What is drop-shipping?
Drop-shipping allows online retailers to offer consumers a wide range of products without investing directly in expensive inventory. Orders taken online are forwarded to the merchandise supplier, i.e. the drop-shipping partner, who sends the products to customers on behalf of your company.
As a result, you do not have to manipulate or have access to the product. Instead, you only act as the intermediary for the sale. The profit from this process comes from the difference between the price you charge in your online store and what your drop-shipping partner charges you.
How does drop-shipping work?
The process is relatively simple, as the image below indicates:
Step 1: A visitor arrives at your online store and makes a purchase.
Step 2: You receive the order and pass this information to your drop-shipping partner
Step 3: Your drop-shipping partner ships orders directly to your customer.
Main advantages
Easy to start: Running an e-commerce business is much easier when you don’t have to deal with physical products. With drop-shipping, you don’t have to worry about the following:
- • Managing or paying for a warehouse
- • Packing and shipping orders
- • Tracking inventory for accounting purposes
- • Handling returns and inbound shipments
- • Continually ordering products and managing stock levels
Less expensive: Because you do not have to invest in product inventory, you can start a successful drop-shipping business with little money. As you grow, your expenses will likely increase, but they will remain low compared to those of traditional brick-and-mortar businesses.
Few fixed expenses: Because you don’t have to buy and manage inventory, fixed costs are quite low. If products don’t sell, you haven’t lost any money, just the time it took to list them on your site.
Flexibility: You can operate a drop-shipping business from virtually anywhere as long as you have an internet connection. Product variety: Because you don’t have to buy items in advance, you can offer a wide variety of products.
Reduced operational risk: Because you only “buy” the merchandise when it actually sells, your operational risk is reduced.
Main challenges
High competition: One of the biggest challenges is ensuring that you stand out from the crowd because you will face substantial competition from other merchants who use this sales medium.
Low margins: High competition must be taken into account. Because it is so easy to get started—and the overhead costs are so minimal—many merchants set up shops and sell items at rock-bottom prices to grow revenue.
Inventory issues: If you stock all the products you sell, it’s relatively easy to track which items are available. However, when you work with third-party products, this information is not always well synchronized with your store.
Shipping complexities: If you work with multiple suppliers—as most drop-shippers do—the products on your website are sourced through a variety of drop-shippers. This complicates your shipping costs.
Supplier errors: Have you ever been blamed for something that wasn’t your fault, but you had to accept responsibility for the mistake anyway?
Losses from fraudulent purchases: This model is convenient, efficient and scalable—so it’s also ripe for credit card fraud. Drop-shippers are prime targets for savvy fraudsters, and the smaller size of many drop-shipping businesses and high average transaction values mean these businesses have a lot to lose if even one order turns out to be fraudulent.
How big can these losses be? The cost of fraud and chargebacks to drop-shippers
Drop-shipping partners collect a large portion of the revenues but share the smallest amount of risk.
When a drop-shipper receives an order, the merchant pays the supplier for the wholesale cost of the order, and the supplier sends the product to the customer.
However, what happens if the order turns out to be fraudulent and the customer files a chargeback? Unfortunately, the merchant is responsible and stands to lose a great deal, including the following
- • Associated chargeback fees
- • The entire cost of the customer’s transaction, including shipping fees
- • The dollar amount already paid to the supplier for the shipped product
- • Your company’s positive reputation
- • Potential loss of the seller’s merchant account, which will make it more difficult and expensive (at best), but sometimes impossible (at worst), to process credit card transactions
The damage doesn’t always end there. Even if a business has the documentation to prove the legitimacy of an online transaction, the merchant may need to spend a considerable amount of time and effort protesting chargebacks. This isn’t the best use of a merchant’s resources.
Unfortunately, when fraudsters use stolen credit cards to purchase merchandise, the results are almost always the same: Merchants lose.
What’s a chargeback?
When customers call their banks or credit card companies to contest charges made by you, you receive what’s called a “chargeback.” Your payment processor temporarily deducts the amount of the disputed charge from your account and asks you to prove that you delivered the goods or services to the customer. If you can’t provide proof, you lose the amount in question and are charged a $25 chargeback processing fee. If you accrue too many chargebacks relative to the volume of orders you process, you could even lose your merchant account.
The largest cause of chargebacks is usually fraud, but customers may also dispute charges because they didn’t recognize your business, forgot about the transaction, or simply didn’t like the product they received. We’ve seen it all.
Which alternatives prevent these chargeback losses?
