October 3, 2016 by Ed Kennedy
Drop Shipping & eCommerce: The Good, the Bad, and the Reality
For all the talk about the many ways someone can sell in eCommerce one model tends to arises again and again: drop shipping. Depending on what source they read, for newcomers often it’s to be the equivalent of a road map to El Dorado. Either a brilliant road to riches, or a total fool’s quest.
The problem with this polarising either/or argument is it often overlooks the greater detail of the debate, does little to advance it, and ultimately leaves people keen to start a business but unsure where to begin at square one. That does a disservice the industry when it comes to helping new entrepreneurs build a real understanding of what exactly drop shipping is, whether the model ultimately proves right for them or otherwise.
This is not just sad for a budding entrepreneur, but also for us as customers; we miss out on opportunity to buy a cool new product. One that would not have existed without someone first getting a good idea, and then having the gusto to startup a business that sells it.
So, may the following be of help to those set to make a start in eCommerce, and are 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…
A Separate Supply Chain
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 in how each party interacts with each other through the supply chain.
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
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
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 adore shoes.
All your waking hours are spent on Instagram, Tumblr and Co – and maybe even a little bit of downvoting of bad shoes on Reddit for good measure – talking classic Nikes, retro 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 up 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 start up a website, sell at a price above your bulk cost (say $200 per pair) but below what your local store sells them for ($400). You’re now selling fantastic shoes for $300 a pair that turns a profit but also outpaces your competition.
Given you’re really passionate about shoes before too long you build a big customer base, and by using your expertise knowledge to source limited edition shoes your store soon has a unique niche. Your store becomes a real standout and it’s great for all parties. Your supplier makes more sales, you run a business you love, and shoe fans buy great shoes affordably from someone who shares their passion, instead of a know-nothing team at their local laces hut.
While you have to run your eCommerce business like a regular business – maintain a website, keep good accounts, and pay taxes – once up and running such an online business can be easy, seamless, and fun. There are drawbacks to this type of operation, and it’s 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 whether you can afford to buy enough stock for the next season, what happens if that stock doesn’t sell, and even worries surrounding damage to stock, defective goods, and so on. As you don’t hold stock the risks around it are zero.
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 domain or one like Shopify or eBay), promote on social media what you’re selling to raise awareness of your site, and that’s it!
Drop Shipping Is Easy to Modify and Change Up
Stock on-hand (SOH) typically determines the sales focus of a traditional business model. A fruit shop with too many apples will sell them at a discount, a clothing store with spring coming will slash prices on their winter coats. As the drop shipping model keeps no stock with the seller you’re free of these constraints.
You can sell what you like, when you like. This is ideal if you find a particular part of your business is performing 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 a ton of DSLR’s you’ve got lying around 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 avoiding the calamitous disasters that can really be ruinous. This is where the drop shipping model can be an issue, as it’s very hard to avoid this risk altogether.
While you’re getting just one order a month for a small item, your risk is relatively small if the manufacturer fails to deliver, deliver the goods to a sufficient standard, or goes completely AWOL. In a situation like this you can likely just refund the buyer, or arrange for supply of the purchased good via another manufacturer. The real danger comes when your business grows, and is dealing with either really expensive orders, sizeable volumes of orders, or both.
An example is if you agree to ship 1000 items to a business, and the goods are delayed or defective. That then costs your buyer business and profits, and they may feel their lost of trade is so significant as to warrant the costs of litigation to try and recover it. Beyond any litigation risks, losing a loyal customer suddenly is also a huge loss.
Complex Agreements Cost Money
As your business grows ensuring you’ve a clear agreement in place with the manufacturer is essential. It is something that in the 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 lunch at your favourite sushi spot.
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 will be needed to see a lawyer to get the document written, and then you’ve also got to get an agreement from the supplier. If they are in another country – or even just another state or region in your native nation – that can take a whole lot more time and money to get sorted.
It’s also important to keep in mind there can be other fallouts beyond losing a customer if your supplier stuffs up, and the blame will likely be assigned to you. Even if a former buyer has no interest in recovering costs, they may not hesitate to post online about their bad experience. Anyone potential customers who sees it may think twice about doing business with you.
Though the online world is borderless there are steps you can take to get a bad review removed if its clearly untrue.
