Drop Shipping: The Easiest Way to Sell Online

    Drop Shipping: The Easiest Way to Sell Online

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Bonus Guide: Check out our Ultimate Guide to Dropshipping - a free comprehensive guide that covers everything you need to know about building and running a successful dropshipping business. Download your copy now.

By Andrew Youderian, ecommerce store owner, eCommercefuel.com

Many people shy away from starting an online store because of the startup costs and fulfillment hassles. But imagine if someone offered to pay your up-front inventory costs on thousands of items and manage your fulfillment operations. It'd be much easier to get started, and you could run your business from anywhere in the world. Sound too good to be true? It's not, if you know about drop shipping. 

In this article, I'm going to teach you all about drop shipping. I'll go over a simple definition, list the benefits, show you how to find drop shipping wholesalers, and give solutions to some common problems associated with drop shipping. 

What Is Drop Shipping? 

Drop shipping is a retail method in which you don't keep products in stock. Instead, you partner with a wholesale supplier that stocks its own inventory - you transfer customer orders and shipment details to them, and they ship the goods directly to the customer. The biggest benefit of drop shipping is you don't have to worry about fulfillment or inventory issues.
Also, most customers don't know you're drop shipping, since "private label shipping" lets you ship from the wholesaler with a return address and invoice customized to your ecommerce store.

The Benefits of Drop Shipping 

There are a number of reasons you should consider drop shipping:
1. You Don't Need Buckets of Money: Drop shipping makes it amazingly easy to get started selling online. You don't need to invest heavily in inventory, yet you can still offer thousands of items to your customers.
2. Convenience & Efficiency: Successfully launching and growing an ecommerce business takes a lot of work, especially if you have limited resources. Not having to worry about fulfillment is incredibly convenient and frees up your time to concentrate on marketing, customer service, and operations
3. Mobility: With all the physical fulfillment issues handled, you're free to operate your business anywhere you can get an internet connection.
4. It's a Trusted Model: You might be thinking that this sounds like some sketchy, fly-by-night model – but it's not. Plenty of Shopify online stores, even major retailers like Sears, use drop shipping to offer a wider selection of products to their customers without having to deal with increased inventory hassles.

How Do I Find Drop Shipping Wholesalers? 

Before contacting suppliers, you'll want to make sure your legal ducks are in a row. In the United States, most suppliers will ask for your business EIN number and a copy of your state sales tax and/or resale certificate. Once you're properly established, you can start contacting drop shipping suppliers.

There are various ways to find drop shipping wholesalers, and the video below outlines your options:

 

If you already know what products you'd like to drop ship, contacting the original manufacturer is the easiest way to find qualified distributors. Not all distributors will be willing to drop ship, but it will give you a list to follow up with. Unfortunately, the market is littered with scams and low-quality information. If you do decide to invest in a directory, I can recommend the paid directory World Wide Brands as a reputable source of drop shipping wholesalers - but it's still very important to exercise caution.
Google can also be an effective tool for finding drop shippers, but you need to keep a few things in mind.

3 Ways to Use Google to Find Wholesalers 

1. Search Extensively: Wholesalers and drop shippers are notoriously bad at SEO and marketing, and usually aren't going to pop up on the first page of Google for a term like “handbag wholesaler.” Instead, you'll need to dig deep into the search results, often going through 10 or 20 pages of listings.
2. Don't Judge by the Cover: Suppliers also tend to have outdated, late ‘90s-era websites. So don't be scared away by abysmal design and layout. While a sleek, modern site could signal a great supplier, a low-quality one doesn't necessarily indicate a bad one.
3. Use Lots of Modifiers: As you hunt for suppliers, don’t stop with a search for “wholesale” - make sure to use other modifier terms, including “distributor” , “reseller” , “bulk” , “warehouse” and “supplier.”

4 Common Problems With Drop Shipping 

Despite my glowing recommendation, drop shipping isn't ecommerce nirvana. Like all models, it has its weaknesses and downsides. With some planning and awareness, these issues can be managed and need not prevent you from running a successful drop shipping business.

 

1. There will be loads of competition and awful margins.

Solution: It's true. Products that can be drop shipped will spawn a lot of competition. Usually this will lead to cutthroat pricing and diminishing profit margins, making it hard to build a viable business.

To be successful, you typically can't compete on price. Instead, you'll need to offer value in a different way, usually through top-notch product education, service or selection. For more information on how to pick a profitable niche and add value, see these posts on finding a product to sell andthe anatomy of a profitable niche.

2. Syncing inventory is difficult & leads to out-of-stock items.

Solution: The best way to mitigate this problem is to work with multiple suppliers with overlapping product lines. It's inherently dangerous to rely on a single supplier. Having two suppliers doubles the likelihood that an item will be in stock and available for shipment.

Many sophisticated suppliers offer a real-time product feed, and you can use a service like eCommHub to easily sync your Shopify website with the warehouse.
Eventually, you’ll sell a customer an out-of-stock item. Instead of canceling the order, give the customer an upgraded product for free! You might not make much – if any – money on the order, but you'll likely build a loyal brand advocate.

3. It's hard to sell products that you never see.

Solution: In today's world, it's possible to become an expert in just about everything through information online. Selling products from manufacturers with detailed websites will allow you to become intimately familiar with a product line without ever having touched a physical item. And when you do need to answer specific question about a product, a quick call to your supplier or manufacturer will give you the answer you need.
You can also buy your most popular items to get acquainted with them, and then resell them as “used” or “refurbished,” often recouping most of your investment.

