Drop Shipping – what it is, and 5 reasons to adopt it

According to the U.S. Department of Commerce, e-commerce sales in the U.S. in 2011 totalled $194 billion, which translated into a yearly growth rate of 16.1%.  Single handedly, Amazon.com, one of the world’s largest online retailers, reported $13.9 billion in revenue for the third quarter of 2012.   

Consumers continue to fuel this growth; marvelling at the vast product selection in this cyber-market while enjoying the convenience and ease of online shopping.  Drop-shipping is another vital component of this growth, as it permits e-commerce businesses to optimize their operations and fuel their growth because they are able to focus on a single “product to consumer” distribution channel.  It is estimated that drop shipping accounts for over 30% of products sold by Amazon.com in 2011.

But what exactly is Drop Shipping?

Drop shipping is a term to describe the process where a retailer does not keep products in inventory, but relies on suppliers, wholesalers or manufacturers to ship the actual product to the final customer. 

This is how it works:

  • A customer places an order for a product online.

  • The online retailer receives the order and the order payment, and contacts the supplier/wholesaler/manufacturer with order & shipping details.

  • The supplier/wholesaler/manufacturer ship the product, completing the order cycle.

  • The online retailer earns their profit.

It seems so simple.  In fact, the simplicity of the order fulfillment process is just the first of many advantages of the drop shipping process.  Any e-commerce retailer would be wise to consider the many  advantages of utilizing drop shipping to serve their customers. 

There are 4 other advantages of drop shipping, which are:


1.  An Expanded Product Offering

Drop shipping results in better product exposure and penetration for manufacturers and suppliers.  It allows merchants to offer an expanded selection of products for sale; far beyond what they would have to hold in physical inventory and merchandise in a physical retail location. Keeping virtual inventories results in a greater breadth of product selection; and of course, the greater the possibility of introducing more potential customers to your site and securing a sale.

Your marketing efforts can also be aided with a wider range of products, since each product page on your website can result in an additional page for indexing on Google or other search engines (hence, boosting your SEO results and traffic to your site). 

Broader product offerings will strengthen your brand and grow revenue, while reducing your inventory carrying and warehouse costs.


 2.  Quicker Time to Market

In this case, “time” relates to both your corporate start-up time, and order cycle time.

Drop shipping can dramatically shrink the time and money needed to get your business off the ground (your “time to market”).  A merchant can now begin selling the minute their ecommerce site is complete, thereby attracting customers from an expanded geographic market base.  Eliminating steps in your distribution channel serves to reduce inefficiency and tightens order cycle times. 


3. Permits Product Line Experimentation

Drop shipping can allow a retailer to experiment with its product offerings without having to invest in physical inventory.  A retailer can test market new offerings to determine the resulting impact on sales, and then drop those items that aren’t selling as well without having to resort the product markdowns that would be necessary in a physical retail location.


4.  Reduces Investment & Operating Costs

As you have read, a new e-commerce retailer will face a significant reduction in investment costs for start-up, simply because there is no investment required for a physical retail or warehouse location.  Nor is there any investment required in product inventories.  Outsourcing warehouse fulfillment duties (like receiving, stacking, pulling, packing, and shipping) helps to keep operating costs to a minimum, mainly by reducing or stabilizing the labour costs associated with fulfilling these duties in-house. 


Of course, as with anything, drop shipping can pose some challenges.  As order volume increases, so does the need for tighter system integration with trading partners.  More importantly, the need for a solid and efficient supply chain is integral.   Picking, packing, and shipping customer orders is a much more complicated process than the old-fashioned method of simply shipping products on pallets to a distribution center.  This is where outsourcing these warehousing functions to a reliable logistics partner is crucial.  A knowledgable and experienced partner will be your greatest ally in optimizing your business operations while preventing customer dissatisfaction due to order mix-up/shipping issues.  ASL Distribution proudly services several Canadian and U.S vendors who currently sell products through Amazon.com, and can expertly assist you with your drop-shipping needs.   Review how ASL can assist you by downloading a whitepaper that will provide you with information on ways to optimize your cross-border distribution functions.