chapter 7

Running a Dropshipping Company

If you've never run a dropshipping business, the information in this chapter could save you weeks of wasted time and frustration. Many of these detailed suggestions are drawn from two basic principles about dropshipping:

1. Accept That Things Can Get Messy – The convenience of dropshipping comes at a price, and having an invisible third party involved in each sale often complicates things. From botched orders to out-of-stock items, fulfillment problems will be something you'll have to deal with. If you accept this ahead of time, you're less likely to throw in the towel due to frustration.

2. Adopt a KISS Mentality – Having a KISS (Keep It Simple, Stupid!) mentality will serve you well with the dropshipping model. Given the inherent complexity of dropshipping – multiple suppliers, shipments from various locations, etc. – it's easy to think you need to set your system to perfectly track your costs and inventory at all times. But if you try to do this, you'll likely go crazy, spend thousands on custom development and never launch a store. Focusing on the easiest-to-implement solutions, even if they're not “perfect,” is usually the better option – especially when you're starting out.

With these two concepts in mind, let's discuss how to structure your business operationally to make things run as smoothly as possible.

When Suppliers Botch an Order

Even great suppliers make mistakes, and you're guaranteed to have fulfillment errors from time to time. So what do you do when your supplier sends the wrong item – or nothing at all?

Own the Mistake – Under no circumstances should you blame your dropshipper for the mistake. It will only cause confusion and make you look like an amateur. The customer has no idea the drop shipper even exists. Instead, you need to own the problem, apologize and let the customer know what you're doing to fix it.

Make It Up to Them – Depending on the level of the mistake, you may want to proactively offer the customer something for the error. This could mean refunding the shipping fee (a personal favorite of ours) or an upgrade if the customer needs a new item shipped out.

Make the Supplier Pay to Fix It – You may have to assume responsibility for the error, but that doesn't mean you need to pay for it! Any reputable supplier will pay to fix its own errors, including paying for shipping costs to return items. However, it probably won't pay for any freebies or upgrades you gave the customer (see above). You need to chalk those up as public relations and brand-building expenses.

Again, even the best suppliers will occasionally make mistakes, but be extremely wary of a supplier that habitually botches your orders and fails to fulfill them properly. Unless you can get the supplier to change (unlikely), your business's reputation will suffer. If this is the case, you should probably start looking for another supplier. 

Managing Inventory &
Multiple Suppliers

Most experienced dropshippers would agree that managing the status of inventory across multiple suppliers is the biggest challenge you'll face running a dropshipping business. Do a poor job of this and you'll be constantly informing customers that their order is out of stock – not a great way to attract repeat business and loyal brand fans.

Properly managing inventory across your suppliers – and limiting the number of out-of-stock items you sell – is a complex process. Web-based services, like Ordoro  and eCommHub  can help you sync inventory. This is a great option when suppliers offer real-time data feeds, but suppliers don't always have them. 

Below are some best practices for inventory management that should help drastically reduce the number of out-of-stock items you sell:

  1. Use Multiple Suppliers – Having access to multiple suppliers can be a huge advantage. Why? Because having multiple suppliers with overlapping inventory is the BEST way to improve your order fulfillment ratio. If supplier A doesn't have an item in stock, there's a good chance supplier B has it.  Additionally, it's risky to rely on one supplier as the only place to source your product.  If they decide not to work with you, raise their prices or go out of business it jeopardizes the future of your business.  

    You'll never be able to find two suppliers that carry all the same products, but if they operate in the same niche or industry, both will likely stock the best-selling items – and these are what you're most concerned about.

  2. Pick Your Products Wisely – Drawing on the last point, try to sell primarily items that you know are carried by both suppliers. This way, you have two potential fulfillment options.

  3. Use Generics to Your Advantage – Even if they don't have exactly the same item, two suppliers might carry near-identical products that are interchangeable. This is particularly true for smaller accessories and product add-ons. If you can confirm that two products are nearly identical, write a generic product description that allows you to fulfill the order from either supplier. Also, list both suppliers' model numbers in the model field. That way you can forward an order invoice to either supplier without having to make changes.  

