By Stefano Virgilli — When Amazon started selling online back in 1994, one of the major challenges to solve was logistic. Now, more than 20 years later, the issues are the same. Although Amazon has been toying with the idea of shipping through drones, the era of future-shipping has not yet come. However, the name of the most recent trend could be quite evocative. It is called Drop Shipping and it has already started redefining the way entrepreneurship looks at e-commerce.
The idea behind Drop Shipping is the thousand years old middle-person type of approach. Traditional commerce in the past was implying that the middle-person could guarantee the transaction. Of course in a physical market or in a store, there is no need for such a guarantee, as the goods are already visible and displayed. But when the middle-person offered to go far away with the goal of purchasing on behalf of a buyer, that was when issues arose.
From a customer perspective the main fear was that the middle-person could have run away with the cash, if the customer paid in advance. From the middle-person point of view, he or she risked to make a purchase without getting to ever see the money in case the client changed his or her mind. To solve such puzzle many financial tools came into place along the centuries and in the recent decades. When electronic payments were introduced, everything became ways simpler, however some challenges still remain.
Drop Shipping is the ability for anyone with an Internet connection to reach out to both customers and suppliers. A Drop Shipper is someone that intermediates between the buyer and the factory, earning a profit (usually quite small commissions) on the transaction. The Drop Shipper is not involved in the shipping process, but simply places the order of the customer to the manufacturer. In other words the transaction is a simple referral, but still carries some extra services that the Drop Shipper commits to provide.
In a perfect scenario the equation works smoothly with the 3 parties involved: The Customer, The Drop Shipper and the Manufacturer. Here is how:
1. The Customer finds the Drop Shipper website advertising the Manufacturer’s products.
2. The Customer places an order.
3. The Drop Shipper forwards the order to the Manufacturer.
4. The Manufacturer processes the order and ships to the Customer.
Quite straightforward, isn’t it? Not quite.
Between Step 1 and Step 2 many issues may arise. For instance the customer might have questions about the product. In that case the Drop Shipper shall answer all questions and help the Customer to take a decision. If the question is beyond the grasp of the Drop Shipper, he or she shall forward the question to the Manufacturer. This may take minutes, hours, days or even weeks when the Manufacturer is not used to deal with Drop Shippers.
Between Step 3 and Step 4 the Manufacturer has large room for error. For instance by sending the product too late, or to the wrong address or even the wrong product. The beauty of Drop Shipping is that Manufacturers that are not tech savvy at all can rely on very ingenious e-entrepreneurs, however a clever Drop Shipper cannot patch the processes within the manufacturing organisation.
In this precarious balance between Drop Shippers and Manufacturers, the Customers have high expectations, mostly because they do not know (in most cases) that they are purchasing through a Drop Shipper. As the latter acts as a representative of a Manufacturer, the Customer seldom feels that is dealing with separate entities. An amateur Drop Shipper is the one who blames the Manufacturer for problem that has come to surface. By doing so the Drop Shipper has given away the secret of his enterprise. In other words, the Drop Shipper is just a regular person working from home and pretending to be an big organisation. Blaming the Manufacturer is somehow funny from Customer stand point.
Another main challenge arise with taxes and regulations. As a Drop Shipping website can be created and hosted pretty much anywhere in the world, as well as Customers can place orders from anywhere in the world, they both have to keep in mind the rules that may prevent a Manufacturer to ship to certain countries freely. Some items could be banned in certain countries or carry taxes that both Customer and Drop Shipper did not envision.
The biggest advantage for a Drop Shipper is that in no-time a new shop can be set up, without inventory, with minimal investment, small overhead and without any specific business authorisation to manufacture products. Hence the system can be replicated easily.
Some Drop Shippers have already reached the point of self competition whereby they set up multiple e-stores selling the same products with different price. If the Customer ends up on the overpriced website and purchases, good for the Drop Shipper. If the customer finds the goods too expensive and goes hunting for better price, would still have a chance to find the same Drop Shipper selling the same item at the regular price, but in comparison to the overpriced one, it would look like a great bargain! And the customer will be happy.