Why drop shipping will kill your business

Posted by Tom LarsenJun 17, 2015 Marketing, Operations, Planning 0 Comment

It is counter intuitive to think that offering added services to certain retailers in order to gain their business is not a valuable thing to do. With many new businesses, it is almost mandatory that they do something above and beyond simply selling products wholesale to retailers. Case in point, when an etailer asks you drop ship to their Customers.

The internet has changed a lot of the ways brands sell to consumers. Many brands have created hybrid versions of themselves in which they wear a retailer hat at their own website and a wholesale hat in the broader marketplace selling to retailers. Some brands offer links at websites to retailers. Some don’t.

Creating B2C relationships is an overwhelming temptation. It can appear as a no-brainer with significantly higher margins and direct contact with avid consumers. If you have experienced a crowd-funding campaign, ever toured Zappo’s or been directly involved in consumer direct sales, as I have, you come to appreciate just how much work there is involved in taking care of consumers.

No matter how attractive the margins, no one accounts for buyer remorse return rates which can easily run up to 15%, which is a deep cut in the overall sales, let alone the added work that returns create as negative sales.

But, presuming you are OK with all that work because you think it will create visibility, and you are OK with competing with your own retailers, when an etailer asks you to drop ship using their UPS account and they still want the wholesale price, you absolutely should scratch your head and say “why”?

The economics are universally terrible. You are doing the same work shipping work as a retailer, and only getting the wholesale price, one piece at a time. Worse, most of the time you can’t even put in your own marketing materials. Instead of shipping to a retailer or etailer that will actually take ownership and pay you for 100 pieces, an online store is going to market your products, see if they sell, and dribble the orders to you one at a time. Likely they will want fast turnaround and tracking information, too, thereby requiring almost the same amount of infrastructure as a B2C business at half the sales value and a greater percentage reduction of gross margin.

Don’t do it. The temptress of capability and revenue growth must be tempered by the actual costs of drop shipping products to consumers and all the transactional effort entailed to make the effort work. Then there are the returns! And I’m not even talking about the massive distraction it is from your wholesale business.

If you have older product you need to get out of, do what you have to do. When you have front line product and you have chosen to be a wholesale brand, be a wholesale brand. As soon as you try to be all things on all platforms to all etailers, you have set a course for reduced profits and increased headaches. There are plenty of places to sell your products. Find those outlets that are your annuity partners, ordering and reordering, taking their appropriate percentage of the sale commensurate for their risk (inventory) and work (customer service). Most importantly, always remember just because you can ship one piece at a time, almost never means you should ship one piece at a time. It’s an entirely different equation.

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