Tina sent us an email wanting to know if drop shipping really works. So I checked in with James Maguire over at Ecommerce-Guide. Maguire says as Internet retailing was getting started in the mid ’90s, online storeowners assumed drop-shipping would be the answer to their every worry.

Filling orders through drop-shipping (sometimes called “virtual inventory”) meant that site owners could route all their orders to wholesalers, who shipped directly to customers. For e-tailers, this eliminated the expense of carrying inventory – and the risk of being stuck with it if it didn’t sell.

According to Frank Poore, CEO of Commerce Hub, one of today’s top drop-ship companies, there were service issues – in fact there were all kinds of issues with virtual inventory. Customers placed orders, retailers routed it to the wholesaler, but the product was never sent. Wholesalers shipped the wrong product or couldn’t keep up with the pace of retailers’ sales.

Jeremy Hanks, CEO of Doba, another leading drop-shipping firm, says the problems were generally the suppliers’ fault. “Those companies didn’t have the knowledge, the processes, the operations and the technology to really excel at that.” For suppliers, it was a foreign concept to ship, say, one camera to a buyer’s home. They were used to shipping pallets of products to retailers.

Worse still, as Internet commerce skyrocketed, the demand for drop-shipping companies exploded, leading plenty of shady salesmen to set up drop-ship firms.

Doba handles drop-shipping for small and midsize retailers. It has contracts with some 50 suppliers, offering more than 250,000 products. The company’s proprietary platform connects wholesalers and retailers using a variety of uniform protocols.”We’ve standardized what we need from a supplier to make it work,” Hanks says. “Each supplier can work with us one of ten different ways.”

It’s inexpensive to get started with drop-shipping. Doba charges its retailers a monthly subscription fee, ranging from $30 to about $70, depending on the services required. But working with a drop-shipper is not a path to easy riches. For a retailer, drop-shipping typically provides smaller profit margins than if they carried actual inventory, Hanks notes.

The biggest mistake that Hanks sees small online sellers make is that, “they forget the fact that they’re a retailer and they need to add value, they need to market the product.” As easy as it is to carry virtual inventory, “it hasn’t made it any easier to be a retailer in the sense that your job is to have a unique value proposition, a reason for somebody to buy from you,” he says.

Anyone can post a photo of a glitzy new digital camera. But “the best retailers in the world, they take that and say, ‘I used this camera in my backpacking trip to Glacier National Forest and it changed my life,'” Hanks says.

Photo by sateda.