Business tips

Drop shipping: the solution to your Christmas inventory and delivery woes?

In the run-up to the Christmas shopping season, we look at how drop shipping can help e-commerce retailers handle product sales and delivery without the hassle of managing inventory and shipping.

The Christmas shopping season is synonymous with out-of-stock products and shipping woes for e-commerce retailers. But, increasingly, retailers are opting for drop shipping – a process where online retailers tie up with bulk wholesale companies that offer to ship products directly to customers.

According to Chris Malta, CEO and founder of Worldwide Brands, “There is no such thing as a legitimate wholesale company that only drop ships and does not sell in bulk. In fact, bulk sales are always a drop shipper’s main source of income, by a very large margin. Those (relatively) few bulk wholesale companies that do offer drop shipping services to online sellers do so in order to develop relationships that can eventually turn into bulk sales channels.”

Below, Malta shares what he believes are the most important considerations for online retailers thinking about using drop shipping this holiday season.

How do I find authentic drop shippers?

Authentic drop shippers are typically not found via the search engines. Most of the individual “drop ship solutions” you see marketed online are simply lead generation techniques used by unscrupulous affiliate marketers that exchange false and misleading “drop ship” information for the contact information of their customers. Those marketers then bombard unfortunate individuals with emails and phone calls, trying to sell them every e-commerce product and service under the sun, regardless of its quality.

Legitimate wholesalers that drop ship are found through painstaking research.

A business owner who wants to research legitimate drop shippers needs to find out who manufactures the product they want to sell. Then the business owner needs to contact the manufacturer, identify themselves as an online retailer, and ask for a list of that manufacturer’s authorised wholesalers.

Manufacturers are happy to provide that information for the most part. Then the business owner needs to contact those authorised wholesalers one by one and ask them if they are willing to drop ship for an online business. The great majority of the time the answer is no. Wholesalers that drop ship are very rare, since running a drop ship program costs a wholesaler a significant amount of money, time and personnel.

How are returns handled in drop shipping?

There are very few product delivery issues that are different between physically stocking products and having them drop shipped. However, one process that is different is returns. A retailer that physically stocks products also handles returns. A retailer that uses drop shippers allows the drop shipper to handle returns.

There are two basic scenarios in product returns:

1. The customer decides they don’t like the product and wants to return it within a specified return window. Online retailers that drop ship should mirror the return policies of the drop shipper. For example, if the drop shipper allows returns for any reason within 30 days but requires a 20 per cent re-stocking fee for an arbitrary return, the online retailer should offer the same policy.

Upon receiving a return request from the customer, the seller will contact the drop shipper for a Return Merchandise Authorisation (RMA) number. The drop shipper will provide that number to the retailer. The retailer will instruct the customer to pack the product in its packaging including all accessories and paperwork, write the RMA number on the outside of the box, and ship it to a PO box designated by the drop shipper.

Once the drop shipper has received the return in good order, the drop shipper will credit the wholesale price back to the retailer, minus any re-stocking fee. Then the retailer will credit the retail price back to the customer, minus the re-stocking fee. The online retailer never touches the product.

2. The product is damaged or not in working order, and the problem is not the fault of the shipping carrier. In this case, some drop shippers will send out a replacement directly to the customer, along with a prepaid return shipping label for the customer to send the damaged product back to a PO box of the drop shipper’s choosing. Others will simply send the prepaid shipping label to the customer and request that the product be returned for inspection before a replacement is sent out. Either way, again the online retailer never touches the product.

What are the advantages and disadvantages of drop shipping?

One advantage to e-commerce businesses of using a drop shipper is a zero-cost entry point into product sales, with no risk of buying bulk products they can’t sell.

Another great use of drop shipping is to test product markets. Once a business tests its markets and determines what lines sell best for it, it can then start putting aside profits from drop ship sales in order to build into bulk sales, where there is more profit because the unit cost decreases with the increase in purchase volume.

The disadvantage of using a drop shipper for an online retailer during the Christmas holiday season is that the wholesaler may run out of product at some point prior to Christmas, and the retailer can no longer sell the product. However, that’s the same disadvantage faced by those that physically stock their own products because once their wholesaler is out of product during the holidays, the business cannot order more stock to fulfil more Christmas orders.

The solution to this is the same for both the seller that physically stocks the product and the seller that uses drop shippers. They both need to be very aware of current Quantity On Hand (QOH) numbers from their suppliers over the Christmas season, and pull the product from their websites and marketing activities when it runs out. The solution to an order placed that cannot be fulfilled is the same, too: it’s classic customer service. You immediately offer a refund and an apology, or you find the product at another store, buy it and send it to your customer at a loss. Any monetary loss is minimal compared with the goodwill generated by such a gesture.

Bear in mind, too, that drop shipping is not a permanent solution because when you use drop shipping you are always paying a higher single-item wholesale price.

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