October 3, 2016 by Ed Kennedy
Drop Shipping & eCommerce: The Good, the Bad, and the Reality
Disclaimer: this article does not constitute legal or financial advice and is for informational purposes only.
For all the talk about the types of things someone can sell online via eCommerce one particular method tends to arises again and again: drop shipping. For newcomers often its often held to be the equilvalent of a road map to El Dorado, and is either a brilliant road to riches, or a total fool’s quest.
The problem with the either/or camp is it often overlooks the greater detail of the debate, does little to advance the debate, and ultimately leaves people keen to start a business but unsure where to begin at square one when it comes to building their understanding of just what exactly drop shipping is.
This is not just sad for a potential budding entrepreneur, but also for us as customers; we miss out on opportunity to buy a new or cool product that would not have existed without someone first getting a good idea, and having the gusto to see through opening up a business online.
So, may the following be of help to those set to make a start in eCommerce, and keen to cut through the noise surrounding drop shipping.
Drop shipping allows you to operate a business that exists with very little risk, and the potential for an easy flow of operations if setup correctly. As detailed further on here, this model is not without challenges, but in principle it is one that can be setup, can work, and can be really good if the first two steps are completely successfully. First an overview of how it works is useful…
At its core Drop shipping involves 3 parties: you, your customer, and your supplier. While this is essentially similar to all commerce, the difference comes when it relates to stock.
How Drop shipping supply chain works
- Buyer buys the stock from you
- You then purchase it from the supplier
- You instruct the supplier to send the delivery to the buyer
..and how a traditional supply chain works
- You buy the stock from the supplier (and the suppliers job is now ‘done’)
- You then hold it and wait for a sale from the buyer
- Once the buyer has sold it you then send it to them
An example in action
Right now this may appear a bit dry and a candidate for a chapter in a dusty business book, so let’s look at it in a practical example: say you just love shoes. All your waking hours are spent on Instagram, Tumblr & Co – and maybe even a little bit of downvoting of bad shoes on Reddit for good measure – talking classic Nikes, retro revived New Balance, and all other styles of kicks.
You like shoes so much you’d turn it into a business and sell them if you could; but the down payment on buying up thousands worth of stock to get this off and running would be real hard. This is where dropshipping can be great.
Rather than needing to buy all these shoes, you can find a supplier who will sell to you at a reduced cost, you can then start up a website, sell at a price above your bulk price ($50) but below what your local store sells them for ($99).
Given you are really passionate about shoes before too long you’ve got a big customer base, and using your expertise knowledge to source limited edition shoes your store soon has a unique niche. Soon your store is a real standout and it’s a win-win; you get to work on a business you love, and shoe fans can shop with someone who shares their passion rather than the team at the local laces hut who don’t know anything about shoes at all.
While you still have to run your business like a regular business – maintain a website, keep good accounts, and pay taxes & Co – once up and running such a business can be easy, seamless, and fun. There are drawbacks to this type of operation though, and it is important they are discussed. Let’s look now at the pros and cons of this a little more.
Drop shipping can negate costs
This means you’ve a business, you’ve a supplier, and you’ve customers. What you don’t have is concerns about is whether you can afford to buy enough stock for the next season, what happens if that stock doesn’t sell, and even concerns surrounding damage to stock, defective goods and so forth.
Drop shipping can be started without capital
Because you don’t need to buy a ton of stock to get a drop shipping business going the startup costs are minimal. Get a website (whether your own or one like Amazon or eBay), put on the website what you’re selling get a social media to help raise awareness of your site, and that’s it!
Drop shipping is easy to modify and change up
Stock on hand typically determines the sales focus for a traditional business model. A fruit shop with too many apples shall sell them at a discount, a clothing store with spring coming shall slash prices on their winter coats, and so on.
As dropping shipping by default has no stock on hand you’re free of these constraints and can sell what you like when you like. This can be especially useful if you find a particular part of your business is performing really well – say you sell DSLR cameras and see the GoPro market is exploding – you can easily shift focus to selling mainly action cameras without needing to worry about all the DSLR’s you’ve got lying around and just depreciating in value.
Your good reputation is in another’s hands
Even the best of businesses make missteps now and then. What’s more, many people who’ve had some great success in their fields have also had some notable failures. The key is to avoid those calamitous disasters that can really be ruinous. This is where drop shipping can be an issue.
While if you’re getting just one order a month for a small item, your risk is relatively small if the manufacturer fails to deliver, deliver goods to a sufficient standard, or goes completely AWOL. In a situation like this you could likely just refund the buyer, or arrange for supply of the purchased good via another manufacturer.
Agreements needed but cost money
The real danger comes when your business grows, and is dealing with either really expensive orders, sizeable volumes of orders, or both. An example of this would be if you agree to ship 1000 items to a business, and then they are delayed or defective – which then costs them business and profit – you may find that buyer now feels the lost business is so significant as to warrant the costs of litigation in an effort to recover it.
For this reason ensuring you’ve a clear agreement in place with the manufacturer is essential. It is something that in event all does go wrong you can point to and say ‘hey, we have a clear agreement the manufacturer would deliver, and they would be responsible for all issues thereafter’. The problem with this it such an agreement is not something you can just draw up on the back of a napkin after Yum Cha at your favourite local spot.
‘Man I tell you what, forget my delivery of stock, you want to just order 10,000 more of these?’
So, while a drop shipping business in theory costs little money to set up, a good drop shipping business with solid legal foundations for its operations can. This means money shall be needed to see a lawyer to get the document written, and then you’ve also got to get an agreement from the supplier.
Promoting the business
If you have a business selling products it’s pretty much essential you need a photo to show what it is. Even intangible things you can’t see like perfumes have glossy ads showcasing the bottle, just as music has album covers and posters to promote it. The issue with drop shipping is where to get these photos.
