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.