Drop shipping is a business model where the store doing the selling doesn’t hold any items in stock. When a customer buys an item from the business, that business arranges for the item to be shipped to the customer from the supplier directly. Essentially the drop shipper just acts as the go between, arranging the transaction between customer and a manufacturer or supplier, such as a factory or importer. It may seem an odd way to do business, but the internet has made this type of business structure much more common. Some businesses are entirely run on a drop shipping model. Examples include online marketplaces such as Etsy and Notonthehighstreet.com. Amazon also incorporates elements of drop shipping into its model.
Many businesses have thrived using a drop shipping model as it’s a way to scale very quickly whilst not taking the risk of holding any stock. But it isn’t an easy business model to get right. When business reputation is so important, putting a large part of your reputation into the hands of your supplier network is a big risk. Many successful drop shipping companies have had to invest high effort in raising the standards of its suppliers and have battled to ensure they commit to agreed delivery schedules. When drop shipping companies first start out, it can be hard to find the right kinds of suppliers who are willing to commit to a drop shipping arrangement. It can be very beneficial for the supplier as they receive orders without having to commit to having a storefront or Ecommerce presence of their own as long as they agree to the rules set by the drop shipper.
The reason for the success of many drop shipping ventures is that it helps every party specialise in their part of the relationship. The drop shipper may be very good at creating a beautiful storefront that’s easy to use and attracts lots of customers via good marketing. The supplier may be really good at manufacturing their product, but too busy to invest in an entire Ecommerce presence and do the marketing. In a successful drop shipping arrangement, both parties benefit and customers find the system an easy way to buy online.
You’ll also see ‘real world’ examples of the drop shipping model. For example, if you visit a major furniture store you may see some examples of the furniture you want to buy in the showroom, but when you purchase your new furniture it is likely to come to you from a supplier via a drop shipping arrangement with the store you visited rather than from the store’s own warehouse.
Drop shipping and customer service
One of the perennial problems of the drop shipping model is the question of who handles the customer service. If there is a problem with an order, customers tend to complain to the drop shipper, who will usually pass on the query to the supplier. In some cases, the drop shipper acts as the policeman in the relationship and usually takes the side of the customer. This can lead to the supplier getting suspended without warning, which can obviously be very disruptive for their business. In a dispute, drop shippers tend to protect their own business at the supplier’s expense.
The disadvantages of drop shipping
For the supplier, there may be disadvantages to the drop shipping arrangement. It may be far easier for them to sell a bulk order of their items and ship them wholesale to a retailer, rather than ship them individually to customers as the orders come in. The drop shipper will also take a commission for making the sale. If the supplier could sell directly to the customer, they would avoid having to pay commission to the drop shipper. The drop shipper may get the credit for a successful order fulfilment; for example, the customer may leave an online review for the drop shipper rather than for the supplier.
Many suppliers and manufacturers benefit from drop shipping relationships because it is a simple way to increase their orders without having to invest in marketing and a proprietary Ecommerce presence. Some manufacturers and suppliers have their own Ecommerce presence but will continue to participate in drop shipping arrangements because it brings in extra business. There remains the risk of the drop shipper terminating the relationship at short notice, for example if a customer complains about an order. Amazon is notorious for suspending merchant accounts on the basis of just one complaint, leading to a supplier’s business being obliterated. It’s important not to rely too heavily on drop shipping as a source of orders for this very reason.
How to start drop shipping
If you’re a supplier or manufacturer thinking of entering into a drop shipping relationship, the most important step is to calculate your costs carefully to make sure the relationship is profitable for you. The drop shipper will often insist on margins of close to 40-50% on your sale price, so you need to be sure you are covering your costs. Many drop shippers set very high standards in terms of shipping and presentation, so you may need to commit to next-day delivery, and to a certain standard of presentation in your packaging. Some drop shippers will also insist that you offer options such as gift wrapping services.
If you’re thinking of starting a drop shipping enterprise, don’t make the mistake of thinking it will be easy. It’s a vulnerable business model because you are so dependant on your suppliers keeping their standards high. A few things that you need to think about include how you will handle customer service, how you will impose standards on suppliers, how you will handle refunds, and how you will handle your supply chain so that your system can communicate with that of your seller to ensure you never run out of goods.
Drop shipping can be a profitable business model for all parties in the relationship; however, it is neither simple nor easy, despite the fact it eliminates many of the inventory and fulfilment challenges of more traditional retail business models.