Insights into Drop Shipping for Ecommerce Companies

[Avid]

I think the first major trend in the marketplace (which I am sure many of you have seen) has been the progressive reluctance on the part of suppliers to develop new vendor relationships with ecommerce companies. In fact some companies have categorically issued moratoriums on new ecommerce accounts. (Some may consider these trends disturbing but I perceive it as an advantage in controlling markets and industrys from online clutter- more about that in a moment.) Indeed, much of the value of some ecommerce companies can be found in the depth and scope of its established vendor accounts. Internet stores that may have been grandfathered in as legacy resellers are in a good position to take advantage of an industry outside of the strategic competitive advantages inherent within their search engine rankings and retail management. It is my prediction, that in the next few years new start ups will be boxed out of the drop shipping arena unless they can offer vendors new market share or expand the size of their customer base. This comes largely from natural traffic. Also, companies that are entrenched with vendors as legacy accounts will be a part of a finite or limited group of online resellers. Consumers performing brand or product title searches will drive their own traffic to this limited coterie of stores.

One great way to develop a compelling value proposition for vendors is to demonstrate new sales and exposure through search engine placements. Therefore with the firms I’ve been involved with, rankings are really the cornerstone of any web development project. If you are in a top placement for a major key term vendors in that industry will actually start courting you. Even with the toughest vendors, persuading them to make an exemption to an internet moratorium can be made e.g. if one is selling “ice augurs” online and one ranks in the top results for that terms than any vendor interested in gaining that brand exposure and eyeballs would want to have their items represented on your site.

In making acquisitions one thing to keep an eye on is the nature of those existing accounts. While some sellers cannot guarantee that all accounts will transfer to new owners as part of any due diligence process it can be helpful to get more detailed information on the vendors and the total number of products. Also are new items being introduced soon? What new vendors exist out their carrying comparable items? Etc.

[Clinton]

Good topic for discussion, Avid, and great post.

One great way to develop a compelling value proposition for vendors...

I like that! Develop a compelling value proposition.

When webmasters find a good programme and want in they usually think in terms of what they can get, not what they can give. The unwritten assumption is that they're giving the merchant "sales" and that's all they need to give in order to be part of the programme. They enhance their case by taking a step back and looking at the wider picture. What does the merchant really want? Outside of pure turnover the merchant may want a vendor who can
1. Get the brand more recognition
2. Add value to the product by developing add-ons, creating video guides on use of product, printing case studies, getting customer reviews
3. Be flexible and assist with the promotion of slower moving products that the merchant is struggling to get established

Any more suggestions here for what the affiliate can do to be a better "partner"?

[ClaytonL]

Thank you both!

What are some possible workarounds if you just don't have the value proposition for the product you want? Buying bulk from another retailer (most likely one who focuses in a different market but has access) comes to mind. The idea being, not to make a profit, but increase your market share until you have the value yourself.

[Avid]

The chief benefit of drop shipping is that it enables home based business people to operate from home without carrying the cost of inventory or dealing with the issues associated with inventory management and order fulfillment. This is one of the primary benefits I have heard articulated by potential investors looking to move into this space. An additional benefit is the relocatability aspect. I have had past investors run their web stores while traveling and many appreciate this flexibility. Ultimately, however, as ecommerce companies evolve they do start to bring on stock and to warehouse some product. The strategic advantage of this is that as one orders in bulk prices go down for these items – so stronger gross margins or the flexibility to lower prices on ones site making your store more attractive for consumers. My recommendation, is for owners is to first identify their top selling products, calculate buying frequencies of these items and then just order these items in bulk to satisfy needs for quarterly increments. That of course still requires bringing in inventory but it eliminates downside risk of bringing on board inventory that may not sell. One variation of this model that can benefit many ecommerce business people is a hybridized approach, wherein one essentially outsources the warehousing and order execution process to a third party. There are many warehouses now that focus on performing the backend and warehouse function for retailers. They may charge 25 cents to pick products and to label them on your behalf and have full access to ones admin panel to perform this function. The ecommerce manager or site owner can order product in bulk and have it shipped to this facility at a very cheap cost of capital. They never see or touch products but still enjoy the benefits of having a warehousing function as a proximate backend infrastruture. NOTE TO MEMBERS: This can be a strong competitive advantage or point of difference for sites that are interested in carrying products from suppliers that may not have a drop shipping available. Bringing in even a limited stock may give you access to the brands that other stores don’t carry for precisely that reason! So keep an open mind!

