Can You Launch a Catalog for a Drop Ship Business?
By: Steve Lett
We receive inquiries on our website about many topics of interest. For example, a recent inquiry wanted to know if you can launch a catalog for a drop shipping business. The short answer is yes you can. But would it be a good business decision? The definition of drop shipping is to have the manufacturer or distributor ship the product directly to your customers so that your company never handles the merchandise. This is different than using a third-party fulfillment service.
Launching a catalog with no inventory sounds appealing. It would reduce the amount of working capital needed to purchase and warehouse merchandise. It would also guard against product obsoleteness. You wouldn’t need a big expensive warehouse. It is definitely the low-cost way to go. But again, is it really the right way to go? I don’t think so and here’s why.
Let me first say that certain product categories can favor drop shipping, i.e., food mailers. Drop shipping food products can be favorable and safe because it can reduce handling and fulfillment times. However, not so much the case for gift items and soft goods.
I want to point out the value of third-party fulfillment service companies. If you use a fulfillment service to pick, pack and ship your merchandise, you actually own and control the inventory. You have more leverage because the entire fulfillment process and possibly order taking and customer service functions, are handled by one company. Before you decide to use a third-party fulfillment company, do the math and compare the cost of having your own warehouse and pick/packing your own orders. Lower labor and property costs in some areas of the country could be more favorable than paying a fulfillment company or drop shipper.
Serving the customer should always be the number one priority. This should be the focus of any successful business. It seems so basic yet it’s not within reach for many companies. Have you ever wondered what it’s like doing business with your company? Try placing an order then returning it and test the system. These are competitive times, i.e., Amazon, Walmart, Target and other big retailers are penetrating the direct-to-consumer market.
Here are a few of the reasons why it is not a good idea to launch a catalog with 100% of the merchandise drop shipped.
- The ability to service the customer becomes more challenging when you drop ship. That’s because the fulfillment of the merchandise ordered is put entirely in the hands of a third party. Of course, you have given the drop-shipper guidelines, but the truth is, you lose control over the time it takes to pick, pack and ship the merchandise.
- Managing multiple drop ship vendors can be challenging. Procedures and systems need to be in place to monitor and to track fulfillment times and inventory levels. What’s more, all of these vendors approach the drop-shipping process differently.
- Customer service and “where’s my order” calls can be difficult to answer on a spontaneous basis without first checking with the drop ship vendor regarding the status of the order. They often require more than one phone call to the customer in order to answer their question.
- Gross profit margins can be impacted when merchandise is drop shipped. Your cost of goods sold will be higher due to the drop-shipping expense on behalf of the vendor. It is much less expensive for a product vendor to ship in bulk to your own fulfillment facility rather than to drop-ship one item at a time directly to your customer.
- Merchandise returns can be an issue. If you have multiple drop-ship items for one order and the customer wants to return the order, they have to ship back the item to the correct vendor or directly to the company. Then, dealing with the returned items can be problematic.
- Fulfillment expenses will be higher. The vendor will tack on a drop-ship fee including their profit to pick, pack and ship the merchandise directly to the customer.
- There can be legal issues. For example, who owns the customer’s name and address. The vendor may feel that they can market to those same consumers while you continue to invest money building your house file.
It makes perfect sense to drop ship some items. For example, large or bulky products that often require extra or special handling - or items costly to ship. I have always felt that the number of drop ship products should not exceed 20% of the total SKU’s in the catalog. This is not a scientific percentage; therefore, it can vary. It’s a manageable percent of total SKU’s without negatively impacting your fulfillment times or your ability to service the customer.
In closing, drop-shipping merchandise is perfectly fine. Keep the percent of drop shipped items at a manageable level, i.e., under 20%. Using a third-party fulfillment service to handle fulfillment services can also be a good business strategy providing the costs are not out of line. Remember, servicing the customer is the number one goal.