Practical Ecommerce

Drop Shipping: The Good and The Bad

Drop shipping may help online retailers increase sales and profits. But the strategy is not without problems — ranging from gathering product information, managing orders, providing good customer service, and removing poor-performing items.

As a business model, drop shipping has online retailers marketing products, and manufacturers and distributors fulfilling orders, shipping directly to customers. The aim for merchants is to give customers more options to choose from without the burden of inventorying every possible size and color from a product line.

“The use of drop shipping to satisfy demand among ecommerce retailers has been one of the main advantages of doing business on the Internet,” said Jeremy Hanks, co-founder and CEO of Dropship.com, a company that provides a software platform to help retailers connect to multiple drop ship vendors via a single interface.

Drop Shipping’s Benefits for Retailers

The drop shipping model has several benefits for online retailers. The first is the potential for more profit.

A 2009 study from university professors W. K. Chiang and Y. Feng — a PDF of the study is here — found that it was possible for online retailers using drop shipping to earn more profit than their warehousing counterparts. In fact, the typical drop shipping retailer, according to Chiang and Fend, might earn 5.18 percent more profit than those merchants that inventory everything.

The practice also allows merchants to make a broader product offering, come to market sooner than might otherwise be possible, explore new product lines without financial exposure, reduce overall investment in inventory, and save time associated with processing incoming pallet loads of goods.

But drop shipping is not without its problems.

The Order Processing Problem

“Most retailers work with more than one product supplier. Since there is no common standard for data formats, order processing, account setup, and billing; managing multiple drop ship supplier relationships has been complicated, expensive, and messy,” said Dropship.com in a promotional paper.

Consider that when a customer buys something from an online store in the drop ship model, a retailer must create a purchase order, submit that order to the vendor, wait for a reply to confirm that the product is still available, wait longer to get the tracking number from the vendor once the product has shipped, and then relay that shipment tracking information to the customer.

If this process doesn’t sound to hard, imagine having to do it once or twice for every order, understanding that each vendor has different purchase order requirements, different response times, and different shipping options.

If an online retailer cannot automate the order management process, there is no opportunity to scale and grow with drop shipping.

The Information Problem

One of the key benefits of drop shipping is the supposed ease of getting to market and offering a variety of products. But drop shipping has a significant information problem too.

For an item to be offered online, a merchant needs a minimum of five pieces of product-related information.

  • A written product description.
  • A good quality product image.
  • A known shipping weight.
  • A price.
  • The available inventory.

Manufacturers and distributors do a surprisingly bad job of providing this sort of information.

Some of these companies simply do not act like sales or marketing organizations and employees at these firms may feel like it is the retailer’s responsibility to come up with the marketing materials needed to sell the product. This attitude, however prevalent, is not helpful. The marketers at a typical online retailer have no specific knowledge about given product that is not derived from the manufacturer and may not even have a sample in hand to take a picture or get a shipping weight.

If drop shipping is to be successful for a merchant, there must be an easy, automated way to keep up to date on product descriptions and images.

Available inventory is another problem. Typically, vendors will publish available inventory levels in a tab-delimited file, or similar, that is made available on an FTP site. Retailers are responsible to collect those inventory levels and update website quantities. Again, this data must be automated to be efficient.

The Customer Service and Shipping Problem

Another major category of drop shipping problems has to do with customer service and shipping.

When a customer orders online, he or she expects that an item will ship quickly and arrive as described. When a merchant employs the drop shipping model, manufacturers and distributors are being trusted with this portion of customer service.

Most major retailers have been able to use their sales volume to require drop shipping vendors to meet certain shipping and customer service requirements. Sometimes there are even penalties in place, but small and mid-sized retailers are not likely to have these sorts of safeguards. It therefore becomes imperative to vet vendors before drop shipping begins and track performance after orders are flowing.

Finally, merchants would be wise to consider that drop shipping can dramatically increase shipping costs. Imagine an order wherein a customer buys four products from three different drop shipping vendors. Collectively, those four items might have fit into a small box and could have been shipped together for a few dollars. But in this model, each will ship separately and each will cost a few dollars.

Solving Drop Shipping Problems

There are, of course, ways to take on any of the drop shipping problems mentioned above.

Dropship.com can help some retailers manage catalog data, inventory levels, and order processing. The firm already has integrations for some leading ecommerce platforms, including Magento, which could speed integration. Merchants pay a monthly fee for each vendor that Dropship.com connects.

Merchants can also develop solutions in house. These solutions can take much longer to get up and running, but they may also offer a deeper level of integration.

Tags:        

Armando Roggio
Armando Roggio
Bio  |  RSS Feed


Get the Practical Ecommerce RSS feed

Comments ( 13 )

  1. milanie May 8, 2012 Reply

    Armando, Thanks for this article. Drop shipping does, indeed, help retailers increase revenue without having to stock additional inventory. Having the right ecommerce software solution can help alleviate many of the problems associate with drop shipping from multiple vendors.

    UpshotCommerce.Com offers an integrated drop shipping solutions for new and established retailers. Continuity in the ecommerce software solution is key for retailers – especially when dealing with multiple suppliers!

  2. Andrew Youderian May 8, 2012 Reply

    Great article, Armando!

