Drop Ship 101: The Benefits of Drop Ship for Retailers
Drop shipping is a business model where a merchant, such as an eCommerce or brick-and-mortar retailer, sells products to consumers, but the product manufacturer or distributor is responsible for fulfillment. When a customer places an order on the drop shipper’s website or in a store that does not have inventory for that product, the order is transferred to the supplier, who picks, packs and ships the products directly to the customer’s preferred shipping location. This provides a great customer experience and both the supplier and retailer earn profits from each sale.
It’s not just small businesses pursuing drop shipping; in fact, the trend has been spearheaded by some of the largest companies in our economy. Some retailers like Macy’s, Kohl’s, and Walmart, offer drop ship programs in addition to their retail stores. Other drop ship businesses are exclusively online, like Etsy and eBay; others like Amazon use a hybrid approach. And the market is booming; in 2018, the global market was valued at $102.2 Billion, and it’s expected to grow to $557.9 billion by 2025.
Why has drop shipping grown so rapidly? For retailers, there are several key benefits that make this business model highly attractive. From low startup costs to nearly infinite scalability, here are a few reasons you might want to consider getting started with drop shipping.
Low Startup and Operational Costs
Because there is no need for a physical warehouse location, starting a drop ship program is much less expensive, and therefore less risky than carrying inventory for every product you sell. In fact, you can create an eCommerce dropship site for mere hundreds of dollars if you use an established eCommerce platform. While store owners without a drop ship program need to “stock up” on inventory before opening, you can begin with zero stock and just a few suppliers to ease into the market, giving you time to focus your efforts on digital marketing without having to worry about massive overhead costs.
From an inventory perspective, the cost savings are also significant. Traditionally, retailers buy inventory ahead of time based on their sales forecasts. This inventory may be housed in a retail store, or in a nearby warehouse, both of which require personnel and overhead to manage. If the inventory is overbought, the retailer is stuck with holding costs and eventually has to take markdowns to move the product. Under the drop ship model, the retailer never takes ownership of the products, and only pays for a product after the end-customer buys it, thereby reducing both costs and risk associated with inventory.
Fulfillment and logistics also require heavy investments in personnel, warehouse space, and technology. For example, in 2018, Amazon spent $34 Billion on fulfillment, a growth of 14.6% from the year prior. As a drop ship retailer, the onus of fulfillment falls on the manufacturer, instead of on your business.
Limitless Product Mixes
Ironically, drop shipping’s lack of inventory investment means you can sell a seemingly infinite number of products. Think of it this way: when you own a brick-and-mortar store alone, you have a limited number of shelves up front, plus perhaps a bit more in your storage room. Your product mix is often dictated by the size of your store. Even businesses with huge inventory warehouses will eventually run out of room, which means they need to be selective about the product types and quantities they have on hand.
In contrast, drop ship sellers can offer as many products as they want, based on the contracts they have with suppliers. There’s no need to worry about “room” because eCommerce aisles are endless, and inventory is kept at the suppliers’ warehouses until being delivered straight to customers.
This also makes it easy to try out new products and see how your audience responds to them. Whereas a retail store would need to buy the merchandise, hoping for a positive reception, drop shippers can simply add a listing to their website and see what sells. For retailers with brick-and-mortar locations, this makes it easy to see if a product sells well online, before bringing it into physical stores.
Protection Against Market Changes
Two of the biggest problems a retail store can have: having too much stock on hand, or not enough. Because inventory for retail stores is bought in advance, the number of products bought by a retailer is based on demand predictions. However, it is impossible to predict which products will be “hot” or “not” with complete accuracy.
For example, data from Neilsen indicates that 80-85% of CPG products fail within two years—including new products from well-known, established brands like Coca Cola and Procter and Gamble. Even Ben and Jerry’s has a “Flavor Graveyard” for products that simply didn’t sell as well as they intended. Retailers storing these product flops in the warehouses may never sell them and end up forfeiting the cost of the purchasing and storing the inventory.
On the flip side, figuring out which products are about to explode on the market may be even harder. Some launches just go amazingly well, like the Apple iPhone X, which sold out across 20 different cities in less than three days. Other products are impacted by world events, such as panic buying in March 2020, which stripped stores clean of toilet paper. In these cases, stores with less inventory lose out on massive potential profits, while competitors with more products in-stock reap the rewards.
Drop ship retailers can meet the changing demands of consumers quickly, without the risks associated with inventory investments. By adding or removing suppliers or products, and taking advantage of eCommerce’s endless aisles, they can provide the right products at the right time, every time.
Larger Buyer Audience
Unless you own a national chain of retail stores, chances are your customer base is largely dictated by your location. Even if your store is located in an area with lots of foot traffic, like a mall or tourism center, your profitability is still limited to the number of people who can access your store physically.
Online, these limits disappear. As long as your suppliers can ship to their location, any customer from anywhere can find and buy from your store. With the help of social media and digital marketing, you can curate an audience of thousands to millions of customers, who will love your site’s wide product assortment and array of new, market disrupting items. If you own a physical store as well, this can help widen your footprint and make your flagship location a destination for loyal shoppers.
Fewer Internal Resources
Another major benefit of drop shipping for retailers is the reduced need for internal resources. Warehouse management and fulfillment processes require significant personnel to make sure that goods are packed and shipped in a timely manner. That’s not including the IT resources needed to work with warehouse automation technology. By offloading inventory storage and fulfillment to your suppliers, you can scale your business with fewer resources, leading to increased profitability.
Unlike a physical retail store, you can manage a drop ship operation from anywhere with a WIFI signal. With today’s eCommerce, remote connectivity to your retail management system and drop ship software, you can sell products, manage orders and communicate with customers directly from your computer. This offers significant flexibility by enabling you to keep your business running no matter where you are.
This connectivity also allows you to create relationships with suppliers across a range of locations. While an individual store might be limited to suppliers that deliver to their location, drop ship businesses can work with suppliers from across the country, or even across the globe.
Getting Started with a Drop Ship Program
Before launching a drop ship business, or expanding your retail business in to drop shipping, you need to assess the risks, opportunities, and options for your brand. Consider the market space you want to occupy, and the physical regions you want to ship to—you'll need to find manufacturers who can meet those needs. Businesses without an existing eCommerce storefront will need to find the right platform and create workflows for sending orders from their eCommerce channels to internal systems and drop ship partners.
Additionally, you’ll want to establish standards and KPIs for your drop ship suppliers, so you can evaluate performance and ensure a consistent customer experience. However, to be truly successful as a drop ship retailer, you’ll also need to have great supplier relationships, and visibility into your orders as they move through the supply chain.
TrueCommerce’s drop ship functionality makes it easy to visualize and manage your suppliers and orders by connecting your demand channels to your business system, and your suppliers’ business systems. This connectivity gives you the visibility you need to track order fulfillment performance, easily onboard new suppliers, and receive important information like tracking data, which you can send to customers to keep them updated. You’ll also be able to set up compliance standards for your suppliers and create branded packing slips and other materials for blind shipments.
Interested in learning more? Fill out our contact form to let us know about your business needs, and one of our specialists will reach out to help you get started.
About the Author: Phil Kenney has been in the retail and supply chain business for over 30 years, and currently drives retail strategy as the Senior Vice President of TrueCommerce ecUtopia. Previously, he led retail and eCommerce expansion at companies including GERS Retail Systems (now BlueYonder), Hot Topic, Wet Seal and Jerome’s Furniture. At TrueCommerce, Phil continues to advance company growth through great customer service and innovative, impactful solutions. Phil lives in Carlsbad, CA and in his free time enjoys the outdoors with family and friends.