A Condensed History of Commerce and Why Dropping Shipping May Be a Tough Business
The history of business ownership, commerce and trade is more ancient than the written word. Over the millennia humankind has learned a lot through trial and error, successes, failures, ethical and nefarious behaviors, to generate a system of rules and laws governing commerce. Some rules are written, others are purely proven methods to thrive (or fail) through years of real-world application.
In ancient times a “business” was established out of necessity to provide for one’s family. A farm, a merchant, one physical good exchanged for another, then along came the system of currency to make trading less cumbersome. Envision making a trade with a merchant, you supply a small fishing boat in exchange for 50 pounds of dry goods. You now have 50 pounds to transport. With the system of currency, one may simply receive the coinage, deposit to your pouch and be on your way.
As time cruised along, more sophisticated trading processes came to be, new lands were populated or conquered. The expansion of massive stores of goods by ship from the old world to the new was a risky enterprise. Dutch and English merchants are credited with establishing a method to recoup the losses from a plundered or sunken vessel, this innovative system is also known as “insurance”. The concept of paying a group of investors gambling on the odds of a shipload of goods transferring from Plymouth, England to a port in the Caribbean safely makes the investment more enticing for a merchant to take the risk of goods arriving in saleable condition.
Fast forward to contemporary times, digital currency, e-commerce and a physical product marketplace is staggeringly massive, so many choices, colors, sizes, basic and premium editions make the buying decision unnecessarily time consuming. Note, this is not an anti-capitalist rant, more a reality check. The evolution of commerce has taken humankind to a place and time when options are seemingly endless, let alone the method to acquire a necessity or a vanity purchase. Whatever the product you desire (practical or otherwise) is easily attained. I think of the scene in the film, “For Brother Where Art Thou”, set in the rural depression era American South, George Clooney’s character is in a rustic general store, he inquires with the shop-keeper for a car part and his favored hair treatment (after all he is a loyal “Dapper Dan” man), both requests are returned by the clerk, “I can order it for you, it’ll take two weeks”, His character’s confounded reply, “isn’t this place a geographical oddity, two weeks from everywhere”, is snarky and a truth about the commerce infrastructure at the time.
As a child, it was the waning days for mail order catalogs. I vaguely recall once or twice a year the massive dictionary book sized Sears mail order guide. It was a treasure trove of things to buy, from a motorized scooter, to household sundries to literally a pre-fab house.
Times have changed, yet the mail order business is re-invented for the digital age. How do we see through the electronic “noise” of this online store from another, from one landing page touting the virtues of a doo-hickey gizmo that will save you time and make you a better person, or so we believe, hence we buy any number of things via the internet?
Do we really know where a product is sourced, how many warehouses and hands touch the product? Do we really care? A popular business model with potentially stratospheric profit margins is “drop shipping”. It is a potentially lucrative enterprise, with an apparent upside so brilliant, the downside is laughable. Or is it?
In the real world, meeting entrepreneurs thriving financially by virtue of a low overhead business like drop shipping tends to be very happy and eager to broaden their burgeoning business empire. Being a risk manager, I can’t help but burst their bubble, for his own good. Although the outlook of a drop shipping business is all “gravy” it is not, quite reality.
The consumer is your customer, regardless whether your company manufactured, augmented or re-labeled a product, in their eyes you are the source. Consider this, being the “place” of purchase for the buyer, the durability, product promises, guarantees and so on are considered the implied responsibility of the drop shipper, unless your receipt or a written contract states otherwise. When you are the consumer, if you dislike a product, it fails or worse causes harm you will naturally return the product to whom you purchased it, not necessarily the manufacturer. In the age of virtual store fronts the lines are blurred with respect to the “retail” element. The days of a predominately brick and mortar point of purchase is likely over.
In many cases a smart, savvy manufacturer will contract with the “retailer” with respect to the rules of liability for said merchandise. Products with moving parts, health related goods (think supplements, vitamins, whole foods) or a product requiring potentially hazardous materials (gas or electric powered — toys, home maintenance products, etc.) can be a legal issue for the drop shipping business. Any of these product types are inherently a potential danger to a buyer.
Another way to frame the liability for a drop shipping business, (in theory does not alter, touch or physically possess) there is still a link in the chain of commerce therefore; is subject to the downside of a product sold whereby income is earned. Simply put, since a profit is received for the transaction, a smart end user and a skilled lawyer will make it your problem.
How does one then shield, avoid or minimize the impact of a bad product? There are few methods:
Self-insure: A wise business person will have a cash reserve on her balance sheet for the unexpected, a lawsuit (erroneous or legitimate), shortfall of product, increased sales, purchase of equipment and so on. Having a reserve is crucial to manage unforeseen issues.
Risk transfer: Purchase of a suite of insurance products creates a safety net designed to pay for litigation and claims. In the modern era, a small business owner is capable to purchase online, an insurance package without a licensed insurance agent being involved in the process. Does it fit and is the coverage adequate for your needs? Make friends with an insurance professional to help guide you, or do your homework and understand what each coverage really does and more importantly doesn’t do. Insurance is about as sexy as a technical manual however; it can make all the difference for your business to weather a costly incident. If you are too busy or decide to invest your time on other business matters, consult a licensed, reputable insurance agent.
Avoidance: All-together avoid selling the item, advertising the sale of, or warehousing a product you feel might cause a customer to file a lawsuit. Avoidance is an extreme measure. If you are concerned about the potential backlash of a failed product or it causing someone harm, it is best to forego. There are tens of thousands of other products to sell, let it be someone else’s issue.
The dropping shipping business is often a high profit, low margin enterprise. It is beneficial to act as if the products you sell are your creation. When a business owner uses that mindset, it helps thinking critically how to improve sales and profits.
Originally published at clarastellabc.com on November 29, 2018.
