Drop Shipping Can Relieve Inventory Headaches

Starting Up: Drop Shipping Can Relieve Inventory Headaches


October 22, 2007
By Diana Ransom
WHEN JUDY AND RONALD Smelser of Arvada, Colo., started selling items on eBay two years ago, their business was a far cry from the well-trafficked "Power Seller" eBay store that it is today.

At first, selling stuff online was simply a novelty, says Judy. "We sold things we'd find at garage sales" or even around the house, she says.

But after a year, and once Judy discovered that she would soon lose her offline job, she began to focus her attention online. Without knowing who to buy from, or even what to sell, she says, sales stalled. After some initial research, which included Internet searches, contacting wholesalers and paying attention to late-night infomercials, Judy learned of an increasingly popular technique known as drop shipping.

Drop shipping, which is the delivery of merchandise from a supplier directly to a retail store's customer, seemed to solve the couple's seller's dilemma. They'd no longer have to figure out where to keep inventory, or contend with packaging and shipping costs.

Now, whenever the Smelsers receive an order for anything from motorcycle jackets and chaps to bedding (which they generally don't keep in stock) they receive a customer's payment instantly. Then they order the requested item from the corresponding drop shipper, which ships the item directly to the customer. From the profit between the wholesale cost of the product and its retail price, the Smelsers pay eBay a fee and a drop-ship fee that can range between 50 cents and $6 to $8 on top of shipping and handling costs.

While maintaining a scant inventory, the Smelsers sell 30 to 45 drop-shipped items each day and capture roughly $6,000 in sales each week via their eBay store Rocky Mountain Traders, which has since branched out into its own online site. Business has gotten so busy, says Ronald, "we'd like to taper it back some."

But even as opting to have products drop-shipped has many benefits — namely, lower costs for stocking, packaging and shipping inventory — the method is not without its drawbacks. For instance, "you are at everyone else's mercy," says Ronald. Suppliers may run out of certain products and returns can be a headache. Drop-ship fees can be pricey and there's typically no discount for buying in bulk.


About Drop Shipping
Drop shipping, which was first popularized by Amazon.com and other large-scale multichannel retailers, used to be off limits to small businesses, says Jeremy Hanks, co-author of "Drop Shipping for Dummies."

That's changed as small businesses have gained greater web footing and captured more customers. Now, like large retailers, they're telling suppliers "why can't you ship it directly to my customers," says Hanks, who also co-founded Doba, an Orem, Utah, software firm that matches retailers to drop shippers.

In 1998, when Gi Goodall first started looking for wholesalers willing to showcase their items online, the lack of enthusiasm was discouraging, he says. But after he persisted and found some takers, he says: "Lo and behold products started selling." And once he launched a more professional site Dealz4Real.com in 2005, Goodall began working exclusively with three drop shippers. Today, he works with about 10 different suppliers plus Doba, which connects him to about 230 others, and the site features about 35,000 items, of which about 75% are drop shipped directly to customers. These days, he says, "it's easier to get a supplier [to drop ship items] when you are a small Internet company."


Combating Obstacles
To be sure, there are still obstacles, and one thing Goodall has learned is: "Don't compete on price." Bigger retailers who can buy in bulk and pass on discounts to customers will undercut you every time, he says. And the web, being a comparison shopper's paradise, is an even worse turf to compete on price. For that reason, he says, "electronics are very difficult to sell." Separate yourself by some other means. The Smelsers, for example, pride themselves on their excellent customer-feedback score on eBay. At nearly 3,000 positive customer reviews and no negative responses, Ronald says: "You can charge $20 higher on an item if a customer can trust that they'll get good service."

Or, "find specialty products and a niche rather than compete on price," says Hanks. Just make sure there's a market for those products, he says. For example, you might be able to find a wholesaler to drop-ship ceramic baskets, but if customers aren't interested, they won't sell.

Once you've found wholesalers to work with, figure out ahead of time how you'll deal with back-orders and returns. To combat getting hung-up by drop shippers suddenly running out of products and having to backorder items, the Smelsers try to keep one of just about everything they sell in stock. "There is nothing more frustrating than [a drop shipper] saying we don't have any" of whatever item you need in stock, says Ronald.

It's also possible to run into drop shippers that will change prices on you, says Goodall. If backorders and price changes become frequent, cease working with the drop shipper. To cut down on this back-and-forth, some retailers have opted to work with companies that research wholesalers; one is Worldwide Brands, which sells a directory of drop shippers.

Lastly, and most importantly, work with only reputable drop shippers.

"As soon as you make things virtual, you open the door up for the bad guys," says Hanks. Drop-shipping scams of recent years include sham drop-shipper lists, shipments of poor quality products or no shipments at all, and middlemen pretending to be wholesalers who instead jack up prices.

To protect yourself, says Hanks, do as much research on prospective wholesalers as possible. Make sure a drop shipper has a web site or ask the company to mail you a catalog. Also, check and see if they are a member of the Better Business Bureau. Find out the location of the drop shipper's warehouse and go on a tour, if it's near you.

Another way to find reputable suppliers is to go to trade shows, says Hanks. "If someone has a booth there, they are legitimate," he says.