    A word of warning: You need to exercise some judgment in this area. Each market will have well-known brands (e.g., Nike, Bose), and you should NEVER substitute those products. 

  4. Check on Item Availability – Just because a dropshipper lists an item on its website doesn't mean it carries that item consistently. It's a good idea to chat with your sales representative about the availability of products you're considering selling. Are these items in stock 90% of the time or more? Or does the dropshipper keep only a few on hand and often has trouble getting the product reordered from the manufacturer? You'll want to avoid stocking the latter type of products.

  5. Dealing With Out-of-Stock Orders - Despite your best planning, you'll inevitably deal with customer orders you can't fill. Instead of telling the customer the item is out of stock, offer a complimentary upgrade to a similar – but better – product. Your customer will likely be thrilled, and you'll be able to retain the customer relationship. You might not make any money on the order, and that's OK. You wouldn't have made any money had your customer canceled the order, either.  

Order Fulfillment

Utilizing multiple suppliers has a number of benefits that we've discussed:  it increases the likelihood that items will be in stock, offers geographical diversity for faster delivery times and prevents you from being reliant on any one source for your products.  But with multiple options for filling an order, how do you know which supplier to choose?  There are a few different methods to consider:

Route All Orders to a Preferred Supplier – If you have one supplier that's best to work with (superior service, great selection, etc.), you can simply route all orders to that supplier by default. This is particularly easy to implement, as you can simply add your supplier's email address as a recipient for all new order confirmations, automating the entire process. If you use this method, ideally your preferred supplier will stock most of the items you sell. Otherwise, you'll frequently have to deal with re-routing orders that it couldn't fill.

Route Orders Based on Location – If you use multiple suppliers that each stock the majority of your products, you can simply route the order to the supplier closest to your customer. This not only expedites delivery to your customer, but also saves on shipping fees.  

Route Orders Based on Availability – If you stock a large catalog of products spread out over numerous suppliers, you'll likely need to route each order based on which drop shipper has the item in stock. This option requires more work if you're doing it manually but can be automated with a service like eCommHub (www.ecommhub.com) if your suppliers provide data feeds.  

Route Orders Based on Price – This sounds great in theory, but unless one supplier has significantly better pricing it can be difficult to automatically determine which supplier will be cheapest.  Any automated solution will need to consider potential drop fees, real-time shipping rates and real-time supplier pricing.  So while not impossible, it can be difficult to implement an accurate automated system to accomplish this.  

Note: Even if you don't route all your orders on price, you should have your suppliers bid against each other to achieve the best pricing possible as your business grows.  Just don't try to do this too early – if you're asking for pricing discounts as a newbie, you'll likely only annoy your suppliers.  

We've tried all four methods and found there's no “best” way to do it. It really depends on your store, your suppliers and your personal preferences.  

Security and Fraud Issues

Storing Credit Card Numbers

Storing your customers' credit card information can allow for convenient reordering and may increase sales. But if you're hosting your own site, this typically isn't worth the security issues and liability. To store credit card data you'll need to abide by all sorts of PCI (Payment Card Industry) compliance rules and security audits. This process is expensive and complex, especially for non-technical merchants. And if your server is hacked or breached, you might be liable for the stolen card information.

The best solution is to not store your customers' credit card data. Focus your efforts on marketing and customer service instead of security audits. Fortunately, if you're using a hosted platform like Shopify you won't need to worry about any of this. But if you're using a self-hosted cart, make sure to disable the “store card information” feature in your configuration panel.  

Dealing With Fraudulent Orders

The possibility of fraudulent orders can be scary when you're starting out, but with some common sense and a bit of caution you can prevent the vast majority of losses due to fraud.

The Address Verification System 

The most common and widely used fraud prevention measure is the AVS, or address verification system. When the AVS feature is enabled, customers must enter the address on file with their credit card for the transaction to be approved. This helps prevent thieves with just the raw credit card number from successfully making purchases online. Fraud is rare for orders that pass the AVS check and are shipped to the customers' billing addresses.