Most e-commerce platforms and payment gateways provide native fraud and chargeback prevention solutions. These solutions usually fall into two categories:
Do-it-yourself fraud filters: These tools are typically available via e-commerce platforms. Fraud filters may use a variety of screening mechanisms to identify fraudulent transactions, including IP geolocation, e-mail checking, external data sources, device fingerprinting, AVS checks, and more. Merchants can implement broad transaction rules based on these insights, such as blocking all transactions from a particular country or region. These rules are simple to implement, but, they may cost you legitimate customers and require constant supervision because fraudsters change their strategies constantly.
Pros
- • Inexpensive
- • Already integrated with e-commerce platforms
Cons
- • Block legitimate orders
- • Require constant supervision
- • Layering fraud filter rules can cause some rules to contradict others Sudden spikes in sales volume are difficult to handle
100% automated solutions: These solutions allow e-commerce merchants to completely outsource their fraud management. Transactions are processed through automated systems and are approved or declined based on various preset parameters and filters. These solutions don’t require your supervision, but they can still cost you legitimate customers.
Pros
- • Inexpensive
- • Liability can be transferred from the merchant to the supplier
Cons
- • Block legitimate orders
- • More expensive than e-commerce platform fraud filters
Why do these solutions cost legitimate customers?
One of the biggest challenges associated with using traditional fraud filters and fraud scores is not preventing the fraud itself. Instead, it’s ensuring that good transactions aren’t declined. For example, if you have a customer who frequently buys expensive items very quickly, makes purchases at odd hours, and ships to many locations, most fraud solutions would assume these transactions are fraudulent and assign them high fraud scores, which would cause the orders to be declined.
However, this customer may be a wealthy, impulsive night owl who is buying gifts for family or friends—meaning the orders are completely legitimate.
Retailers lose more money on false declines—$118 billion per year—than they lose to actual credit card fraud, which is around $9 billion. Additionally, 32% of customers who experience false declines with a merchant choose not to shop with that merchant again.
The best option for those looking for peace of mind and bottom-line improvement.
Outsourced Managed Solutions: With this type of solution, all transactions are screened through machine learning technology. Questionable transactions are not automatically declined; instead, they are flagged, reviewed, and authenticated by a team of fraud analysts. As with automated solutions, merchants still make the final decision to approve or decline a transaction, but when the artificial intelligence identifies discrepancies, rather than just declining the order as other solutions do, our team of experts conducts a thorough manual exam of the order details and collected information. These human agents can see beyond algorithms and have a keen sense of intuition in matters regarding online fraud, so they capture details that computers cannot.
Pros
- • No automatically rejected transactions means a lower false decline rate
- • Capacity to handle sudden spikes in sales volume
- • Liability can be transferred from the merchant to the supplier
- • Peace of mind: The focus is on managing results, not operational tasks. It’s all about optimizing three KPIs:
- • If not priced properly, this solution might be more expensive than e-commerce platform fraud filters or automated solutions
Owning and running a small business is anything but easy. Before you know it, you can be spending a lot of time on business operations, payment management, advertising management, and so forth. Each such task eats away time.
Every business needs to use its limited time and resources as effectively as possible. Outsourcing fraud management shifts the burden of worrying about chargebacks and fraud off your plate and gives you the ability to stay focused on your core business and do the work that serves your customers.
Ready to free up your time?
ClearSale has offered outsourced managed solutions for more than 15 years and serves hundreds of drop-shippers worldwide.
Our solution quickly integrates with all major e-commerce platforms, including Shopify, Woocommerce, Prestashop, BigCommerce, and more. Simply retrieve the plugin for your platform, enable the ClearSale module in your store, and start tracking your orders on your ClearSale dashboard. If you need a custom integration, we can help with that, too.
Proven protection
We were the market’s first fully outsourced fraud management solution in 2001, and were first to offer chargeback guarantees. We remain the largest and only solution with the scale, flexibility, expertise, and experience to support any merchant worldwide.
- 700+
specialized fraud analysts
- 99%
customer retention rate
- 18+
years of experience
- +3k
direct clients
- 160+
countries
Want to know more about drop-shipping? Visit the resources below.
Visit the resources below
- • Shopify: https://www.shopify.com/guides/dropshipping
- • Bigcommerce: https://www.bigcommerce.com/blog/dropshipping/
- • Drop shipping Lifestyle (DSL): https://www.dropshiplifestyle.com
- • Woocommerce: https://www.commercegurus.com/woocommerce-dropshipping-guide/
- • Magento: https://magento.com/blog/drop-shipping
- • Ecwid: https://daniella.io/ecwid-dropshipping/
