From Zero to Sixty: The Case for Drop Shipping

August 30, 2016

Drop shipping is a critical e-commerce strategy employed by many of the largest online retailers.  It lets retailers focus on their core assortment while employing a low risk/low investment “endless aisle” strategy to carry more products and categories to increase basket size and reduce the chance of their customer going elsewhere.

However, in the past, the term “drop shipping” had a very negative connotation in the marketplaces realm.

Historically, drop shippers were known to throw everything up online at a low price, and if it sold, great!  The given drop shipper only had to pay for what was sold, and all they had to do was tell a distributor to ship the order to a given location. Even though the margin was low, there still margin to be made with little downside risk and no investment in inventory.

However, when a drop shipping business grew, issues began to arise. Since sellers had to key in every order to a distributor’s portal, the process of actually shipping the items could get slow, and if they fell behind even one day, things got ugly, fast.  

And this was just shipping the order.  

To maintain your ratings on a marketplace, the tracking numbers had to be keyed into the respective marketplaces for each order. If the seller fell behind on this process it was equally as bad. I once spoke to a seller who spent every night at dinner trying to keep up with this process alone.

When ChannelAdvisor first partnered with a data partner, it became obvious to me that for this process to really work, we had to help our retailers gain access to multiple sources of inventory to map product data to. However, the process of drop shipping had to address both the existing issues at hand as well as the negativity that marketplaces had when it came to the drop shipping process as a whole.

Working with another partner, HubLogix (formally OrderPigeon), I approached CEO and Co-Founder Christian Hassold with the problem. What I needed at the time was a process that would integrate the ChannelAdvisor platform with as many distributors as possible, while allowing retailers to intelligently route orders to their network of distributors based on Business Rules.  

However, we had some pretty stringent requirements for the distributors to ensure we addressed the negative side of drop shipping.

First, any distributor we worked with had to be able to send both retailer cost and quantity on hand multiple times a day for each retailer. Second, the distributors had to be able to have the capability to import an order file into their system. This could have been accomplished via several protocols like APIs, EDIs, or XMLs, but it was a tough requirement. Finally, the distributor had to send tracking numbers back throughout the day so that we could update the buy that their item was shipped and so the retailer could eat their dinner!

 As we moved forward with the process, we also starting asking for distributors to update quantity on hand as frequently as every 15 minutes — to reduce the possibility of stock outs for our retailers.  Distributors unable to do this couldn’t be added to the network since they would slow down the process and likely cause inaccuracies which, in turn, would end up hurting everyone involved.

While all of this sounds like a lot of work, the advantages of this new process were (and still are!) immense:   

  • Location – Retailers now have access to distribution sites located all over the country. More distribution centers means that customers can get their orders quicker and at lower shipping costs.
  • Variety – Access to thousands of brands and hundreds of million dollars in inventory
  • Rich Product Content – More brands means more data from content providers like DCi and the SEMA Data Co-Op.  Being able to use more content to match to more physical inventory enables retailers to list more products.

Now, just being able to get more content and matching this to inventory isn’t a magic bullet.  I feel very strongly that the retailer must know everything about their products to be able to sell effectively and take care of their customer. Below are a couple of guidelines that I always tell retailers before jumping into the business:

  • Invest time in quality product data. Retailers who make the effort to provide unique product descriptions and data tend to see better results. Go beyond the basics and make yourself stand out from the competition.
  • Know your product. To provide great customer support, you’ve got to know what you’re selling, and I’m talking about way more than just the physical product. Before jumping into an industry like auto, for example, take the time to know the industry, the language and the people you’re going to be selling to.
  • Optimize! Drop shipping to me is a no brainer. The time spent taking an item off a shelf, packing it securely, and processing a label can now be spent enhancing the product data and learning about the brand to better serve the end user.

The results of working this process have been pretty compelling. In general, we’ve seen that retailers who really understand their respective categories have been able to grow their business faster and at a lower cost. Many of our clients have increased their same store sales (SSS) significantly, and some have been able to reduce inventory space and drop ship as much as 98% of their sales!

ChannelAdvisor has worked with Hublogix to build a network of distributors that include verticals in the automotive, power-sports, sports and outdoors, consumer electronics, and apparel.  We hope to soon add a non-perishable grocery and K-12 education supplies distributor to our network sometime this year.

Blog post by Curt McDowell, strategic partnership manager at ChannelAdvisor