by Adam T. Sutton, Reporter

Peter Cobb, Co-Founder, SVP, eBags.com, and his team established a drop-shipping system about 12 years ago. Orders placed through the luggage retailer's website were fulfilled and shipped directly from suppliers' warehouses.

This system nearly eliminated the need to inventory products. The company saved millions in warehouse expenses, and drop-shipping presented a variety of marketing and business opportunities (described below).

However, establishing and maintaining the system required diligence. The company offers more than 40,000 products from 536 brands. Each brand presented unique technological and operational challenges for the team to integrate.

"It's really quite difficult and challenging," Cobb says. "It is not easy."

However, the system reaps tremendous benefits. After more than a decade, the team still pushes and tweaks to increase efficiency. Comparing this year to 2009, eBags has achieved:

o 30% improvement in processing time from suppliers, cutting fulfillment time from an average 1.29 days to 0.9

o 80% improvement in backorder rate, from 0.45% to 0.09% -- meaning fewer than one out of 1,000 orders is backordered

Also, Bizrate lists eBags' customer experience rating at 9 out of 10 based on more than 275,000 responses.

Below, we describe six tactics Cobb's team uses to make its drop-shipping system work and how the team pulls marketing and business value from it.

Tactic #1. Continually improve customer experience

EBags has worked with brands and suppliers for more than ten years to make drop-shipping work. The team needs to know each supplier's inventory to ensure products offered to customers are in stock and ready to ship. Otherwise, customers might order products only to have them backordered, which is not a pleasant experience.

"Twelve years ago it was much simpler," Cobb says. "We had fewer brands, fewer SKUs, less technology and less bandwidth...It was a lot of faxing and emails."

Over the years, eBags expanded its number of brands and products and continually updated the system's technology to improve efficiency.

Cobb cites the advantages of including electronic data interchange (EDI), which automatically transmits data between businesses, as a recent major improvement. Many brands no longer send daily emails or faxes listing their inventory. The process is mostly automated.

However, some brands still send inventory information via email, but Cobb's team can handle it, he says. Working with so many brands has exposed his team to a variety of processes and technology, which has made it very flexible.

"They've seen it all," he says.

Tactic #2. Offer a large product assortment

Most retailers have to purchase inventory in anticipation of customer preferences. The result is a lot of black luggage in stores, Cobb says, since retailers do not gamble on red or green bags, which are seen as riskier sales prospects.

Since eBags typically does not purchase inventory, it also does not risk overstocking. To sell a new product, the team only has to add its information to its website and coordinate with the supplier's inventory system. This process enables the team to sell any product a supplier offers.

"We don't want our merchandisers trying to guess what the customer wants. Let's show every product Samsonite has and let the customer pick," Cobb says. "A brick and mortar store would have six to 10 pieces of Samsonite, and we'll have 500 pieces."

This also enables the team to sell unique bags other retailers do not stock, such as many color varieties, Cobb says.

"When you walk into a brick and mortar store, it's a sea of black. One brand told us, in rough numbers 'With other retailers we sell 80% black and 20% colors. For you guys it's 20% black and 80% colors.'"

Tactic #3. Purchase strategic inventory

The team has not entirely eliminated the need for inventory. The company has two warehouses, one of the west coast and one on the east coast, which are managed by a third party. Here are three reasons the team stocks products in its warehouses:

- Anticipated shortages

Some products are in such demand that they're expected to sell out across the country. The supplier might only be able to drop-ship for a short period before running out of stock. For these hot products, the team will place a bet by purchasing inventory.

"There are occasionally products we cannot be out of during a back-to-school or holiday period," Cobb says.

- Overseas shipping delays

Some brands are based overseas without warehouses in the U.S. If the team likes a product and it's a strong seller, it will purchase an inventory to store in the U.S. to quicken shipping times for customers.

"Maybe it's an Italian handbag where they can't [directly] ship it from Milan," Cobb says.

- eBags private label

The company offers its own brand of bags and luggage, which has become one of the best selling brands on the site, Cobb says. The team must inventory and fulfill orders for these products.

Tactic #4. Highlight product assortment in marketing

Offering a wide assortment of products helps Cobb's team drive stronger marketing performance, he says. Here are several examples:

- Paid search and SEO

The team competes in PPC and natural search engine marketing with 20 to 30 luggage retailers. Competition for the top 500 to 1,000 keywords can be fierce, Cobb says. However, since eBags offers such a wide product assortment, it's able to pull value from long-tail keywords (those for which there is little competition).

On a per-keyword basis, long-tail terms bring the team less traffic than more popular keywords. However, in aggregate, the team's long-tail traffic can overshadow that of the more popular keywords.

- Email

The team offers customers highly customized product suggestions via email. Customized suggestions are based on purchase history and click activity, Cobb says.

By having such a wide assortment, Cobb's team is able to better customize offers to subscribers' preferences.

- Partnerships

The team's assortment has also provided unique opportunities. For example, the team partnered with CNET, a technology product news and information website, to offer visitors a tool to find laptop bags, Cobb says.

Visitors provide the exact model laptop they own, and CNET and eBags combined data to list exactly which products eBags sells to fit that computer.

Tactic #5. Use system flexibility to enable marketing

Since the team does not need to ship and inventory products, it can start selling new products almost immediately. This flexibility can be a valuable asset when a brand wants to push a product it's having trouble selling, Cobb says.

"We just had a brand come to us and say, 'We have more than 5,000 pieces of this one product we're stuck with.' And we're able to say 'Give it to us at a killer price, and we'll move it for you.'"

In this case, Cobb's team crafted a promotion for the product, passing some of the savings to customers through a discounted price. The team sold 20% of the products on the promotion's first day, he says.

"The brand liked that. And they didn't have to negotiate with a company who'd give them $0.15 on the dollar."

- Fill gaps in promotion

Cobb's team recently had spare promotional space in eBags' email marketing program. The team placed calls to several brands asking if they had products they wanted to push, and if they could offer them at lower prices. Again, because the team did not need to receive and inventory the products, it could quickly add them to email newsletters for promotion.

Tactic #6. Work directly with brands

A key driver of the drop-shipping system's efficiency is the team's ability to work directly with brands to ensure fast fulfillment times and daily inventory updates. Team members have assigned brands they work with through telephone and email.

"The challenging thing is we have to be receptive to different technology skill levels at each brand," Cobb says.

Strong relationships are based on communication and understanding. Even knowing when trucks arrive to accept packages at a brand's warehouse can help the team determine its processing deadline to ship orders on the same day.

"Even though technology drives the process, we feel very strongly that there has to be a human touch involved, especially with the brands," Cobb says.

The team also communicates to the brands how they're performing. They've even set up different tiers of performance and let brands know where they stand. The tiers and their sizes:
o Platinum -- 53% of suppliers
o Gold -- 22% of suppliers
o Silver -- 13% of suppliers
o Copper -- 10% of suppliers
o Lead -- 2% of suppliers (these brands should expect daily phone calls to get any issues resolved, Cobb says)

Part of the reason brands are so willing to accommodate, Cobb says, is that eBags has become a top-five seller for many of them. Some have dedicated staff just for eBags' orders.

Useful links related to this article

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Bizrate: eBags customer ratings

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