Drop-shipping: Is it right for your business?

What is drop-shipping?

drop-shipping-diagramDrop-shipping means that when people buy goods from you, the goods ship directly from your supplier to your customer. This business model is especially common for e-commerce operations.

Your supplier could be a manufacturer or a wholesaler. The important point is that they are happy to pick, pack and ship small orders direct to end-consumers rather than wanting to deal in bulk.

They also ship as if the goods came from your business. They use your company name, branding and packaging. The contact details on the shipment are yours, not the supplier’s.  So you maintain control of the customer relationship.

Benefits of drop-shipping

1. Drop shipping reduces your inventory headaches.  If you can drop-ship all your items, you don’t need a warehouse at all. You don’t need to touch physical product at any time. You have more free time to concentrate on marketing, customer communication and business growth.

2. Drop-shipping can be fantastic for cashflow! If you’re selling non-custom items, you can simply promote product online and you won’t have to pay for any stock until it’s sold.

3. Even if you’re selling custom items and you have to pay for the goods upfront, drop-shipping can cut total shipping costs. If your supplier can store and ship goods for you, then each item is shipped once only. In a ‘normal’ shipping scenario, you’d get everything delivered to your location, then ship out again to the end customer, so everything would be shipped twice.

4. You can work from wherever you want. If your drop-shipping supplier is looking after all stock, you can communicate online from your home or from the beach in the Bahamas. (You might just need to check your time zones!)

5. Your business is easily scalable. It’s easy to handle increased volume without having to take on operational staff. It’s your supplier’s problem. This is great for easy business growth. It can help with seasonal variation too. But remember your operations are only as good as your supplier’s, so be careful who you work with! (Of course this applies when you outsource  your e-commerce fulfilment, whether it’s drop-shipping or not.)

Challenges of drop-shipping

1. Your cost of goods may be very high. It makes sense if you think of it from the supplier perspective. Why would they give you any volume discount when you’re only buying items one or two at a time? Unless you can offer something special, you’re not likely to make much margin on drop-shipping standard goods. So competing on price will be hard – you may need to compete on something else.

2. If you don’t see your product before you sell it, how do you manage product promotion, product quality and product support? It’s harder to check out features or to take great photos for promotion. You can’t check each order for quality as it leaves the warehouse.  If your customers call with queries about how to use the product, it’s hard to replicate their experience and talk them through the issue. One option is to buy a single unit for yourself.

3. You may not have full visibility of stock levels. What happens if you sell something and the supplier’s out of stock?  You may need to invest in technology to ensure you have real-time inventory information on your website.

4. What happens when a customer buys goods from two or more different drop-ship suppliers? The short answer is, you have to pay for two shipments. But your customer is buying from one business only – yours! So you can only charge one shipping fee.

Quite apart from this cost issue, your customer experience is also less good. They place one order, but goods arrive one by one. And the paperwork probably won’t show their complete order either! (Would you let supplier A see what was ordered from supplier B?)

5. You may have less control of your shipping service levels and costs. If you use your supplier’s shipping, you’re tied into their rates and services. As long as these match your business model, it’s not a problem, but make sure you check.

There’s an additional problem if your supplier is overseas. In this case, drop-shipping may make your delivery times longer. The cost of lots of small international shipments can add up too. And there’s the risk of items getting delayed by customs.

On the other hand, where are you shipping to? If you have customers all over the world, shipping from a supplier in China, India or Singapore may be a lot cheaper than shipping from Australia every time.

6. Returns are much more complex.  There are now three parties involved – your customer, you and your supplier. But the only reputation on the line is yours!

Was the product faulty? If so, will your supplier pay for return freight and for shipping a replacement item? You need to address this in your contract with them before it happens.  Even if they cover everything, your brand is still damaged.

What if the product isn’t faulty but the customer changes their mind? In this case, the customer should be willing to pay return shipping, but is your drop ship supplier happy to take stock back?

Worst of all, what happens if the customer is unhappy with the item but the supplier thinks it is up to standard? You’re caught in the middle. Hopefully this will be rare, but you may have to wear the cost of refunding a customer occasionally.

Is drop-shipping right for you?

In the end, the only person who can answer this question is you.

There are pros and cons to drop-shipping. It really depends on your situation and your business goals.  There’s a great post here comparing a drop-ship ecommerce store to one which has inventory. Perhaps the most interesting thing of all is this – the owner of the drop-ship store would like inventory next time around, but the one who has inventory would like to go with drop-shipping next time round. So it seems the grass is always greener!

Some questions you may want to ask when trying to decide what’s right for you?

1. Are you selling standard products or custom products? Standard products are easier to drop-ship, but there’s more competition and less margin.

2. How expensive are your products to ship? If they’re big, heavy or extremely fragile so they require careful packaging, there’s more opportunity to save on shipping costs by drop-shipping.

3. How many different suppliers do you use for your entire product range? The more you use, the more complex drop-shipping will be.

4. Do customers generally buy one item at a time, or multiple items? Orders with multiple items from different suppliers make drop-shipping more complex and less attractive.

5. Do you sell high volumes of a few items or small volumes of many items?  Keeping a large product range in stock can be expensive, which makes drop-shipping more attractive.

6. Where are  your customers located? As discussed above, this can have an impact on  your total shipping costs.

7. Does it have to be an ‘either-or’ choice? Would a hybrid model work for you? Keep stock of your core product range, in your own warehouse or with a warehousing partner, then use a drop-ship model as a low-cost, low-risk way to extend your range.

To explore fulfilment options for your specific business situation, contact Xpadite today.