The vast majority of fraudulent ecommerce orders occur when the billing and shipping addresses are different. In these cases, a thief enters the card owner's address as the billing address and enters a separate shipping address for the goods. Unfortunately, if you don't allow customers to ship to addresses other than the billing address, you'll lose out on a lot of legitimate orders. But by allowing it, you're at risk for fraudulent orders that YOU will have to pay for. If you ship an order to an address other than the card holder's address, the credit card company will make you foot the bill in the event of fraud.

Fortunately, fraudsters tend to follow patterns that make it easier to spot illegitimate orders before they ship. Individually, these signs won't help you flag a fraudulent order, but if you see two or three of them you should investigate:

  • Different Billing and Shipping – Again, more than 95% of all fraudulent orders will have different billing and shipping addresses.

  • Different Names – Different names on the billing and shipping addresses could be a red flag for fraudulent orders. That, or a gift purchase. 

  • Unusual Email Addresses – Most people have email addresses incorporating some part of their name, allowing you to match part of an email address to a customer's name. But if you see an address like dfssdfsdf@gmail.com, there's a good chance it's a made-up address and is one sign of fraud.

  • Expedited Shipping – Since they're charging everything to someone else's card, fraudsters will often pick the fastest – and most expensive – delivery method. It also reduces the amount of time you have to catch them before the item is delivered.

If you spot an order you suspect is fraudulent, simply pick up the phone. Fraudsters almost never put their real number on an order. If the order is legitimate, you'll likely have a 30-second discussion with someone that clears everything up. If not, you'll get a dead number or someone who has no idea that she ordered a 25-foot boat scheduled for overnight delivery. At that point, you can cancel the order and issue a refund to avoid any chargebacks or problems.

Understanding Chargebacks

When a customer calls his or her bank or credit card company to contest a charge made by you, you'll receive what's called a “chargeback.” Your payment processor will temporarily deduct the amount of the disputed charge from your account and ask you to prove that you delivered the goods or services to the customer. If you can't provide proof, you'll lose the amount in question and be slapped with a $25 chargeback processing fee. If you rack up too many chargebacks relative to the volume of orders you're processing, you could even lose your merchant account.  

The largest cause of chargebacks is usually fraud, but customers will also dispute a charge 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.  

When you receive a chargeback, you often have just a few days to respond, so you need to act quickly! To have a shot at getting your money back, you'll need to provide documentation of the original order, tracking information showing delivery and likely a wholesale packing slip showing which items you purchased and shipped. If the contested charge was for a legitimate transaction, you'll have a good chance of recovering the funds as long as you didn't make any untrue statements or promises in the course of the transaction.

Unfortunately, if the chargeback is related to an order with different billing and shipping addresses, you're almost certainly not going to win. Most processors will only compensate you for fraudulent orders shipped to the billing address on the card. In our businesses, we don't even bother responding to these kind of chargebacks because we know it's a waste of time. 

Dealing With Returns

Before writing your own return policy, you'll want to make sure you know and understand how all your suppliers deal with returns. If they have a lax 45-day return window, you can afford to be generous with your terms. A strict return policy from just one supplier can cause you to re-evaluate the terms you can afford to have in place.

When a customer needs to return an item, the process will look like this:

  1. A customer contacts you to request a return
  2. You request an RMA (return merchandise authorization) number from your supplier
  3. The customer mails back the merchandise to your supplier, noting the RMA # on the address
  4. The supplier refunds your account for the wholesale price of the merchandise
  5. You refund the customer for the full price of the merchandise

It's not always this straightforward, however. The following can complicate returns:

Restocking Fees

Some suppliers will charge a restocking fee, which is essentially a surcharge for having to return an item. Even if your supplier charges these fees, we strongly recommend not having them be a part of your return policy. They seem outdated and unfriendly toward customers. Although you may have to eat a fee here and there, you'll likely recoup that expense in more customers who decide to do business with you.

Defective Items

The only thing worse than receiving a defective item is having to pay additional postage to return it! Most dropshipping suppliers won't cover return postage for defective items. In their minds, they didn't manufacture the item so they aren't liable for defects. They simply view it as a risk of selling products to a retail market.

