Episode 3: Hybrid Dropshipping

Episode Transcript:

Hello, welcome to The Business of eCommerce. I’m your host Charles Palleschi. This is episode three, and today I’d like to talk a little bit about what I call hybrid dropshipping. First, what exactly is hybrid dropshipping? Then we’ll go into is it used, who uses it, why it’s useful, that sort of thing.

First, what is it? This isn’t a term that we commonly see around. A lot folks are using it but nobody really has put a great label on it. I’ve personally called it hybrid dropshipping. I’ve seen other folks have a different kind of name for it, but that’s just something I’ve come up with.

What it actually is, is, if we rewind a few years ago everyone was taking physical inventory, that was the big thing. That’s how everyone did retail. Along came dropshipping. It became popular. At that point, people started going all in the other direction, all dropshipping, no taking physical possession of merchandise anymore. So then everyone was just using the manufacturers essentially as their warehouse, distributors, that was their warehouse at that point. Nobody ran their own internal warehouse.

Past few years, what I’ve seen become more popular is this approach called hybrid dropshipping. Where retailers are taking physical possession of some inventory but not all. Where it’s been used a lot is when there’s a lot of SKUs, a lot of parts, a lot of that sort of thing. Where it makes sense to have let’s say a catalog of 100,000 SKUs, you might not be able to have all those in stock but the top 100, the top 10, the top X number of SKUs. That might make sense to have some in-house.

It’s not something you’re going to do with all SKUs, all products, that sort of thing. It’s something that you’re going to cherry-pick and have some on-hand, and then for the bulk of them still you’ll go back to manufacturers or distributors. When I say in-house, it’s either actual in-house, like your own inventory physically at your location, or something, a 3PL, third party logistics company, where it’s your inventory you’ve purchased, it lives in their warehouse but it’s your inventory and only you have it.

The other option is some retailers, not all vendors offer this, but some retailers prepay for inventory at the vendor. So ahead of time it’s your inventory, it’s paid for, but you haven’t actually ever left the manufacturer. It’s still sitting at the manufacturer’s warehouse. So this is your inventory, you know no one else is going to be touching this. Those are three places when I say your inventory, either prepaid at the manufacturer, at a 3PL or your warehouse.

The dropship inventory is distributors, or the bulk of the manufacturing inventory, where it’s in that pool of dropship inventory at that point, where other retailers also have access to it. Which is used a lot in let’s say auto parts, a lot of parts type of thing let’s say, where you might have your top 10 SKUs, top 50, top 100, but also 500,000 SKUs back at the manufacturer.

What this allows you to do is a few different things. First because you have your popular SKUs in stock you are able to first ship them a lot faster in some cases than the manufacturer. Second, there’s a lot of folks out there that are dropshipping, some people that’s all their business. So if you just pick these SKUs, these 20 SKUs you’re going to go after, those then, once they go out of stock with the distributors you might be one of the few people left with those SKUs in stock. So that allows you to essentially make the market and be the only game in town for those particular products for a short time. This even goes for, they could be selling on a marketplace, they could be selling on Amazon, that sort of thing, and they do go out of stock from time to time. If you are the only one left with product on hand, all those sales, 100% of them, will start going to you.

This doesn’t make sense for all products but it’s up to you as a retailer to pick and choose and merchandise the correct products that you want to have in stock that makes sense for your business. Whether that’s some sort of high price replacement part that you know always goes, the manufacturers a lot of times don’t have a lot of those on hand, so they might keep a small quantity but they do go out of stock often. If that’s something you’ve noticed over time it might make sense to start bringing those in-house.

Another great use for this is returns. A lot of times what happens with dropshipping, the whole kind of relationship is you send it out to a buyer, to an end consumer. At that point if they have a return you have the option of sending it directly back to the manufacturer. You might pay a restocking fee, some sort of thing like that, but a lot of times it’s something where the buyer got the product, maybe they didn’t even open the box, the product’s not damaged, everything’s fine. They can send it right back to you as the retailer and now you have that product on hand. You are able to then sit on that inventory for a little bit, the next time you sell that you know to send that out of your inventory locally and not to the manufacturer. That avoids paying restocking fees, anything like that. Unless the products are damaged, it easier to sell them from your location as going to manufacturer.

You can have some basic label printing somewhere, something like ShipStation, or similar, one of those type of local label printing, where then you’re able to generate labels, do all the packaging at your location, and do it that way versus having the manufacturer do it. Also, if you’re going with the 3PL or something like that, they do this all for you, so that’s really nice as well.

The other thing is when you start competing over popular items, it’s really up to you to understand what’s in stock, what’s out of stock, what goes out of stock often. If you see products that are going out of stock often but are popular, you might be able to capitalize on that very easily using this approach. It allows you, ahead of time you might be able to purchase 20 units, even 10 units, just to see a small test run. Bring them in-house, or the very easy of doing this like were saying are returns. You don’t even have to pre-purchase them, you’ve already paid for them. You’re essentially instead of getting that money back just going to have to keep that in limbo for a little while. But you’re not going to pay restocking fees, so in the long run you might actually make more doing this method.

It’s a really great approach. We don’t see it talked about too much in blogs, in the news, that sort of thing. I’ve put this term hybrid dropshipping. Hopefully that’s useful to some folks. I know talking to retailers through my own personal experience, even when I was an online retailer I did some of this. I know a lot of retailers do it, but nobody really solves this approach, because I don’t think there’s … it doesn’t benefit anyone except for the retailer, so nobody’s really talking about it and trying to push it.

But it’s a really great approach, and if it’s something that you can utilize in your business, it’s something to think about and maybe just dip a toe in the water. Do a little at a time, start to get a feel for it. It could be something really great that over time you might start with four or five SKUs, and over time you might a small local warehouse or 3PL where you have 50, 100, 1,000. You have your own stock that you bring locally. The more of that you do the easier it is to bring stock in and start really filling those items.

Plus, at some point once you are comfortable with this, you could actually start moving for some items, and this is very targeted on certain items, start making large bulk purchases of these items and bring certain SKUs in-house. That way you’re getting a deal on a particular SKU. If you know you can sell it, often it’s a popular product, you’ll actually be able to start getting a more competitive price for that one, two, three particular SKUs and work your way from there and start to make large purchases or orders for those SKUs from manufacturers.

It’s a great approach. I urge you to give it a shot, try it. See if it’s right for your business. Maybe it helps you, if it does write in, send us a comment, I’d love to hear it. As always you can find us businessofecommerce.fm. You can reach my email at charles@businessofecommerce.fm. Also you can reach me on Twitter, @CharlesPal. I’d love to hear if this helps anyone, if this is something folks have tried, and what they think. Drop me a line and I’d love to hear from you. Thanks. Talk to you soon.

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