[meathead1234]

Hey Avid,

Good to see you've decided to contribute to the forum, I look forward to learning from your posts.

I've no experience with drop-shipping at all but I can see why suppliers are picky. Being picky also signals to me that the supplier is legit which from what is always one of the hardest aspect of building a business (reliable suppliers are gold). Those who accept anyone and everyone with a website implies to me lower quality and possibly lower quality service (impossible to offer good service to 100s of sites driving 1/2 sales a day).

Interesting point you mentioned, Avid, regarding using SE rankings to prove to a supplier you are able to drive traffic. I've noticed your business model seems to be heavily reliant on Google traffic (correct me if I'm wrong?). I would have thought that relying PURELY on SE traffic is a huge risk and as a supplier I think I would be more inclined to work with those who invest heavily in other marketing areas (PPC, Media buys etc) who won't see their business tank over night if Google decide to play games.

As you mentioned, part of the DD process should always involve looking at supplier risk. How many suppliers and/or backup suppliers would you recommend for one looking to build an ecommerce business? I've worked in a large UK drinks manufacturer in supply chain management and despite wanting to be lean had at least 2 back ups in case the primary suppliers let them down.

[Avid]

I think vendors are the most appreciative of the resellers that can provide them with exposure through the ownership of the underlying internet "real estate" in the SEs. I have had many conversations with vendors who have seen the pay per click upstarts come and go. For many it is not even worth the time expension to set up the account. If a site owner can demonstrate to a vendor that they are getting the eyeballs and natural search traffic, then there is substantial value. Remember, because a site doesnt advertise or market through external ads or pay per click it doesnt mean that they have not made heavy investments for their organic traffic. With the sites I have been involved with the cost to develop and incubate a well ranking web store is more expensive than the cost to throw it up on pay per click. From my experience, suppliers respect, understand, and appreciate that. As a sidenote, even if a customer doesnt end up buying something they still have come in contact with the brand and products of that vendor being sold...that is a big incentive. Back to the ice augor example, if you have the ranking the internet traffic will browse the site and if they dont buy they will still see the brands from the vendors that you carry...in many ways free band exposure for the vendor who does work with you in the ice augor market!

[Avid]

As you mentioned, part of the DD process should always involve looking at supplier risk. How many suppliers and/or backup suppliers would you recommend for one looking to build an ecommerce business? I've worked in a large UK drinks manufacturer in supply chain management and despite wanting to be lean had at least 2 back ups in case the primary suppliers let them down.

Great question and commentary. Thanks for joing in. I dont really think of suppliers in terms of "back ups"....really is about contructing a diversified portfolio of vendors relationships. These are not supplers that one simply keeps in reserve but whom are actively represented on the site. To be more specific, if any one vendor or product line represents the bulk of ones sales then one is heavily dependent on that vendor or product line. That is the supplier risk that one should look to avoid. Spend the time to develop multiple supplier relationships all of whom are represented on your website. Strong images, product descriptions and pricing that has been benchmarked against the competition is paramount. Keep in mind the overarching benefit of increasing your product offerings or product optionality to your customers.

The goal is to avoid a scenario where the loss of any one vendor will have a limited net effect on your core business or product supply. As an example, if one is selling celing fans online, then there should be hundreds of ceiling fans represented on your store from a myriad of brands and suppliers. For a catagory like ceiling fans I would look to have at least 10 different vendors. Many vendors also have 2 or 3 sub brands which enhances the brand building for the site. Once you start to demonstrate traction and sales with your vendors, I would encourage etailers to go back to vendors, point to the sales demonstrated thus far and request more preferential wholesale pricing. It has been my experience that 5 times out of 10 they will oblige. Also, note that with every new product uploaded to you are expanding the size of your site for individial product rankings for those internal pages on Google. Last DO NOT, underestimate the value and importance of Google.com/products as a free resources for additional product sales. Take advantage of this tool and be sure to refresh your product feed every 30 days. Hope this helps!

[Clinton]

Relevant link: Avid's article at Flippa.

[benitez17]

Relevant link: Avid's article at Flippa.

Did you know he was writing this article with a link back to here?

I figured that the last place he would want to send potential clients is this forum.

[petertdavis]

I figured that the last place he would want to send potential clients is this forum.

I disagree. Obviously, his initial response to Clinton was ill conceived, but since then he's shown a much more reasonable, thoughtful side. People who are looking for information about him are going to find this site anyway, it is in his best interest to show that he can mend fences, and I would guess that's what he's now trying to do.