While the digital age is bringing about a new relationship with visuals, images, and other creations – one need only look at the litigation YouTube has faced to see evidence of this – the way in which your business operates online shall nonetheless be subject to law and commercial regulations. When it comes to drop shipping this can be a big issue in copyright.
The fact is the law surrounding copyright in numerous countries is held to be grey, and many eCommerce sellers regularly walk the line without getting a stern letter in the mail from a team of lawyers.
Many individuals or businesses who own the image know this goes on but don’t mind; after all many are likely to be happy their product is being promoted. By contrast, presuming this won’t happen though can be very dangerous, as some brands are very protective (often done via exclusive arrangements with particular sellers) about where their goods may be sold. So, anytime you use an image without the explicit permission of its owner that doesn’t clearly fall within the acceptable exemptions like fair use is it potentially a legal issue.
As drop shipping by default would be a business in which you profit, using an image that you don’t have explicit permission to use is unlikely to fall under fair use. Sure, you can contact each supplier direct and maybe get permission to use a photo, but this shall likely take time, involve much red tape, and like any other field, it can be difficult to get a foot in the door if you are new.
Drop shipping has good points and bad points. Given we addressed the bad points most recently here it’s worthwhile noting lest someone starting their first business get needless fear of litigation – few kids who set up a lemonade stand outside their home when young ended up in a Supreme Court showdown with a disgruntled neighbour – so the idea that it is a venture fraught with nothing but danger is wrong.
In many respects it’s actually just like driving a race car: if you know what you’re doing and have experience doing it the risks can be very small or even outright negated. The trouble is few drivers on our roads do have the skill set to overtake a Ferrari through Eau Rouge.
Here is where the reality of drop shipping exists. It is often put forward as a great way for someone new to business to start one – but is usually best explored once someone has a thorough understanding of business, and knows how to properly set one up, maintain it, and deal with issues surrounding it. This is particularly so as any business is easy to run when it’s going well; but the high flyers of the business world truly earn their money for running a business when its going wrong.
This is where drop shipping can be so hard for a newcomer. This all the more true for even if a profit if being made and the business is growing. If so much time and expense is spent on the surrounding costs, it may ultimately feel less like a fun new startup business you began one Saturday morning, and more like a routine set of chores, except just half as fun.
With this understanding now in hand, someone new to drop shipping could look to perhaps look to pursue successfully by avoiding the pitfalls in the above, and exploring avenues via the following..
Name your Products via Private Label
Anyone can hop onto eBay or Shopify and buy some obscure product with no name. They can do so again and again, and not particularly remember much about where they brought it. If you go down the Drop Shipping road looking to brand your products with a name and a logo is ideal.
Not only does this help people remember where they brought your goods from when they want to do so again, but also help you kick off the next round of sales. Did you start by selling a good pair of arm warmers to cyclists? Cool. If your put your a name and logo on it people shall be sure to consider buying from you again once they get word you’ve released other clothing too.
Find a Local Business to Supply You
While many other starter guides in the drop shipping world shall often suggest sourcing goods from overseas, oftentimes looking in your backyard can be best. Further, for all the chatter amidst startup circles using words like ‘scalable’ some businesses are happy the size they are.
You know the ones. It’s that family run restaurant at the end of your street. That hardware shop in town‚ and maybe that factory just outside it. Not all business owners are just craving the chance to do a knit tie and ring the bell of the NYSE.
For those businesses like the ones above striking up a deal with you could be perfect. They increase their profit but don’t need to go through the business of setting up an online store. In turn, you’ve got a partner in the business who you can speak to locally if something goes wrong.
It may be easy for a supplier to avoid your call if on the other side of the world, much harder if the other site of town.
Have Stock on Hand at the Start
While a chief drawcard of drop shipping is that you don’t need keep stock on hand at the start it is a good idea to have a little. The time and volume of stock depends on your business, but if you begin your store and find success after the first month, using the profits to buy up and ship to you a month’s worth of stock in the event of emergency in the next 3 months is sage.
While this does depend a little on what you sell – a dozen grand pianos are very hard things to store in the living room after all – if your product is sizeable there are usually storage lockers around town you can rent for a couple of months.
This stock on hand can serve to insure any problems that arise with the manufacturer can be covered off by you shipping the product direct to a customer. In turn, after a few months where your satisfied the manufacturer shall continue to supply without issue, you can usually get rid of the stock by just putting up extra listings online in a sale, and then returning to a ‘no stock on hand’ operation.
..and if it stalls Start another Business
Drop shipping undoubtedly has its advantages. This is all the more so as once a good drop shipping business is up and running it can be among the easiest and more drama-free operations to maintain.
The downside of this is knowing how to set it up effectively and avoid the problems that can arise at the start either requires much experience in hand; or a willingness to spend much time moving slowly and procedural through a big learning curve.
So, while giving a business time to grow is certainly important, so too is making the distinction between slow progress being made in terms of growing a customer base, and the day-to-day management of operations.
If you find progress is patchy at first growing sales, give it time. If you find management of the business is just one drama after another with the manufacturer, permissions, and paperwork; it may be high time to restructure the business to a traditional model with stock on hand, direct connection to the customer throughout the supply chain, and a capacity to make decisions down the line when needed to move the business forward.
For those that are undoubted they’ve found their calling in drop shipping good luck to you! For someone just exploring the idea then pursuing a traditional style of eCommerce site shall likely bring you better results quicker, and do so without the pitfalls of drop shipping, that CAN bring some unique benefits as a business model; but shall almost certainly bring many problems for a newcomer.Ed Kennedy is a journalist, ghostwriter, and web designer proudly from Melbourne, Australia. Say hi to Ed via email@example.com or on Twitter @Edkennedy01