Identifying the pros and cons of drop-shipping – what is it and is it the right business model for you?

An article by Mindy Emsley, Founder and Managing Director of www.merababy.co.uk

According to Wikipedia “Drop-shipping is a supply chain management technique in which the retailer does not keep goods in stock, but instead transfers customer orders and shipment details to either the manufacturer or a wholesaler, who then ships the goods directly to the customer. As in all retail businesses, the retailers make their profit on the difference between the wholesale and retail price”.

Put simply, it means you advertise and sell Product X on your site for a retail price of Y££. When the customer buys Product X, they pay you the Y££ advertised. You then place an identical order with the supplier of Product X, who charges you a Wholesale (drop-ship) price of Z££. You give the supplier the customer’s details and the supplier packs and ships Product X directly to your customer.   The customer receives their goods, the supplier receives the wholesale (drop-ship) price for their product and as with all retail, you have made your profit on the difference between the price you paid the supplier and the price the customer paid you.

Drop-shipping is becoming increasingly popular, particularly given the massive growth of e-commerce sites that are looking for reduced overheads.  It is a highly beneficial business model for smaller retail outlets and web-based stores that primarily use a catalogue system for sales.  When a customer buys online, they don’t always expect to receive their goods immediately, so waiting a couple of extra days for an item is not usually a problem for them.

So what are the major benefits?

• The drop-ship model enables you to significantly reduce the amount of investment required to set up as a retailer.
• You can minimise risk significantly as you are not paying out vast sums of money for stock that doesn’t sell or is out of fashion/unseasonal.
• Logistically you do not need to lease commercial premises or maintain a warehouse etc, despite the size of the stock range you appear to offer your customers.
• The packing and shipping is all managed by your suppliers, thereby reducing your workload.

...And the downsides?

• The drop-ship price is likely to be more expensive than the standard wholesale price. Most suppliers will charge you extra to cover their admin costs, as well as a postage and packaging fee.
• You are relying on the supplier to dispatch on time and offer a professional service.  If the supplier is late in delivering or doesn’t fulfil the order at all, it is you that will be left to deal with the customer.
• If your drop-ship supplier is unreliable or untrustworthy, it will reflect badly on you and your business/brand, so make sure you choose your suppliers very carefully.
• Some suppliers will only refund or exchange on faulty goods. If a customer wishes to return something just because they’ve changed their mind, you will often be left with that returned item.

Drop-shipping in practice – questions to ask your suppliers

After identifying suppliers that are happy to support a drop-ship model, there are a number of questions and issues you will need to consider before commencing your agreement with them.

The following list is a good starting point regardless of which products you are interested in.  However, it is not exhaustive and you may need to add questions that are specific to your line of business.

• Do you charge a drop-ship fee per item or per order placed?
You’ll need to add this to the wholesale cost you are charged for each item before you can calculate your end profit.

• How do you calculate shipping costs?  What shipping method/company do you use?
You will need to add this to your other product charges. For example courier companies tend to be more expensive than Royal Mail, so you need to know who your supplier is using so that you can calculate your total costs and end profit.

• How do I pay you? Will I have credit terms payable at certain intervals or will you require payment every time an order is placed?
It shouldn’t really matter, though the latter option would obviously be more time consuming as you would be actioning payments more frequently.

• How do you handle returns?
Some suppliers will only take returns under certain circumstances. Be sure to examine their Terms & Conditions carefully so that you know what to expect and so that you can convey the correct information to your customers.

• How do you handle lost and damaged items?
It’s vital that they insure every item they ship and are willing to handle any claims arising from loss or damage in transit to the customer.

• How quickly do you dispatch an item after I have placed an order?
This must be within a reasonable timeframe, otherwise you are the one that will have to deal with dissatisfied customers.  Ensure you confirm dispatch timelines within any contract, Service Level Agreement or Terms & Conditions you may accept.

• Will you notify me when the order has been dispatched?  Will you send me tracking info for me to relay to my customer, or will you send the tracking information directly to the customer?
Either way is fine, as long as it’s agreed in advance and your customer is definitely notified within 48-72 hours of them placing the order.

The proof is in the pudding!

No matter how much preparation you do, quite often it will come down to just taking the bull by the horns and getting on with it.  Ultimately you won’t really get to know how reliable your drop-ship supplier is until you start using them.  It may be worthwhile asking friends and family to place orders just so you can test out suppliers for their timeliness, presentation and attention to detail. This will give you a chance to see how the supplier performs before you start pushing their products on to your other customers.

In conclusion, drop-shipping can be a great way to grow a small business relatively risk-free.  It requires little financial outlay and no investment in premises, logistical infrastructure etc.  Drop-ship business models are also a great channel for mothers who wish to return to work, but need the flexibility of being able to work around their children.  It also gives you the freedom to define your product range over time and without the worry of investing in the wrong product. If something doesn’t sell or things don’t work out with a particular supplier, you can just discontinue that product or find a new supplier of it.

Drop-shipping is definitely establishing itself as a successful business model within the world of e-commerce.  But as with any business decision you make, ensure you do your homework thoroughly first.  Good luck!

Mindy Emsley is Founder and Managing Director of www.merababy.co.uk – an online store specialising in handcrafted baby essentials and personalised gifts. www.merababy.co.uk drop-ships on behalf of other retail outlets. For more information email info@merababy.co.uk