You, however, should ALWAYS compensate your customers for the return shipping fees for defective items if you're interested in building a reputable business. Again, this is a fee you won't be able to pass along to anyone, but it's part of the cost of running a quality dropshipping business. Unless you have your own UPS or FedEx account, it can be difficult to print a pre-paid shipping label for customers so you may need to issue a return shipping refund to compensate them for their out-of-pocket expense. However you do it, make sure you compensate them somehow.

If the defective item is relatively inexpensive, it often makes sense to just ship the customer a new product without requiring them to return the old one. This has a number of advantages compared to making them return the old item, including:

It Can Be Cost Effective – It doesn't make sense to pay $10 to return an item that only costs you $12 from your wholesaler. You'll get a $2 net credit, but it's not worth it for the hassle to your customer, supplier and staff.

The Customer Is Blown Away – How often do companies simply ship out a new product without needing an old one back? Almost never! You'll score major points and may land a customer for life. Also, the customer will get the new product much faster than if the old one had to be returned to the warehouse before the new item could be shipped.  

Your Supplier May Pay for Shipping – Suppliers won't pay for return shipping on a defective product, but most will pay to have a new replacement sent to the customer. Because they'll be paying for return shipping anyway, most suppliers can be talked into covering the shipping on a replacement product that you simply purchase separately. Plus, many are glad to duck the hassle of processing the return.

If a customer wants to return a non-defective product for a refund, most companies will expect the buyer to pay for the return freight. This is a fairly reasonable policy. If you're willing to offer free returns on everything, you'll definitely stand out (and companies like Zappos have made this part of their unique business model). But it can get expensive, and most customers will understand that you shouldn't have to cough up return shipping fees simply because they ordered a product they ultimately didn't want.

Shipping Issues

Calculating shipping rates can be a big mess for dropshipping merchants. With so many different products shipping from multiple locations, it's difficult to accurately calculate shipping rates for orders.  

There are three types of shipping rates you can use:

Real-Time Rates – With this method, your shopping cart will use the collective weight of all items purchased and the shipping destination to get an actual real-time quote. This is very accurate but can be difficult to compute for shipments from multiple warehouses.  

Per-Type Rates – Using a per-type method, you'll set flat shipping rates based on the types of products ordered. So all small widgets would ship for a flat $5 rate, while all large widgets would be $10 to ship.

Flat-Rate Shipping – As the name implies, you'd charge one flat rate for all shipments, regardless of type. You could even offer free shipping on all orders. This method is the easiest to implement but is the least accurate in reflecting actual shipping costs.  
 
When it comes to shipping, it's important to refer to the overarching principles about dropshipping that we listed at the outset of this chapter. Specifically, we want to find a solution that emphasizes simplicity over perfection, especially if we're just starting out.  

Some merchants will spend days – or weeks – struggling to properly configure automated shipping rules for a store that has yet to generate a sale. Instead, they should focus on other issues like marketing and customer service, and quickly implement a shipping policy that makes sense from an overall level. Then, once they start to grow, they can invest in a more exact system. With this philosophy, it's often best to estimate an average shipping fee and set that as your overall flat rate. You'll probably lose money on some orders but make it back on others.  

Even if you could implement a system that passed along extra shipping fees based on supplier location, would you really want to? Most customers balk at excessive shipping fees, especially when they assume their order is originating from one location. Instead, try to limit multiple shipments by using suppliers with overlapping inventory and by being selective about the items you sell. This is a much more practical and simple long-term solution.

International Shipments

International shipping has become easier but it's still not as straightforward as domestic shipping. When you ship internationally, you'll need to consider and/or deal with:

  • Different weight and length limitations for different countries
  • Additional charges from suppliers for processing international orders
  • The added expense of resolving problematic orders due to higher shipping fees
  • Excessive costs for shipping large and/or heavy items

Is the hassle worth it? It depends on the market you're in and the margins you earn. If you sell small items with higher margins, the increased market reach may make it worthwhile to deal with the hassle and expense of offering international shipments. For others – especially merchants selling larger or heavier items – the added benefit won't be worth the expense and inconvenience.  

