Dropshipping refers to online catalog commerce by which a retailer is responsible for making the sale

What is drop shipping? A logistics view

29 March 2021

Drop shipping is one of several logistics business opportunities opened up by e-commerce. New technologies have not only revolutionized warehouse logistics, but have also ushered in new market trends, such as click and collect, buy online/pick up in store, and so on.

Among these new concepts, drop shipping has emerged as one of the most common in recent years. This is reflected in a study by online sales consulting firm SaleFreaks conducted between 2016 and 2018, which finds that drop shipping sales on eBay grew by 146%.

All these new practices have popped up in response to the rise in demand for products brought about by e-commerce. In fact, according to a study referenced by Forbes, e-commerce is set to register a turnover of over $6 billion by 2022.

Drop shipping: when sales and logistics don’t go hand in hand

Drop shipping is an e-commerce practice in which an intermediary (drop shipper) makes the sale but is not the person who ships the product. According to this method, this sale without stock is carried out through an initial agreement between the retailer and the wholesaler, which will be in charge of the entire logistics process (storage, shipping, etc.).

This market trend produces a symbiosis between the intermediary and the holder of the goods, as the stages of the sales process are shared between them: the retailer is charged with making the sale, while the wholesaler guarantees that the end customer receives the product on time and as per the agreed-upon conditions.

But just how does this business work? The terms of the contract between both parties are established in an initial agreement stating that the drop shipper is responsible for advertising the merchandise on its website, thereby eliminating storage and shipping expenses.

Drop shipping pros and cons

Drop shipping is a form of e-commerce based on coordination between the intermediary and the wholesaler to ensure that the product sales chain is successful. This consumption trend has many advantages (as well as disadvantages) for both wholesalers and drop shippers.

Benefits for wholesalers:

  • Wholesalers don’t have to worry about the sales process: the company can center its efforts on providing logistics service during the most complex and costly phases, such as goods transportation and last-mile delivery.
  • More profit: a recent study from a drop-shipping software supplier showed that wholesalers that choose to make use of this agreement with external sales portals can boost their business by up to 50%, depending on the sector.
  • Greater convenience: advertising and sales management are not part of wholesalers’ regular activities, so they can focus on effectively responding to complex processes such as storage and order fulfillment.
Nowadays, marketing is the key to successful drop shipping
Nowadays, marketing is the key to successful drop shipping

Drawbacks for wholesalers

  • Less satisfactory customer service: potential customer service disputes could give the product a bad name.

Benefits for drop shippers:

  • No stock management or orders: they can dedicate all of their time to the sales process.
  • No staff costs: all logistics activities will be taken care of by the wholesaler, who, on the other hand, will not participate in the direct sale to the user.
  • Lower investment: since the intermediary will have to pay a price lower than the market value of the product, there will always be a profit margin, however small it may be.
  • Flexibility: drop shippers can easily change products or add others in line with market trends. Thus, website owners can enter into multiple contracts with diverse suppliers to broaden their catalogs.

Drawbacks for drop shippers:

  • No control over shipments: the main disadvantage of this new business practice is that the intermediary doesn’t have control over the deliveries to customers; moreover, the wholesaler doesn’t receive the customer’s order. These factors increase the probability of error in order preparation and shipments.
  • Low profit margin: by dividing the product sale process, both the wholesaler and the intermediary see their gains reduced.
  • Digital marketing specialization: although this technique does away with almost all logistics costs, as it doesn’t require personnel or storage expenses, it does call for investment in digital marketing to attract customers.
  • Coordination issues: having an extensive product portfolio can actually work against you: the bigger the range of merchandise, the more difficult the positioning campaigns and more complicated the coordination between retailer and supplier.

Drop shipping without dropping the ball

To ensure that the sales process goes off without a hitch, both wholesalers and drop shippers should adopt this approach:

  • Positioning in a niche, high-demand market.
  • Firm, stable intermediary/wholesaler agreement.
  • Continuous investment in digital marketing.
  • Control over customer service to guarantee that the sales process was successful.

First and foremost, both partners should commit to dealing in high-demand merchandise that can be quickly positioned online, steering clear of market niches that are already saturated.

After carefully choosing the products to be marketed via the website, the intermediary should come to an agreement with the wholesaler that includes both methodology and financial aspects. The contract will stipulate the profit margin obtained from each sale and establish the communication process between the holder of the goods and the intermediary.

Logistics — a drop-shipping challenge

In drop shipping, the relationship between the drop shipper and wholesaler is key. This should work like a well-oiled machine so that shipments don’t become returns, which could lead to the loss of customers.

While drop shippers have to make sound investments to attract customers, wholesalers need a logistics plan to meet the challenges of Logistics 4.0: omnichannel retail, same-day deliveries, and the handling of more SKUs that are smaller in size (thus complicating warehouse management).

The solution lies in incorporating IT systems, such as our WMS for Ecommerce. These programs will increase warehouse efficiency and, particularly, reduce errors in picking and dispatch operations, which could hamstring the entire sales process. In the end, the one in charge of reverse logistics is the wholesaler.

The goal of both the intermediary and the supplier of the goods is to devise an agreement that provides for the optimal delivery flow of a product, from the time the customer purchases it through the e-commerce site to the moment he/she receives it, at the time and place of his/her choice.