Internet retail: stock or drop ship?
Dealing with distributors can be a pain - but it’s important to find more SKU’s if you’re serious about making it in the internet retail world.
Over the past 6 years or so I have met several internet retailers and have been surprised by how many retailers actually carry no inventory - they are basically more like marketing companies who drop ship their entire inventory as opposed to dealing with the overhead associated with stocking inventory.
So when should you consider drop-shipping and which products should you consider stocking? Here is a quick look at the factors you should consider when considering a drop-shipping approach.
The Good
The cost of carrying an inventory is not limited to the amount you invest in the inventory itself - you need to have space to house the inventory, a staff to order and reorder, a staff to ship the inventory out and a myriad of other fulfillment-related expenses.
Basically, if you are going to survive by carrying an inventory you need to make sure that you have extremely padded margins if you want to break even - remember, scale is your best friend. If you can just squeeze out a couple of percentage points of profits then as your business grows you will be more and more profitable.
But while you are small you are probably not going to be profitable so if you decide to carry a physical inventory you need to have a good game plan to take your business to the level you need to be at to be profitable.
Drop-shippers, on the other hand, can be profitable with one sale per week. They general have extremely low fulfillment costs (sending the order to their drop-shipper) so they can focus on marketing their products.
The Bad
So if drop-shipping is such a great deal everybody should do it, right? Not necessarily - for the convenience of having somebody else ship out your products you will pay a price in the form of the margin. You will have lower margins - that’s a fact. But if your choice is between having a lower margin and losing money the choice seems pretty obvious.
The only other major concern associated with drop-shipping is control over fulfillment - you lose that. If you pick a drop-shipping supplier that doesn’t get shipments out on time or constantly sends out the wrong products that reflects poorly on you - remember, the end-user doesn’t care where products ship from, but they will always the company that processed their credit card with that order.
A Sound Strategy
So what do I recommend the vast majority of internet retailers do? In general blend these two strategies together for an optimal mix - if you can get extremely high margins importing products from China you should probably import those. If you have good domestic suppliers willing to drop-ship high-ticket products that you can’t afford to carry, drop ship those.
Also, if you want to test the waters of a new product line without committing yourself consider drop-shipping those products until they prove their value, then stock according to a realistic ROI - this allows you to offer an unlimited number of products with a limited budget and really invest your money where you get the best bang for the buck.
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This is really a strategic question — it’s about control on the supply chain, costs, and service level. A mix is good if and only if the requirements of Traceability & Visibility are met and also the requirement of Service Level or Click-to-Ship. And, both must be met under the constraints of costs.
For some firms, it’s important to note that, regardless of costs, there is an emphasis on control — controlling the customer experience, instead of abdicating that control to someone else.
This is a big question that many large internet retailers still wrestle with.
Comment by Pete Abilla — August 21, 2007 @ 10:53 am
Pete,
You bring up a good point - if a company has a strategic advantage such as customer service, for example, their pricing may not be as important as delivering what their customers have come to expect.
I have only met a small number of retailers who choose to only sell products that they carry a physical stock of - it will be interesting watching the trends in fulfilment going forward.
Comment by admin — August 21, 2007 @ 10:58 am
No matter if an online retailer choose to drop ship the product or carry a stock of it, what really matters is ROI and good customer relationship, if an online retailer choose to drop ship he should be smart enough to choose a drop ship supplier and can have an indirect control over the fulfillment by entering into an agreement to ship the right product on right time. But again, there are several other disadvantages of drop shipping, customer support time can increase, sometimes a drop shipper might send a different product (as you said), a drop ship supplier might scam and violate the agreement, etc…
Inventory model is the true retail method, retailers can ship the product immediately and can provide excellent customer support, but to do all this, an efficient fulfillment system is required.
You have made a good point that retailers have to combine these two strategies to find what works best for them. These two strategies should be the part of their marketing plan.
Comment by idris — August 24, 2007 @ 3:24 am
I agree with all your points above. But people need to be very careful with some of the big dropshippers that are out there. They show thousands of SKU’s and then are always out of the product that your customer wants. I would refer them to a site such as www.knickknacks4less.com which offers customized products for dropshipping. Talk about having the best of all worlds! You can literally increase your SKU’s by hundred fold simply by adding more images to your reperatoire. And they are never out of stock…EVER. Free drop shipping with no charges shipped worldwide.
Come check it out….it’s worth your time.
Comment by Mike — September 1, 2007 @ 8:22 pm
At therightbuy.com we are always up to date with product availability and do our best to assure quality shopping for all.
Comment by Jake — September 6, 2007 @ 11:33 am
Inventory Source gives you the tools to find and manage multiple drop shipping wholesalers suppliers, manage multiple websites, sell hundreds of thousands of products, work with online auctions and marketing channels, and is a 100% automated solution
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