Drop-Shipping: Outsourcing your Shipping and Fulfillment

Drop-shippingSo you’ve decided to start an e-commerce business. You’ve read our articles about the Pros and Cons of Opening a Web Store, How to Choose the Right Payment Methods, and How to Market to Your Target Customers. But there’s still one more challenge to face when entering the online retail industry: shipping and fulfillment.

Navigating this aspect of selling goods over the internet can be complicated, so in order to dispel some of the confusion we’d like to explain some of the finer aspects of shipping and fulfillment. We’re going to begin by explaining a common and simple way for small merchants to taking care of their shipping needs in one fell swoop by outsourcing that aspect of their business. This method is called drop shipping.

Drop shipping makes it simple and affordable to run an online retail store. With drop shipping, once an order has been placed the retailer contacts the wholesaler and has them ship the goods directly to the purchaser. The benefits of drop-shipping include:

  • Lower costs: You don’t need to keep a stock of inventory and to process shipping information, which saves small business owners a sizable amount of labour and overhead costs.
  • Low risk: In order to keep an inventory of your products, you need to purchase those goods. But what happens if the products don’t sell? You have no way to recover the initial investment you made on them. With drop shipping, you don’t need to purchase the products until a customer has ordered them.
  • Testing the market: Since there’s no risk of lost investment on stocking goods, you can test out more new product offerings. If you find that there is no market for them, you can simply delist them without having any leftover stock to go to waste.
  • Higher selection: With drop shipping, you’re not limited to the total amount of stock that you can fit in your storage facility, so it is easier for you to offer a wider range of products for your customers.
  • No shipping issues: Even for a small business, handling the logistics of shipping and fulfillment, from packing boxes to buying insurance and contacting couriers, is a full time job. If your business is still small and you can’t yet afford to hire additional staff, drop shipping allows you to fulfill your orders and begin to grow.

But don’t start drop shipping just yet – while it’s an ideal solution for many small retailers, especially those just entering the e-commerce business,there are two major disadvantages that mean that, depending on the nature of your business, it may not be the right fit for you.

Drawback #1: Slim Profit Margins

The main drawbackto drop shipping is that absorbing less risk always comes at a cost and in this case that cost is a lower profit margin. In some cases, retailers may find that their wholesale drop ship costs are as high as their competitors’ prices, leaving them no room to make a profit.

There are two main reasons why drop shipping results in much slimmer profit margins. The first is that wholesalers themselves don’t make much of a profit on individual products, they make their money by selling in bulk to retailers. When you drop ship, you aren’t paying the bulk price, you’re paying the wholesaler’s much higher per-item price for each individual product sold.

The second reason is the drop-ship fee. This is the wholesaler’s handling charge for taking all of your shipping and inventory management off of your hands. They handle storage, packaging, labelling, tracking software and working with couriers. This is a perfectly normal industry practice – wholesalers who choose to offer drop shipping services need to recover those expenses and turn a profit somehow.

Market research, as usual, is the key to finding out whether you can drop ship for a profit. While pretty much any type of good could be shipped using this method, some products may be too expensive to make it worth your while. For instance, in industries where your competitors have huge economies of scale, the expenses associated with drop shipping might make it impossible for you to compete with their value.

Drawback #2: Customer Service

Outsourcing any aspect of your business is going to have a unique negative effect on your customer experience. Many consumers, in choosing which businesses to offer their loyalty to, are looking for a personalised experience. With drop shipping, customer service becomes more challenging since shipping and fulfillment is completely out of your hands.

When you handle your shipping in-house, you can ensure that every order is filled accurately, packaged adequately, and shipped out in a timely manner. When outsourcing your shipping, you are still the one who customers are going to blame if your product arrives broken or doesn’t arrive at all.

And that’s not the only way drop shipping can harm your customers’ loyalty. In general, consumers prefer to do business with companies that they feel have a hands-on, personalised approach. They want to feel like the products are coming directly from whom theypurchased. Outsourcing the delivery process can limityour ability to offer a personalised customer experience and discourage some of your customers from returning to your webstore.

In choosing a drop shipping provider, you should test their services by placing an order from them and seeing in what condition and timeframe your purchase arrives, and by calling their customer service to ensure that they are friendly, helpful, and that their order tracking services are adequate.

Despite its drawbacks, drop shipping is an excellent way for a small business to build a clientele, especially before you can afford the staff to do it yourself. But even as you grow, drop shipping can be still be a boon for your business, whether using it for all your fulfillment or to manage specific bulky or hard-to-store products while you keep your most popular goods in-house.

Next week we’re going to take a closer look at handling your shipping and fulfillment in-house, whether you’re just starting out or are ready to make the transition from drop shipping to managing your own inventory. Subscribe to the DalPay Blog for notification about this and other upcoming articles about online retail, and follow us on Facebook and Twitter for the latest news from around the e-commerce industry.

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