands of authentic, name-brand designer products drop shipped for pennies on the dollar once you pay their "access fee to drop ship sources" only to find out the hard way that there is no such thing.

    For people selling in marketplaces such as eBay and Amazon, drop shipping can also present problems because the drop shipper’s turnaround time is not always as quick as the shipping requirements for these marketplaces.

    In fact, I recommend that ANYONE considering using a drop shipping arrangement with a company place some test orders with the supplier and have them delivered to YOU first. This allows you to test the delivery time and make sure that their packaging is satisfactory.

    Out of stock merchandise requiring an order cancellation can also present a problem when selling in a marketplace.

    People new to selling online, also often tackle drop shipping and product sourcing in the wrong way.

    They’ll start out by saying "I want to sell online and I need to find a drop shipper." But first you need to figure out WHAT you are going to sell online.

    Once you have an idea of what you want to sell, then you can proceed to locating suppliers who might be willing to drop ship for you.

    Drop shipping is an excellent tool that can be used by online merchants, big or small, when it is used in the right manner.

    -Lisa

  7. Elizabeth Ball November 23, 2011 Reply

    Great article Armando!

    Mike, perhaps you can ask the retailer to advertise free shipping on your products over $99. Some of my dropshipping retailers do this to make the price more attractive, while others charge the client, even though I don’t.
    Also, is there a website which lists online retailers who provide dropshipping arrangements?

  8. Derek Bacharach November 23, 2011 Reply

    I tried dropshipping for over a year using a subscription program that offers thousands of products from dozens of vendors and had terrible results.

    While having more inventory for my website was great and the ease of ordering products with a few clicks to dropship made the process seem easy, I learned the hard way that it didn’t fit into my business model.

    I highly recommend figuring this out Before launching an e-commerce site; this way dropshipping can be the horse that pulls the cart (your website). What I mean by this is if you offer 3 types of shipping options, you better think twice about how you’ll do this if the vendor who is dropshipping the product for you has only one shipping option.

    Here’s something else to think about: what is your plan if one of the dropship products you offer on your website is out of stock by your vendor and you don’t find out until after a customer has placed an order for this item? (This happened to me during the holiday buying season.)

    I think the worst thing I saw in this dropship program was the vendors pricing of video games. They would set a competitive MSRP for a game before its release date but never changed the price, not even a year or two afterwards, as if there’s no such thing as a product pricing cycle. So when I came on board, they would be asking for twice the retail price on Amazon. I spoke to reps in the program about this and they said they would look into it but this never changed while I was in the program.

    While I gave up a bunch of products that were on my website when I decided not to renew my subscription, I gained peace of mind and better control (and fewer unhappy customers).

  9. Lisa December 22, 2011 Reply

    What do you recommend for out of stocks? We run into that often with various vendors. We even order on their "Dashboard" and get an email the next day it’s out of stock. Why does this happen so often? We try to save sales by calling customers and emailing them options. Ideas?

  10. EFS February 13, 2012 Reply

    Most of the problems with drop shipping can traced back to poor performing suppliers that do drop shipping as an afterthought. These supplier want to ship pallets, and cases, not ones and twos. Their processes and interest are with big orders that cut in front of the small ‘onesies’ and ‘twosies’ typical of a retail drop-ship.

    A couple questions to ask your supplier
    1. how long have you been drop shipping
    2. do you have dedicated people, inventory, and procedures for your drop ship program
    3. do you have online tools to upload and manage drop ship orders

    At EFS (www.shipbulbs.com) we’re 100% dedicated to flower bulb drop shipping. We understand the difference between drop shipping and wholesaling and everything about our business is set up to service the special needs of retailers looking for a drop ship fulfillment program that works.

    For example, we not only provide online and FTP access to current inventory, but we also provide access to our pending inventory so our clients know when new products will arrive. We dynamically schedule orders based on current and future inventory so clients can manage pre-orders.

