Happy New Year!
A member of the eBay Sellers group on LinkedIn recently posed a question about drop-shipping; a topic that brings back some painful lessons for me. I first started thinking about this several years ago, while working at Jewelry Television. There, we were looking into an enterprise-wide drop-shipping program; of course, I wanted to see if we could add these types of SKUs to our eBay and Amazon stores. There are some compelling advantages to the successful implementation of a drop-ship program; but there are also some disastrous results if your execution is less-than-perfect; and unfortunately, you don’t control the whole ordering and fulfillment process.
So, before I get into the advantages and disadvantages, and then talk about my own experience, let’s define what drop-shipping is. For the purposes of this blog post, drop-shipping is simply having a 3rd-party supplier fulfill orders that you take on your site. So, for example, at JTV.com, we had products listed from a supplier called Quality Gold, a wholesaler. Customers ordered the product on JTV.com; we placed orders with Quality Gold, and Quality Gold shipped the orders directly to the customer. We did not buy the product prior to the sale, and never inventoried it.
Now, it’s important to remember one subtle distinction: a well-executed drop-ship program can be great for all parties when it’s implemented on a company’s website; but typically, drop-shipping is anathema to marketplace sites such as eBay, Amazon, Sears Marketplace, or Rakuten.com.
- Just to say “you’ll get incremental sales” is actually a bit too simplistic. It’s true, you will. But, you will most likely also realize incremental sales on the items that you inventory yourself; I call this the “networking effect”, and it’s a whole separate topic that I plan to cover in a future blog post. But one additional aspect of “incremental sales” is the learning aspect; you’ll discover that certain items are worth inventorying; and by buying more and stocking them, you’ll get better costs.
- The other great advantage is that, like consignment sales, you don’t own the inventory, and thus don’t have any inventory investment. If you can buy on terms, you’ll get your customers’ money before you pay your supplier. Of course, depending on your sales volume and relationship, you may not be getting the discounts that other resellers are getting.
- Lower margins. While drop-shipping gives you a means to expand your product assortment and increase your revenues, you may do so at margins that may be unacceptable. Because you’re often buying one or two at a time, you’re (most likely) not getting volume discounts; and, you’re probably going to be competing with a multitude of other sellers, selling the same items, for prices that may make you want to pull your hair out. Drop-shipping allows anyone with a laptop and an idea to set up shop – the barriers to entry are often quite low. In some industries, like auto parts, many suppliers / wholesalers won’t sell to just anyone; but in jewelry, many suppliers will.
- You don’t control what the drop-shipper sends. You don’t control the packaging quality/care; and you probably can’t control what they put in or on the box; which can be a major issue if branding is important to you, or if you want to control promotional messaging inserts.
- You don’t control when the supplier will ship, or if they will ship at all. There are many variables here, of course, and it takes two to tango. The quality of the relationship; the volume of business; the industry; the communications technologies used (i.e., EDI, XML feeds, email, etc); product availability. These are all factors in the shipping performance of the shipper. Unless you are electronically linked with your supplier, it’s unlikely you’ll be able to have your pricing completely up-to-date, and you’ll often take orders for products that are out-of-stock & backordered, or simply discontinued. Some suppliers will delete the purchase order and never even tell you – meanwhile, you’re hanging onto a customer’s money, assuming the item will ship. This ends up being a very negative customer experience, which can be more problematic for a marketplace seller, versus someone selling from their own website. Cancelled orders and shipping too late are prime drivers of your Amazon report card. Do this too often, and Amazon will shut down your store. Ditto for eBay.
- Same order, different suppliers. Another customer experience hassle will happen when the customer buys multiple items in the same order, which must come from different suppliers. That means they’ll come in separate boxes, usually on different days. Many customers will then contact you, saying that they didn’t get part of their order.
- Returns logistics are a hassle. If your in-box instructions to the customer aren’t buttoned-up, there will be confusion. You’ll have to negotiate a returns process with each supplier, and even then, some customers will return product to you when they should return it directly to the supplier, or vice-versa. The returns process can be convoluted, confusing, require a lot of follow up, and result in refund delays to the customer; that will result in negative feedback and complaints to Amazon’s customer service, or to PayPal.
- Difficulties in updating product data. Expansion of your SKU assortment is certainly a big advantage of a drop-ship program, but it’s also a downside. Think of this from the online merchandiser’s perspective: they have to list the product on a website(s), writing descriptions for products they’ve never seen. They have to figure out a way to get images for products they can’t take pictures of, and they have to maintain up-to-date pricing and inventory information on (potentially thousands of) obscure products from a supplier that may not always do a great job of sending out timely data updates. If you have to manually update your data, this could be prohibitive, and not every seller can link to their suppliers via APIs and XML feeds.
