Enterprise Drop Shipping, Part 4: Winning Strategies

In Enterprise Drop Shipping Part 1, I discussed how important drop shipping is for brick and mortar stores to be able to compete with online retailers. In Part 2: The Basics, I provided a definition of drop shipping, explored some of the hype surrounding it, and defined its major challenges. In Part 3: Suppliers vs Retailers, I addressed how drop shipping alters the traditional relationships between suppliers and retailers.

In this post, I’ll outline several important strategies for enterprise-level drop shipping operations to achieve success. I’ll start by highlighting one of my favorite drop shipping all-star retailers: Wayfair.

Drop Shipping Is Wayfair’s Main Ecommerce Strategy

When Wayfair — the 17-year-old, 12,000 employee, mostly online, home-decor retailer — went public in 2014, it did so with a $2 billion market capitalization and 7000 third party sellers. Five years later, Wayfair is now worth over $11 billion and has partnered with over 10,000 third-party sellers that represent 10 million unique products. In 2018, nearly all of Wayfair’s estimated $4.8 billion in sales were drop shipped to millions of customers directly from manufacturers.

Wayfair, a large home-decor ecommerce firm, relies on drop-shipped products for most of its revenue.

Alex Finkelstein is a general partner with Spark Capital, a venture capital firm that invested in Wayfair. In his book, Startup Cities, he states, “In my mind, that’s the secret of the business — teaching thousands of small, mid, and large manufacturers how to do drop-ship so well. That’s what really enables the engine behind the engine to work.”

How do Wayfair and others do it?

First: Identify Your Unique Online Selling Proposition

The role of a retailer can provide huge benefits to consumers. However, retailers have to work to justify their existence as middlemen. What value do they really add? Many times, the mental narrative of starting a drop shipping program for a brick and mortar retailer goes something like this: “These online marketplaces are really killing us. We should expand our own online store. But we can’t match Amazon’s product variety or geographic reach selling our own inventory and we also don’t have the money to buy more inventory and build more warehouses and distribution centers. What should we do? I know, we’ll drop ship them. Virtual products from suppliers! Easy. Let’s roll.”

The problem with this narrative is it incorrectly shifts the focus to the mindset that finding the right drop shipping suppliers and their products is the first strategic step. All successful retailers, however, add value by having some sort of unique selling proposition. Unfortunately, drop shipping somehow gets everyone focused on the product side first, rather than the selling side.

Placing too much stock in a supply side focus — based on drop shipping — seems to keep many retailers from identifying the more important need: in a virtual hyper-connected and hypercompetitive world, you really must identify your unique selling proposition. That’s exactly what Wayfair has done extremely well from the very beginning — they made sure to develop hundreds of unique branded and niche domain names for each product category (for example RacksAndStands.com was their first site and sold stands for TVs).

So, make sure you know what your company’s unique selling strategy is for drop shipping before you go looking for suppliers.

Second: Emphasize Curation Using Your Unique Selling Proposition as a Guide

One of the most important services a retailer provides is curation. Consumers look to retailers to be selective because they are often overwhelmed by the large amount of choices available online. Research has shown that sometimes offering too many options actually leads to less purchases. This is what psychologist Barry Schwartz has called the “paradox of choice”.

That’s why one of the important values you can offer your customers is to let them know what to buy.

This means that just because a product is available, it doesn’t necessarily make sense to make it part of your drop ship selection. Drop shipping removes the traditional friction that drives curation out of necessity — limited dollars for inventory. But that friction isn’t necessarily bad. Successful retail drop ship operations don’t just take a data feed of thousands of products from their suppliers and blast it unchecked to their ecommerce storefront. They whittle it down and curate it based on the particular brand and value propositions they are offering their customers. To this effect, they generally work with more niche suppliers, such as branded manufacturers, to make sure they are offering unique products for their own unique customers.

Carefully selecting supplier partners in a smart category, and then curating and limiting their products as you put together your product selection is an important part of building and maintaining a successful enterprise level drop ship program.

Third: Experiment, Then Make Smarter Bets Using a “Less Limited Aisle” Strategy

Many successful retailers use drop shipping as a way to test new products and suppliers. This is a great strategy because on the one hand, it allows you to add a virtually-sourced product to your assortment without losing money from the inventory buy if the product doesn’t sell. On the other hand, once you discover a product that sells well through drop shipping, wholesale economics mean you can make more money from it by adding those products to your physical inventory in bulk.

I call this type of experimental curation, Less Limited Aisle.

Here’s an outline of a less-limited aisle strategy:

1. First, work with current suppliers to backfill inventory items through drop shipping.
2. Then, work with current suppliers through drop shipping to (a) expand assortment within a current product, such as more sizes and colors and (b) increase new product offerings from the same trusted brands.
3. Once you’re up and running with current suppliers, you can try out new drop ship suppliers to test new offerings and new categories.
4. If any of the above new products are successful, add them to your permanent drop ship catalog and turn any new suppliers into permanent trading partners.
5. Finally, for those products that sell extremely well, consider adding them in bulk to your own physical inventory.

A key part of this strategy is not shying away from physical inventory and the more traditional wholesale process. This can be a very big strategic advantage in your relationships with suppliers as it allows you to potentially sell more of their products as well as incentivizes them to strive for high performance in your drop ship program as a means toward a larger wholesale partnership. Even Wayfair does a version of this–maintaining wholesale inventory in physical warehouses in several states allows it to offer fast, 2-day shipping on tens of thousands of items whose past sales justify bringing them into inventory.

Fourth: Consider the Consumer

It is critically important to think about the consumer experience. There are three important parts to this in drop shipping.

First, make sure you have the best possible virtual product presentations on your ecommerce storefront. Many successful retailers approach the product data piece by being very hands on and using data supplied by the brand only as a starting point. They make it part of the curation process to write their own product descriptions and even capture their own images. Not only does this ensure rich and complete data presented to the shopper, it also helps in other ways, such as search engine optimization.

Second, effective retailers also consider inventory availability when choosing which items to offer online. If the manufacturer is creating products continually, or has deep inventory stock, there is far less risk of selling something that can’t be fulfilled.

Finally, it’s important to understand a consumer’s need for transparency into the ordering and fulfillment process of drop shipping. As the drop-shipping retailer you’re not going to box up a product and ship it yourself. Consumers need to know that you have a partner involved in the fulfillment. Years ago that was a negative. But in today’s world, with so much drop shipping and the existence of major marketplaces, consumers are used to transparency around who is actually holding and fulfilling the product, even if that isn’t the same as who they are buying from.