Its been awhile since I wrote about the dropship product sourcing and fulfillment model and since this is one of the most common times of the year to start an online business and dropshipping is one of the most misleading business models, I thought I would take some time to explain my experiences with dropshipping.

Dropshipping is one of the most common product sourcing and fulfillment models used by online merchants.  How it is most often pitched is you set up a relationship with a dropship supplier and you market their products on your site. When a customer purchases an item on your site, you collect the money and then purchase it from your dropship supplier (at a wholesale cost), and then they ship the purchased item on your behalf.  You keep the difference between the wholesale price and your selling price.  Their claim to fame is the promise that you do not stock any products and you just collect profit.  While the model of dropshipping is sound, many dropshippers are not. In fact when you compare their wholesale costs to what other retailers are selling, more often than not, you will find their wholesale prices higher than what you can by at normal retail.

Many dropshippers charge a membership fee.  Basically you pay a monthly or annual fee to get access to “their” items. But in most cases, the dropshipper is just a middleman and not the actual fulfiller of the merchandise.  Dropshipper’s often aggregate suppliers much like a real online store would, and then offer the products to people like you and I through their website.  The dropshippers make their money off your membership fee’s and not so much from the sale of the actual item. Unfortunately, you have to pay to basically use their “service”. This is their revenue model.

Experienced online retailers or those with a little investigative skill can locate many of the same suppliers that the dropshipping company uses and avoid paying expensive fees altogether. Not to mention, you will often find the “so-called wholesale” price of the dropship company is magically higher than the “actual wholesale cost” of the backend supplier.  This makes it close to impossible to be competitive and make a profit.  Also, if you have a high number of retailers using the same dropship companies, competition with these items will be very high.

Dropshipping is not my primary inventory model. In the few cases where I do use a dropshipper, I do not use one of the hundred of online advertised services.  I negotiate dropshipping with the original supplier.  Not all will do it, but some will.

Before you decide to use a dropshipper, let me tell you why I do not like using dropshippers and the few exceptions I make:

1. Most dropshippers are middlemen. Whether they just markup the actual wholesale cost (thus selling at a really cheap retail price), or charge you a membership fee, your profits are almost entirely eaten up. Remember you can find their sources with a little bit of work although I recommend you source your product elsewhere.

2. Dropshipping makes customer service more complex especially if you have multiple vendors. For example, customers wonder why their orders are not shipped together, arrive at different times, even where their items are.  It increases the number of customer support requests.   Often you do not receive your tracking information for several days, even though your customer will often ask you within a day or so.  You can also be stuck with shipping losses since you may charge your customer a fixed cost for all their purchased items, but each dropshipper charges you a separate, individual shipping charge. (not to mention separate dropship fees)

3. Out of stock conditions are more prevalent since dropshippers (even those that list inventory levels) are often out of sync or over-sell their items. For example, lets say a dropshipper has 10 items in stock, but several merchants sell 20 items. Some merchants are left without product for their customers and are at the mercy of the dropshipper when new product will arrive. Your customers will be upset with you since you sold them an item that was not actually in stock.  Dropshippers  only update their inventory once a merchant orders from them and there is often some lag between when a merchant makes the sale, and the time that merchant submits the dropship order. Usually a dropshipper fulfills the order on a first-come, first-serve basis.  Some dropshippers only update their inventory at the end of each day and some do not even track it.

4. Slow shipment times.  Sometimes it took a week or more for an item to be shipped as most dropshippers charge your charge card when you pay them, and hold the shipment until they receive the funds from your bank.  If they are a middleman, then add another few days for their supplier to ship as that supplier waits for your dropshippers payment to clear. This is really bad, especially when your customer paid for expedited shipping.

5. Higher occurance of misrepresented or broken products. About 10-20% of the time, the shipped item did not even look like the item in the picture, or product description or picture was lacking. This led to more customer support calls. Also, customers often receive items in packaging that is less than presentable.  Since you can not see the merchandise first, you are at the mercy of the dropshipper.

6. Refunds can take up to 30-45 days to receive.  Handling customer returns is horrible because again, your refund is at the mercy of the dropshipper. I refunded my customers immediately, and had them return the items to me rather than expose my customers to the dropship company. I then handled returns after the fact, which added to my return shipping costs, and added time that my money was locked up. A 15%-%20 percent restocking fee is also common.  One time, I had a customer send directly to the dropshipper. The dropshipper would not claim receipt (even though tracking showed they received it). I was out the money I refunded the customer, and out the money I paid the dropshipper. Pay very close attention to their refund policies.

7. Profit margins are horrible.  My average profit after the sale (regardless of price) was only a few dollars in best cases.  Especially after I paid my merchant fees, shipping, dropship fees, etc.  It just wasn’t worth the effort in light of all the problems.

I could go on and on and list more examples, but here are cases when dropshipping worked:

1.   Find a legitimate dealer willing to ship on your behalf when dropshipping is not their primary business.  For example,  a major disc golf supplier was willing to dropship large disc golf targets for me, because they were big, bulky, and hard to stock in my own warehouse.   The sales representative actually offered this to me when I told him I was not interested in stocking them because they were expensive and took up too much space.   He was willing to ship them on my behalf because he could either ship them to me, or my customers just as easily, and he would rather have me promoting his items, than not selling them at all.  It worked out great.  And, I had a real sales rep, not an unfriendly customer service rep when something (it never did though) goes wrong.

2.  You sell expensive items that only rarely or occasionally sell.   I used to sell GPS units back when these items were just coming out and were several hundred dollars each.  Rather than tie up my cash flow in stocking my own inventory,  I used a drop ship model.

3.  You rarely or occasionally sell very large items that take up space. Large items are a pain to ship as well as they take up valuable space.  I sometimes pass up a bunch of the profit margin to let someone else (eg. the supplier) worry about it for me.

Again, I could go on and on, but as you can see, dropshipping is not the Cinderella that the dropshippers and get rich quick business marketers will lead you to believe it is.  Should you use dropshipping,  be very careful.  Be sure to keep a close eye on your business as it is easy to lose money if you do not price your items with some thought and you are keenly aware of the hidden expenses both on item price, but also your service costs.