This is a hot topic that I did not realize was so hotly disputed until my concern was voiced in public about the drop shipping business model. Hundreds of people responded wanting to know why I felt personally that drop-ship is a recipe for failure without question. Pretty strong statement by any standards and I struck a nerve – so here’s why I know drop-ship business is a recipe for failure for the small business eCommerce owner. That is, unless it is done a very specific way!
Imagine this scenario:
The neighbor to the left of you shops online at a drop-ship website, they receive [level-premier-free]the product only and are content. The neighbor to the right shops at a non-drop shipper and receives the same products, coupons, brochures and a free surprise with their order and they are happy. You meet at the end of your driveway and talk about their orders. When done talking, who are you likely to order from? Who received more value? Who has a coupon to give you? Who’s going to feel ripped off a little?
DROP SHIPPING PLUS:
- Easy to process, forward the order and its done.
- No boxes, shipping tape, postal scale or packing peanuts required.
- You save an hour +/- a day.
- Depending on the distributor, you may have the ability to ship items out the same day they are ordered by customer, speeding up the process by one business day.
- No inventory to carry.
- No marketing material to print, publish or carry as you cannot put this in a drop shippers box without paying for storage and handling of such material.
DROP SHIPPING MINUS:
- Your customer list is no longer proprietary. The first rule of retail is never share your customer list with anyone, ever. When you share this list with a distributor you have taken away a competitive advantage and quite possibly opened it up to your biggest competitors who are the big fish probably ordering from the same distributor.
- Sacrifice a percentage of profits, usually 8-18% for someone else to ship to your customer. They also usually charge per shipment flat fee.
- Cannot include marketing material, coupons or brochures. This information is critical to further a sale, get a customer to come back and spread the good news about your business. Without this step alone, the drop-shipper is left to have to market over and over again to the same customers instead of retaining some through repeat business.
- Backorders, discontinueds and out of stock items are a nightmare. If a customer orders ten items and two are on backorder, the drop shipper will ship a partial order (or not based on your instruction). With this model you must decide if a customer will have to wait for their whole order or if you will go to double expense to ship a partial order and ship again later. Remember the per shipment flat fee mentioned above, that can be twice on this type of order.
- There is little or no option for how the order is packaged, the boxes, packing slips, etc.
- You cannot take advantage of postage and shipping discounts, incentive programs (such as UPS free computer for signing up with them, etc) with this type of relationship. A distributor does not have this cost-savings factor in mind for the end-user (you) but they will probably be benefiting from it in their business.
- There are manufactures or “distributors” of products who are not really distributors but instead sell the same product to your customer base – you are their sales rep! They figured out that if they can recruit other small business owners to sell their products, or products they can get from their distributor, they can get a slice, a middle man of sorts. This is a real problem as your margins are whittled away to nothing – under this scenario, a person considering this business model should really just get a job instead.
Many drop-shipping type websites profess that its, “easy”, “convenient” and relatively negligible work. I have spent thirteen years studying and fine tuning our process so that we turned it into an easier model to follow, working about an hour a day. But that did not come easy and it certainly wasn’t convenient.
In doing research for this article, I found many, many websites that have written a great deal of information on drop-shipping. They sell directories and links and access to information about how to profit from drop shipping, etc. The question keeps bothering me, if its so profitable and so easy, why are they selling information and spending a boat-load of money developing sites to sell others information on how to do it. Why aren’t they doing it? Or are they…?
Avoid drop-shipping companies or drop shipping with a manufacturer directly. In fact, avoid drop-shipping with even a reputable distributor, you just cannot compete effectively by trying to take a shortcut. This is the most important part of running an online business, the one-to-one communication between you and the people who help pay you bills and that comes in the form of a package. It speaks volumes for you business or against your business, the choice is up to you.
Drop ship, in this author’s opinion is a recipe for failure for the eCommerce store owner and is to be treated as toxic! Ship it yourself and save your business and your customers.
**If you are serious about a drop-ship business and need help, I can help you put together a ecommerce store, shopping cart, live datafeed (which makes drop ship and attractive and profitable business. Send me an email at email@example.com or call anytime!
UPDATE: I have received a flurry of responses to this post and I want to update my thoughts on them. There are those who support the drop-ship model and yes, have even profited from it. So I should clarify… I have always taught the kids the Latin meaning for decision is to “cut off from”, so when I decided against drop-shipping, that was my decision regarding it. Having said that, is it applicable and workable for some people? Absolutely! It is not a “failed” model specifically, it is not the most “efficient” model and thereby it fails in “my book”. Where you are sacrificing a percentage of your profits and revealing your customer lists, then its a concern (for me anyway). If you can sustain margins from a supplier, and deal with sold out or discontinued situations and try to get your customers coupons, etc., it could work, marginally – if being marginal is your goal or situational need. I just never spent enough time to solve those issue as in the back of mind, even if they were solved, I still was resolving back to the “sacrificing a percentage of your profits and revealing your customer lists”.