The digital economy is booming and it is easier than ever to offer online products. However, ease comes with a price. There is always a group of people who abuse the low-entry barriers to mislead consumers, specifically the drop shipping industry. In this article, I will discuss how drop shipping works and why the current industry is disadvantageous for online marketplaces.
The idea of drop shipping can be advantageous from a consumer point of view: a company acts as an intermediary between the manufacturer and the consumer. This intermediator does not have any products and therefore no costs associated with inventory. This intermediator can provide additional marketing resources and handle customer service.
However, with the high availability of products and suppliers, the entry barriers of this industry are very low, leading to many entrants and therefore high competition. This diminished the profit margins, leading to a need for other strategies. The result: placing low-cost products from websites such as AliExpress on other marketplaces such as Amazon or an independent website for a high premium.
The problem with this is the lack of transparency and misleading the consumer. The consumer buys a product from company A but receives that product from company B. According to research by the Dutch Consumer Association drop shippers generally do not follow the law for online selling and have bad customer service1. Amazon tries to combat these practices with the following policy:
“Drop shipping or allowing a third party to fulfill orders to customers on your behalf, is not acceptable unless it is clear to the buyer that you are the seller of record. When a customer sees packaging and invoices or receipts identifying a seller that is not you nor Amazon, they may be confused about how their order is being fulfilled and who they should contact with any problems or questions.”2
Digital marketplaces have a great positive impact on the search costs for consumers and offer a wide range of products. However, the high amount of drop shippers increase these search costs and leads to negative cross-side effects since consumers will avoid online platforms with a lot of malpractices.
References
- Spierenburg, G. (2024, August 27). Dropshippers maken er een puinhoop van [Drop shippers make a mess]. Consumentenbond. https://www.consumentenbond.nl/nieuws/2024/dropshippers-maken-er-een-puinhoop-van ↩︎
- Amazon. (n.d.). Amazon. Drop Shipping Policy. Retrieved September 16, 2024, from https://sellercentral.amazon.com/help/hub/reference/external/201808410?initialSessionID=eu%3D262-8033512-2651237&ld=NSGoogle&ldStackingCodes=NSGoogle ↩︎