- Tracking numbers. Loading tracking numbers into the marketplace orders so you customers can track shipments is required on each marketplace now. Unfortunately, Amazon and eBay do not care about your problems in getting tracking information from your suppliers, and neither do your customers. In my experience, suppliers routinely provide these numbers after the marketplace’s required time window expires. But if you don’t get the tracking number loaded within the required time, it will count against your seller metrics.
In My Experience
One company I worked with recently had thousands of drop-ship items on their website and in their eBay and Amazon stores. The customer service issues were out-of-control, the company was losing money hand-over-fist due to pricing issues, customer concessions, and shipping costs. The worst part was that the week of my arrival, Amazon shut down their store, and eBay was getting very close. On their own site, much of the pricing was incorrect, and it was littered with discontinued items. Finally, the product descriptions and photography were in worse shape than a politician’s campaign promises post-election.
It took some doing, but eventually, after submitting a detailed written plan to some folks at Amazon, I was able to get their Amazon store back open. One of the action items I took was to delete ALL drop-ship listings from Amazon, and I did the same thing on eBay. One item was particularly problematic, an item called a “pyrometer”. This one single item was responsible for countless resolution cases on both eBay and Amazon. It turns out that this item had been backordered for some time, with no ETA. Our people didn’t know this for some time, until the refund requests, phone calls, and anger started pouring in. Apparently, the supplier continued to accept the orders, cancelled them, and didn’t communicate any of this to the company I was working with. On eBay, we lost our Top Rated Seller status, and our Amazon store was shut down. Talk about an education!
- Start slowly. Build up your program’s SKU-count – and supplier list – methodically. You want to know if your business can sustain the low margins that drop-shipping will typically provide. You’ll also want to know if your business is ready to handle all the other issues that the drop-ship program will bring; starting too fast is a recipe for failure. Test, test, and test again.
- Try to find suppliers that have MAP (minimum advertised price) programs. I’ve been in a love/hate relationship with MAPs going back to my Circuit City days as a Buyer, because there are advantages and disadvantages with MAP programs. Of course, MAP violators abound, and sometimes suppliers aren’t very good about enforcing it, causing a dilemma for the ethical sellers. I’ve even seen Amazon itself violate MAP. Some suppliers don’t want to deal with MAP programs because they’re a headache to implement and enforce legally; though many are successful. Generally speaking, if you have suppliers with MAP policies, it can be an asset to a drop-shipper, because they will help preserve your margins, especially on marketplaces. One of the downsides to MAP, however, is that you’ll have to find other ways to compete other than price. That can be a good thing for professional online retailers.
- Have written Service Level Agreements (SLAs) in place with your supplier(s). The SLA should cover:
- How you’ll communicate with your supplier, and what the communication expectations are. Will they be required to respond via email, EDI, or some other way with P.O. receipt confirmations? Will they be required to send tracking numbers to you, your customer, or both?
- What the supplier can or cannot put into (or on) the shipping boxes; i.e. promotional materials, box logos, etc.
- What the packing slip will say. Will it have your name, address, and logo on it?
- In detail, what re-stocking fees will be charged, and when. They should honor a certain amount of “concessions” that you – or Amazon – determine is appropriate in particular customer situations, so that you don’t eat all of these fees.
- The standard operating procedure when something arrives damaged or missing parts. Who will the customer deal with? (Think about RTA furniture – they always say “don’t deal with your retailer”). Your own website’s policies page should reflect your agreement.
- Which shipping account will be used? Whoever has the better rates, of course. Don’t let your suppliers charge you standard UPS or FedEx rates; if they do, insist that they use your UPS account.
- They should honor old costs (if costs went up) – if those costs were very recently implemented, giving you as the seller little opportunity to adjust all pricing on all websites. This is where it pays to have a great relationship with your supplier.
- Setting proper customers expectations is incredibly important. Create standard language to add to all listings that you don’t inventory; call it your “special order” text. Let customers know that this is a “special order” or “made to order” item; you don’t stock it, and it will require extra time for handling and shipping. If you don’t do this, you will regret it!
- Related to the messaging above, your listings, policy page, and shopping cart (if you control this), should tell customers that sometimes items in multi-item orders will arrive in separate boxes on different days, depending on a variety of factors, so “please be patient, and use the tracking numbers”.
To sum up, drop-shipping can be a profitable way to grow your business, if done very carefully. But it can also destroy a business, especially a marketplace business. Start slowly, preferably on your own website, before expanding to ecommerce marketplaces. Expand SKU counts methodically and test every new supplier and category carefully.