But if your former customer is telling the truth? There’s nothing you can fairly do but wear it, even if it was the supplier and not you that stuffed up the order. A regular eCommerce model doesn’t have this risk, and you will always have SOH, and because of that have an ability to act quickly to fix a supply issue.
Promoting the Business
If you have a business selling products it’s pretty much essential you have a photo to show what it is. Even intangible things you can’t see like the smell of perfumes still 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.
Copyright law in many countries is 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 arranging exclusivity agreements 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, it’s potentially a legal issue.
As drop shipping would see you profit, using an image without explicit permission is unlikely to fall under fair use. Sure, you can contact each supplier direct and maybe get permission to use a photo, but this will 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 above it’s worthwhile underscoring some common sense exists here lest someone starting their first business get needless fear of litigation. No kids who set up a lemonade stand outside their home when young ended up in a Supreme Court showdown with a disgruntled neighbour – so any idea drop shipping is fraught with nothing but legal risk 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 have the skill set to overtake a Ferrari through Eau Rouge. Here is where the heart of drop shipping as a business model is found.
It’s 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. Someone who 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 resolving issues when it’s all going wrong.
That’s why drop shipping can be hard for a newcomer, even if a profit if being made and the business is growing. If so much time and expense is spent on the surrounding costs and tasks, it’ll ultimately feel less like a fun new startup business you began one Saturday morning, and more like a routine set of chores, except half as fun.
With this understanding now in place, someone new to drop shipping could perhaps look to grow a business well by avoiding the pitfalls listed above, and going the extra mile by…
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 advertise to a secondary audience.
Did you start in eCommerce by selling a good pair of arm warmers to cyclists? Cool. If you put your a name and logo on it everyone in a Saturday morning group ride with your customer will see your arm warmers in use, and your brand name. That’ll come to mind when your customer’s cycling buddies buy their next set of arm warmers.
Find a Local Business to Supply You
While many other starter guides in the drop shipping world will often suggest sourcing goods from overseas, oftentimes looking in your own backyard can be best. Furthermore, for all the chatter amidst startup circles using words like ‘scalable’ some businesses are happy at the size they are. Odds are good you know of a few already.
It’s that family restaurant at the end of your street. That small hardware shop in town‚ and maybe that factory just outside it. Not all business owners are just craving the chance to don a knit tie and ring the bell of the NYSE. Some just want to keep doing what they are doing, but are also open to growing profit provided their model is maintained.
For business like this striking up a deal with you could be perfect.
They increase their profit but don’t need to go through all the fuss 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 they’re on the other side of the world, but much harder if they’re on the other side of town.
Have Some SOH with You
While a chief drawcard of drop shipping is you don’t need to keep SOH it’s 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 some backstock is worth it in event of emergency.
While this does depend 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 backstock can be a form of insurance, as if any problems arise with the manufacturer you can keep operating without interuption and ship directly to customers for a while as you seek to resolve the problem.
If worst comes to worse you can turn off sales for a while as you seek to find a new supplier. Sure a customer may not be delighted to see a ‘out of stock’ sign, but it’s way better for them to encounter that than buy a product you then can’t supply. It’s also really easy to get rid of any excess SOH when you need to, just ship to a customer direct instead of notifying your supplier of a sale next time an order comes in.
..and If It Stalls Start Another Business
Drop shipping undoubtedly has its advantages. Especially as once a good drop shipping business is up and running it can be among the easiest and most drama-free eCommerce models to maintain. The downside of this is knowing how to set it up effectively, and avoiding the problems that can arise at the start.
This usually requires either lots of prior experience, 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 in terms of growing a customer base, and the daily 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 time to restructure the business. One that has a traditional model with SOH, direct connection from you to the customer through the supply chain, and a capacity to quickly made take action and how to resolve a supply issue if one arises.
For those who are certain they’ve found their calling in drop shipping, good luck to you! For someone just exploring the idea pursuing a traditional style of eCommerce site first will likely bring you better results quicker.
Drop shipping can bring some really unique benefits as a business model; but will almost certainly bring many problems for a newcomer. Think carefully about what sort of entreprenuer you are at core, and then go from there.Ed Kennedy is a journalist, ghostwriter, and web developer from Melbourne, Australia. Contact Ed via firstname.lastname@example.org on Skype or LinkedIn.