Picking a Carrier

Selecting the right carrier is important, as it can save you a significant amount of money. In the U.S., the largest decision you'll need to make is between UPS/FedEx and the U.S. Postal Service.

UPS/FedEx – These privately run giants are great for shipping large, heavy packages domestically. Their rates for big shipments will be significantly lower than those charged by the USPS.

U.S. Postal Service – If you're shipping small, lightweight items you can't beat the rates offered by the USPS. After dropshipping fees, the cheapest UPS shipping fee you're likely to see is around $10, while you can often ship items for $5 or less through the post office. The post office tends to be a better choice for sending international shipments, especially smaller ones.

When setting up your shipping options, consider categorizing them by shipping time (“Within 5 Days” or “Within 3 Days”), as this gives you the flexibility to pick the carrier that's the most economical for each order and delivery time.  

Providing Customer Support

Take it from us: Managing all your customer emails, requests and returns in an Excel spreadsheet is NOT ideal. As excellent as Excel is, it's not built to handle customer support. Similarly, as your business and team grow, managing support with a single email inbox also quickly breaks down and leads to problems and service lapses.

Implementing a help desk is one of the best things you can do to ensure quality service for your customers. Help desk software comes in a number of different forms, but all provide a centralized location to manage your customer support correspondence and issues. Most desks make it easy to assign issues to team members and maintain communication history among all related parties.

A few popular options to choose from include:

Help Scout – Less cluttered than other desks, Help Scout treats each issue as an email and removes all the traditionally appended ticket information that customers see with support requests. Instead, support tickets appear like standard emails to customers, creating a more personalized experience. 

Zendesk – Highly customizable and powerful, Zendesk offers a variety of tools and integrations and is one of the most popular help desks available. It takes some customization but is very powerful once it's tailored to your company.

Desk – Backed by well-known SalesForce, Desk's 'Universal Inbox' allows you to interact with your customers across numerous channels from one streamlined interface.  

Kayako – Kayako boasts an all-in-one platform that offers built-in live chat, phone call and remote support issue management alongside traditional ticket-based support.  

Offering Phone Support

Deciding whether to offer phone support can be a tricky decision. It's obviously a great way to provide real-time support but is one of the most expensive support methods. If you're bootstrapping a business while working your 9 to 5, you won't be able to handle calls. But if you're working full-time on your business – or have a staff member who can – it might be a feasible option. If you're unable to staff a phone throughout the day, you can always have your phone number ring through to voicemail and return customer calls later. This isn't a perfect solution but can be a good compromise.  

You should consider the type of products you'll be selling when thinking about how to offer phone support. If you're a diamond boutique selling jewelry in the $1,000 to $5,000 range, many customers won't be comfortable placing an order that large without talking to a real person. However, if you're selling products in the $25 to $50 range, most people will feel comfortable buying without phone support, assuming you've built a professional, information-rich website.

If you do decide to offer phone support, think through strategic ways to do so. Slapping a large 800 number on the top of every page can lead to a surfeit of low-value phone calls that cost more to support than they're worth. Instead, consider adding your number in more strategic places like the Contact Us and Shopping Cart pages, where you know the visitor has a high probability of purchasing.

Regardless of how you decide to handle sales requests, you should always be willing to call customers after the sale to resolve any issues that arise. There's nothing wrong with carefully evaluating the best ways to offer pre-sale support, but when it comes to taking care of people who have purchased from you, you should never refuse to help them on the phone.

The following services can help you set up a toll-free number and sales line:

Grasshopper – Grasshopper offers phone services and is geared toward smaller businesses and entrepreneurs. You can get a toll-free number, unlimited extensions, call forwarding and voicemail for a reasonable monthly fee (around $25).

RingCentral – RingCentral is the 800-pound gorilla in the VoIP and 800-number space, and we've used it in the past with mixed results. Its flexible interface lets you set up custom routing rules and extensions. For Mac users, we recommend looking for a different company unless you plan on buying a VoIP phone, as RingCentral's phone software for OS X is buggy and unreliable.

Next chapter

8. The Key Elements of Success

6 min

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