(This post was originally published on July 2, 2012. We’ve updated it for accuracy and completeness.)
Many types of retailers use drop shipping as a powerful strategy. It works well for merchants where purchasing inventory is risky or not affordable. It even works for established retailers looking to diversify their product line.
While drop shipping can increase sales, it can also have its share of problems.
If you’re considering drop shipping, you need to understand these issues. Learn how to avoid these costly mistakes that many learn the hard way.
What is Drop Shipping?
Drop shipping relies on a relationship that exists between a seller and a manufacturer or supplier of a product.
When drop shipping, the seller does not keep goods in stock, or just a very limited amount (especially if the business maintains a brick-and-mortar location). When a customer places an order, the merchant routes the order through the item’s supplier. The supplier receives the order and proceeds to pack and ship it to the customer.
The best part is that the customer receives the order as if shipped by the merchant directly! The suppliers is invisible to them.
Drop Shipping Benefits
There are many reasons for companies to consider using drop shipping services:
- A business such as a blog site or non-profit, may want to supplement income by offering complementary products for sale on their web site. They don’t always have the time, money or resources – and often experience – to invest in buying and storing inventory. With drop shipping, they don’t have to.
- Companies that sell online may want to test items that they’re not sure will sell quickly. They use drop shipping to avoid having to purchase wholesale items that may or may not sell.
- Online auction sites or sites that solely exist on the Internet will use drop shipping to manage varying orders and to save money by not requiring space to store products.
- Custom products (like T-shirts) are often sent to a manufacturer that will create the item and drop ship it for the retailer.
- New online sellers use drop shipping as a way to incur less costs and get up and running quickly.
With these kinds of benefits, it’s no surprise then that so many retailers utilize this practice. However, drop shipping has problems to go along with all of its advantages.
Common Drop Shipping Problems
It’s important to know the issues that sometimes arise with drop shipping and what you can do to avoid them.
Here are a few pitfalls that make retailers wary of the practice:
Visibility and Communication
Drop shipping relies on a tight relationship between the merchant and supplier. When an order is sent, a retailer must know the supplier received it, whether it’s in stock, and when it ships.
Retailers fear that they will be left in the dark about the order’s status. If a customer asks about their order, the seller must answer. A supplier should be transparent about shipping schedules, but that is not always the case.
Sellers need to understand the prices of the wholesaler they work with. It is important that you know the total price of every drop shipped item (the product, shipping, etc.). This helps to accurately set prices in your store.
Some drop ship companies attract sellers with low wholesale price of items, but make their money by tacking on outrageous shipping charges.
Picking the Right Vendor
Merchants must be diligent about who they decide to work with. Drop shipping is now a more popular, feasible practice. Merchants should be wary of posing vendors offering false “wholesale” prices hoping to take advantage of new sellers. They offer “wholesale” prices that are actually marked up.
Read this article How to Find Drop Ship Suppliers for tips on how to find the ones best for your business.
The product moves through many hands from the manufacturer to the consumer. Each entity hikes the price up along the way. This allows the merchant to make a profit.
However, online selling is very competitive. Merchants often find themselves in a pricing war to continually lower their price. This results in merchants selling at very low margins, even at a loss!
Margins vary greatly depending on the product type.
Suppliers run out-of-stock, too. This is a common problem of drop shipping, especially with popular items. It’s often out of the seller’s control.
The wholesaler should keep you updated. However, it’s up to you to ensure that your customer is able to receive their products, or arrange for a substitution if possible.
Remember that the supplier is invisible to the consumer. Answering to the customer is your responsibility.
If these types of problems aren’t taken care of, see how drop shipping can ruin your business
How to Avoid Drop Shipping Problems
What’s the easiest way to avoid these drop shipping problems?
That’s easy: research, visibility and communication.
Be sure to do your homework on drop ship suppliers you wish to do business with. Investigate their past performance, read reviews from other sellers. Contact the drop shipper directly with any questions you may have.
Doing your due diligence from the beginning will save you plenty of headaches in the future.
Drop shipping is a complex process. Once established, merchants can use a solution like nChannel’s to ensure you get all the visibility you need between your suppliers.
To get started, check out our Drop Shipping 101 Guide to learn everything you need to know!