    I’ve had a lot of success with drop shipping eCommerce and have been doing it full-time for more than 4 years. Many of the potential problems/issues described in your article are right on – it can be harder than it looks. But with some dedication and the proper systems, it’s a great way to source products. A few tips from my own experience:

    Finding good supplier(s) is really important, and I highly recommend only getting into a market if you have TWO suppliers. It can be difficult to keep warehouse inventory synced up with your website, which is why I ALWAYS use multiple suppliers with overlapping product lines. The vast majority of the time Supplier A doesn’t have an item, I can get it shipped from Supplier B.

    Multiple suppliers prevents you from being totally dependent on one source of inventory. It also gives you geographic diversity, allowing you to save on shipping costs – and reduce transit time – by routing orders through the warehouse closest to your customer.

    Not seeing the physical products you sell CAN be a challenge, and it’s often a good idea to order a few of your best sellers. However, I can tell you from personal experience it’s possible to become an expert for a line of products that you’ve never touched. With the wealth of product pictures, reviews and information online you really don’t have to touch something to know a lot about it. As your business grows, you’ll quickly learn the ins-and-outs of the niche through your customers’ experiences, opinions and problems.

    One of my favorite aspects of drop shipping is that it’s a great model for automated, passive income. If you invest a LOT of time up-front in building an information rich-store and market it well, the operations side of the business (fulfilling orders, dealing with returns, solving customer problems) is fairly simple to outsource.

    I’m wrapping up a 50+ page eBook based on my own drop shipping experience titled “Picking A Profitable Niche: A Guide to Drop Ship Suppliers, Market Research and Niche Analysis.”, and would be happy to send a copy to anyone interested. My contact information can be found at:

    http://www.ecommercefuel.com/about/

    • margaret February 13, 2014 Reply

      Dear Andrew,

      I want to do the same in Europe. I want to ask you do you do this by e-shop template?
      Also what about the invoice?

  3. izzonet May 9, 2012 Reply

    Great review.
    I’m sure there is a software solution that can deal with the problems in this field and solve them.
    Our company deals with almost all kinds of software solutions, especially in the e-commerce field.

  4. Mitch Rezman May 10, 2012 Reply

    In June of 2005 our business burned to the ground – we immediately went from about 20% of our sales being drop shipped to 100% – until we could get ourselves re-situated.

    Now with the economy in the tank were still at approximately 50% drop shipping. The largest benefit is showing millions of dollars worth of inventory on our website without having to pay for the inventory.

    Our biggest challenges are synchronizing our inventory with the inventory of our vendors. Teaching them that if they get our credit card number we need tracking information that we can forward to our customers the moment the item ships.

    Another challenge, because we are free shipping site is determining the necessary shipping cost to add when drop shipping from multiple destinations. Then keeping the customer informed as to when and where the merchandise is it any given moment

    We’re successful at it because we feel we provide an underserved niche. That said we do work with traditional drop shipping organizations when we find products that dovetail with our overall business strategy.

    Overall it can greatly benefit a small business owner but he can be a slippery slope.

  5. Matt Clark May 10, 2012 Reply

    Hi,

    Does anyone have any good drop-ship or wholesale suppliers they love? I’m run a membership program called AZ Money Machine (http://azmoneymachine.com) and have about 1,000 members looking for good suppliers in categories such as health, beauty, electronics, hardware, gardening, and sports/exercise.

    Any resources are greatly appreciated!

    Thanks!
    -Matt

  6. Andrew Youderian May 15, 2012 Reply

    Due to the large number of people contacting me regarding my comment above, I wanted to post a link to my (now available) free eBook on drop shipping and eCommerce:

    http://www.ecommercefuel.com/profitable-ecommerce-ebook/

    Hope you find it useful!

  7. YDeveloper August 30, 2012 Reply

    Drop shipping I think a great idea to make more profit. It depends on the software or services you are using for drop shipping. If it manages all aspects of order and inventory details accurately then I think this should be adopted.

    We are planning to build such application which one can find here – http://www.ydeveloper.com

  8. webber55 March 3, 2013 Reply

    The articles on this site are very good but many of the comments following the same annoying format:

    I have a solution to the problems discussed in the article and it can help you earn a lot of money. See my website below to start earning your fortune.

    http://www.my-company-name.com

  9. Sudarsh Khare September 30, 2013 Reply

    Cheers Armando,
    You have covered all benefits and demerits of drop-shipping very nicely. Well we have also created a small online drop-shipping application for retailer and consumer which bridge the communication gap between them. For more information you can visit:

    http://supplyandtrack.aakarsoft.com/

  10. Eduardo December 13, 2013 Reply

    As in retail businesses, the majority of retailers make their profit on the difference between the wholesale and retail price but some retailers earn an agreed percentage of the sales in commission, paid by the wholesaler to the retailer. http://www.empleosenguadalajara.com.mx

  11. Doug Burgess April 1, 2014 Reply

    Thank you Armondo, it’s nice to finally see someone post details about the pro’s and con’s of dropshipping, instead of just a list.
    I am new to the business of dropshipping, and just wanted to thank you for information and suggestions that I can put into practice.

    http://www.americandefenseandsurvival.com

  12. otto April 19, 2014 Reply

    Before you dropship or sell on ebay, Please watch my honst youtube video over dropshipping and how I lost my ebay account. http://youtu.beZjq_IcRj5lM

Email Newsletter Signup

Sign up to receive EcommerceNotes,
our acclaimed email newsletter.

And receive a free copy of our ebook
50 Great Ecommerce Ideas