  11. Galia Vilchynska January 22, 2013 Reply

    I think that drop shipping is a good way to start an e-commerce business with a zero investment. Nevertheless, there are a lot of risks that can prevent you from reaching your goal. I mean sudden stock shortages for example.
    Also, it is better to start drop shipping with some unique product categories. As it is difficult to compete on marketplaces like eBay if you pay more per each item that other merchants are buying in bulk.
    So we should consider all positive and negative aspects of drop shipping.
    Here is the post with main positive and negative characteristics, so you can get more info
    http://www.file2cart.com/blog/6600-drop-ship-ecommerce-to-start-or-not-to-start

  12. Sneha Rai February 14, 2013 Reply

    Hi,
    The post is very helpful. I am planning to launch an ecommerce website very soon and desperately looking for a drop shipping vendor. Can you please let me know which is the best and trust worthy drop shipping vendor in India.

  13. anworks February 27, 2013 Reply

    Hello all,

    I have been in the e-commerce business for over 10 years now and have several different e-fronts. I have run into every problem described by both the authors and uses. I now have a full retail store + my online stores and handle/ship most of my main items my self, basically the 80/20 principle at its best… No matter I still have no desire to stock items that we do not sell a lot of. I would rather pay the 10$ extra (or whatever) to have smaller items drop shipped from the manufacturer if they are willing… It is simply more cost effective. One of the main issues we have with drop shipping is

    1. Will the item be in stock? nothing much we can do here. If it is in stock great if not communication with the customer begins.

    2. Knowing what is going from where to where and how to keep the client updated with order status.

    It is very easy to put a PO in to a drop shipper and assumed it gets shipped, forget about the order and the client never gets the item and never hears anything from you. Sure if you get tracking from your drop shipper you update the customer with that tracking but what if the customer orders multiple items that are filled from different drop shippers?

    For the past 6 months I have been working on a small web based piece of software that will help keep drop shipping organized and clients updated with tracking. No matter which ecommerce platform you choose from magento to zencart they all fail in this area to some degree.

    My software will allow you to add a customer and order with line items which can include sub items (for kits as an example) assign estimated ship dates to each item, add any shipper you want including freight companies with link to their tracking page. On the dashboard it will show you all your incomplete orders with estimated ship date. Once the order goes past the estimated ship date it will flag the order for your review. Once you get tracking from your vendor you can easily add the tracking and it will send e-mail to customer with tracking link and mark that line item as shipped. Until all the orders have tracking added (or marked as shipped) the order will stay open. This will allow you to communicate with your customers keeping them happy and allow you to know what orders have been missed or not shipped at a glance so you can stay on top of it.

    Bottom line you better be ready to do some planning if your ebusiness takes off. It is very possible to have more orders than you know what to do with and your dream of sitting on the beach while all the orders roll in will quickly become a fantasy. It only takes a few bad reviews to destroy what you have spent so much time working on.

    If anyone else is having problems keeping orders in line I am considering releasing my software to the public to manage orders. If you are interested please msg me and I will put you on the beta test list.

    Good luck to everyone! online success is there for there taking just be ready to work for it. My average online order is $1700 and we currently do over 4M annually in sales online.

    -Chris

  14. astreum May 14, 2013 Reply

    Hi Chris, I’d be very interested to get more info about your software.

  15. dnadivi July 20, 2013 Reply

    HI

    I just recently got exposed to the whole drop shipping model (where have I been all these years right?). Now of course I realize that using the model for YOUR OWN BRAND NEW PRODUCT is much more profitable, I´ve always gone by the philosophy "dont wait for the perfect plan tomorrow, act upon your imperfect plan today" and I wanted to start an online retail store using the Drop Ship model reselling a product purchased through a wholesaler.

    My question is though, if I am able to purchase small quantites (or even one by one) via a wholesaler and then add the retailer value (my middle man cost) on the product on my website – why on earth would someone purchase from ME and not from the Wholesaler if bulk is not a "sale requirement " for the Wholesaler?

    I appreciate any info on this, im new to the field. Thanks.

  16. Newbie November 13, 2013 Reply

    Hi I am exploring dropshipping and though this question may sound silly I just wanted to know if a customer orders multiple products from multiple vendors. He/she is charged shipping for each of them separately ?( therefore adding double shipping cost if instead it were in stock at one place right ) and are they all are delivered also separately to the customer ? ( leading to different delivery dates for each product ?) Will be grateful for your reply and wisdom- since a lot of experienced ppl have posted in the comments here

  17. diela November 23, 2013 Reply

    what is the risk that i will involve if i want to enter in drop shipping comp??
    what the return??

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