PetSmart acquired Pet360 for $130 million in cash and up to $30 million more in future performance-based payments.
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“It allows customer service to handle a lot more orders, because you don’t have to have staff checking and tracking every order,” Hamlin says. “If there is a problem, your business rule is there and you are informed. That way you’re only dealing with orders that are problematic.”
Shoebuy, for example has created such business rules as an average ship time of 1.4 days, and at least a 99.6% fill rate, meaning that when a customer orders a product, the inventory must be in stock and filled at least 99.6% of the time. If a partner fails to meet a business rule, which Shoebuy refers to as a key performance indicator, Shoebuy receives an automatic notification, as does the shipper
“They should beat these averages,” Pryor says. “If you are not meeting our KPIs we will be having a conversation with you.”
Online business supply retailer Shoplet.com, which drop ships all its 200,000 products, has a similar alert system, says Tony Ellison CEO and founder. Ellison’s team receives messages on a need-to-know basis, as well. Staff receives a notification if a customer receives damaged goods or if an item is “shadow stocked,” meaning a warehouse incorrectly reported it had an item when it did not.
Fry’s Clendenin, who helps draw up drop shipping contracts for retailers, says retailers must see the drop shipper as a partner and establish business rules and standards that are feasible for the warehouse staff to meet. For example, Clendenin says something that seems like a simple request to a retailer, such as a two-sided packing slip with special logos, advertisements and line itemizations, can be time-consuming and tedious for a drop shipper.
“It may be something that seems very logical to do from the retailer’s warehouse, but is very onerous from the drop shipper’s,” Clendenin says. And although a drop shipper may be willing to customize a packing slip or receipt, or modify its warehouse to meet other demands, such changes can be pricey. “You have to gauge what’s important,” he says.
Once standards are in place, Clendenin says it’s important to hold shippers accountable. In addition to a notification system tied to business rules, Clendenin recommends having mystery shoppers randomly place orders to ensure packages arrive on time, in the correct box and with the proper documents.
When retailers take the time to work with staff and outside vendors to develop a solid, efficient drop ship program, Clendenin says many start reaping benefits beyond the obvious.
For example, the consultant says many merchants he’s worked with use drop shipping to try out new products.
Department store chain Kohl’s used drop shipping to test the sales of high-end jewelry on its e-commerce site and found a customer base it never knew existed.“They were able to bring in a lot of jewelry online that they never would have brought to their site without drop shipping,” Clendenin says.“They are now selling jewelry that costs as much as $8,000.”
Home improvement retailer The Home Depot tested several styles and colors of area rugs through drop shipping and response to some of the rugs was so positive that it began offering them in stores. Clendenin says drop shipping can be a great way for multi-channel retailers to select new products to bring into bricks-and-mortar locations, which unlike a web site, have limited space.
“If a retailer has to buy it, they a lot of times won’t expand their product line,” Clendenin says. “Drop shipping lets them do it without risk.”
However, Cohen of ToolKing found offering more products can present another hurdle-figuring out where to put them on the site so that a customer can find them. “You have to list all the products, add categories to your site and incorporate them into your search,” Cohen says. “Having more products touches every part of your business.”
Another potential drawback retailers point to is margin. With drop shipping, merchants pay for items on an as-ordered basis and therefore may miss out on discounts offered with buying in bulk, Shoebuy’s Pryor says.
And then there is the issue of trust.
Drop shipping requires a merchant to hand over one of the most important aspects of its business to a third party-order fulfillment. Moreover, as most e-retailers “blind drop ship,” meaning the vendor ships items with boxes and packing slips bearing the merchant’s name and logo so that the consumer is unaware another party is involved, an e-retailer is literally putting its good name in another company’s hands.
For some merchants that can be downright scary. “Many retailers, especially smaller retailers, don’t understand the benefits and are afraid of losing control,” Clendenin says.
While drop shipping can take time and resources, Clendenin says the benefits typically outweigh the drawbacks.
Several merchants the consultant has worked with to launch drop shipping programs have experienced a 200%-300% return on investment within two years when taking into account sales of items they may not have offered previously.
“It mitigates the risk of inventory, the risk of having additional employees, the risk of owning and operating warehouses and the risk that you will have to reduce your margin to get a product out the door,” Clendenin says.
That is, of course, if the retailer gets it right.