Drop Shipping: The Future of the Online Economy

Episode #724 of the “Planet Money” podcast tells the story of Fred and Natasha Ruckel, a couple who invented the Ripple Rug, a toy for cats, and began selling it on the Amazon Prime marketplace. After their business experienced rapid growth and success, they began to notice that their product was frequently being listed and sold on eBay—for twenty dollars more than the original price. Though Fred sent cease and desist letters to these resellers, nothing came of them because this practice, known as drop-shipping, is not illegal (Smith). Drop-shipping is the rapidly-growing business of seeking out products online, listing them on resale sites such as eBay for a higher price, marketing the products, taking orders from consumers, and shipping them the products directly from the sources (Cheong et al.; “Drop Shipping System”). The podcast also includes an interview with professional drop-shippers Nicki and Parish Witherspoon, who have made millions from their online store. According to Michael Monger, economist at Duke University, drop-shipping is “the most competitive industry the world has ever known” (Smith). Though it is profitable and hugely successful, drop-shipping has raised serious ethical questions and has created issues for manufacturers.

To drop-shippers, the best part of their industry is that there is virtually no risk. They can test consumer reactions to products simply by listing them online, and they will not lose any money even if the products never sell (“4 Reasons”). There is no investment or stock purchasing required—all of the work is in the marketing and customer service (“4 Reasons”). Drop-shipping can also benefit manufacturers, because these middle men advertise their products and help them reach a wider audience (Smith). Some businesses have even decided to partner with drop-shippers, delegating certain tasks to them in order to focus more on other aspects of their companies (“Namaste Signs”). This relationship can be symbiotic—profitable for both the manufacturer and drop-shipper.

Unfortunately, when drop-shipping occurs unbeknownst to a business, it can negatively affect their profits and demand. One major issue is that consumers are often unaware that they are not purchasing directly from the manufacturer; they are deceived and scammed out of a better price. When their package arrives, they may notice that the box has come from Amazon when they have actually ordered from eBay. This can prompt them to search for and find the product on Amazon for the lower price, return the eBay purchase, and re-order from Amazon. The manufacturers are the ones who bear the cost of return, delivery, and other fees, and this type of incident can result in huge losses. Just two months after Fred Ruckel began to notice his product on eBay, he received over two hundred returns—in many cases, returns of already used or damaged products—which cost him over ten thousand dollars (Smith). Many argue that drop-shipping is a scam, since it does not add any value to a product. Former drop-shipper Thomas Despin agrees, saying that he “basically marked up a product anyone could find…[and] called it a business” (Despin). Drop-shippers themselves can face issues with inventory data mismatch and inaccuracies, which can upset customers and ultimately affect public perception of the manufacturer (Cheong et al.). Many drop-shippers also add logos of well-regarded or popular companies to the products they resell in order to artificially add value, out of which brand infringement issues can arise. Mark Bearfoot, Brand Protection Manager at Harley-Davidson, explained that on any one resale site, ten to fifteen different brands could be facing blatant infringement (“Spring Conference”). All of these issues not only impact the manufacturers, but the drop-shippers, too, resulting in a scenario in which both sides lose profits.

“The internet,” the podcast hosts argued, “was supposed to get riddle of the middle man” (Smith). However, online resale platforms have only increased the popularity of arbitrage. How is it successful—why are consumers purchasing products for a much higher price than they need to, especially when the information is readily available with a quick Google search? Economists have always based theories and hypotheses on the idea that humans are rational and frugal, never willing to spend more money than absolutely necessary. Consumers can be flawed, however, and choose convenience over lower prices. If something appears in an advertisement on their Facebook homepage, they may choose to purchase it without researching other options. Drop-shipping has taken advantage of this fact, and it has the potential to take over our future economy.

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Works Cited:

“#724: Cat Scam.” Planet Money. NPR, 13 Mar. 2019.

“4 Reasons to Consider Using Drop-Shipping for Your E-Commerce Store.” Bizcommunity.com,12 Sept. 2018. General OneFile, http://link.galegroup.com.massasoit.idm.oclc.org/apps/ doc/A553962498/ITOF? u=mlin_s_masscomm&sid=ITOF&xid=1bdfc303.

Cheong, Taesu, et al. “Effect of Inventory Information Discrepancy in a Drop-Shipping Supply Chain.” Decision Sciences, vol. 46, no. 1, Decision Sciences Institute, 26 Feb. 2015.

Despin, Thomas. “11 Months and $750k Later, I Closed My Drop Shipping Business. Here’s Why.” Tech In Asia, Tech In Asia, 12 Oct. 2017. https://www.techinasia.com/talk/11-
months-750k-closed-drop-shipping-business.

“‘Drop Shipping System System’ in Patent Application Approval Process (USPTO
20190057349).” Politics & Government Week, 14 Mar. 2019, p. 1682. Academic OneFile,http://link.galegroup.com.massasoit.idm.oclc.org/apps/doc/A577827347/AONE? u=mlin_s_masscomm&sid=AONE&xid=e95fc1b3.

“Namaste Signs Exclusive Drop-Shipping Agreement with Ample Organics Enabling Ample’s Licensed Producer Customers to Sell Vaporizers and Accessories.” Plus Company Updates, 11 May 2018. General OneFile, http:// link.galegroup.com.massasoit.idm.oclc.org/apps/doc/A538212167/ITOF? u=mlin_s_masscomm&sid=ITOF&xid=46c42af0.

“Spring Conference: Drop Shipping.” European Union News, 28 Mar. 2018. General OneFile,http://link.galegroup.com.massasoit.idm.oclc.org/apps/doc/A532617292/ITOF? u=mlin_s_masscomm&sid=ITOF&xid=1dc25d7c.