4. Involving a third party will result in more fulfillment errors, mistakes, and logistical problems.  

Solution: Even the best drop shippers make occasional mistakes, and mediocre ones make a lot of them. Suppliers are fairly good about paying to remedy problems, but when they're not, you need to be willing to spend what's necessary to resolve the issue for your customer.
If you try to blame your supplier for a fulfillment problem, you're going to come off as amateurish and unprofessional. Similarly, if you're unwilling to ship out a cheap replacement part to a customer because your supplier won't cover the cost, your reputation is going to suffer.
One of the costs of drop shipping convenience is the expense of remedying logistical problems. If you accept it as cost of doing business – and always make sure to put your customer first – it shouldn't be a long-term issue.

The Final Word on Drop Shipping 

Is drop shipping the path to overnight ecommerce success? Of course not. As with any successful online store, you'll need to invest over time in a quality website, marketing, and customer service.

But drop shipping does provide an easy way to get started and the ability to leverage other people's capital without having to invest thousands of your own. When managed correctly, it can form the foundation of your own successful online store.

Dropshipping Explained

    

  

Dropshipping Explained

 

Here we look at understanding drop shipping as a business strategy and determining if it will work for you. Let's begin by quickly reviewing the distribution chain as a way to understand how drop shipping fits into the model.


Traditional Distribution Chain
In a traditional distribution chain, you as the seller (sometimes known as the reseller) purchase an inventory of products from manufacturers, wholesalers or distributors.

• Manufacturer - the creator of the product
• Wholesaler - usually provides products to distributors; may sell directly to retail buyers
• Distributor - works to distribute products to as widely as possible. Purchases from manufacturers and wholesalers

If you purchase from the manufacturer, you pay the manufacturer's wholesale price (MWP). If you purchase from a wholesaler or distributor, you pay the MWP plus the mark-up charged by anyone else in the distribution chain. For example, let's say you purchase from a distributor who purchases from a wholesaler, and that the original manufacturer's wholesale price (MWP) was £10.00 per unit. Below is what you would pay in this example:
£10.00 (MWP) + the wholesaler's markup of 10% (£1.00) + distributor markup of 10% (£1.10) + handling/shipping (£.50/unit) = £12.60/unit.
You maintain an inventory of the product, market and sell it to your customers at a marked up price that will cover your costs of marketing, inventory and so on, for example, £20.00/unit. (£5.00 to cover your costs and £2.40 profit/unit).
You package and ship the product to your customer, charging your retail price plus the cost of shipping and handling. £20.00 + £3.00 shipping/handling. Your profit is £2.40/unit.


Drop Shipping Model
In the drop ship model, you arrange to sell products offered by selected manufacturers, wholesalers and/or distributors.
You do not purchase inventory. Instead, you promote the products through photos and information provided by the supplier and/or by showing sample products.
When the customer orders the product, you collect payment then transfer the order and payment to the supplier who then packages and ships the product directly to the customer, often with your shipping label or other branding.
In this model:

• You transfer shipping costs to the customer. (You will save £.50/unit; your customer will pay more for single order shipping.)
• You may be able to reduce your £5.00 overhead costs because you don't need to purchase in bulk, store and handle the merchandise. Say that saves you £1.00/unit.

Now you have two choices. You can either:

1. Sell the product for $20.00/unit and increase your profit to $3.90/unit ($2.40 profit + $1.00 saved on overhead + $.50 saved on shipping) or
2. Pass on some of the savings to your customers in order to be more competitive and sell a greater volume of products.

Sounds perfect, doesn't it? Well, you're absolutely right; drop shipping can be a wonderful way to build or expand a business for many reasons. Of course, there are some drawbacks as well. Let's take a look at the advantages and disadvantages of drop shipping next.


Advantages of Drop Shipping
Drop shipping truly offers exciting opportunities, especially for new and small businesses (though many major retailers use drop shipping as well).

1. You don't need to purchase and manage inventory. In a traditional retail or reseller setting, you purchase enough inventory to be able to fill customer orders as they come in, most of the time. If you are just starting out in business, the inventory costs can be huge. Even if you are established, it may be difficult to afford expansion into a new line or stocking up in anticipation of the holiday buying season or the spring growing season.
2. You don't need to store inventory. Unless your inventory is paper clips, tacks and staples, you will need to have some sort of storage capability. (Even small items can be difficult because they need to be stored so that they are accessible for the "picking and packing" process.) Storage is one more overhead cost that needs to be considered in your pricing.
3. You don't have to deal with unsold stock. Most companies try to have enough stock on hand to meet demand. If demand falls short, you have product sitting on your shelves that you need to move in order to either get some return or simply free up cash for the business. Companies often resort to "inventory" or "warehouse" sales, selling at very low prices, sometimes under cost, to move inventory remainders.
4. You don't need to handle the product. Shipping product requires manpower to do the picking and packing.
5. You don't need to manage relationships with shipping firms (UPS, DHL, Royal Mail etc.)
6. You can try out new products with almost no investment. If you are a web retailer, you just put up the new products on your website and if they sell, you make money. If not, you only lose the time you spent putting up new information.
7. Your customers never have to know that there is a third party involved. Most drop shippers will place your shipping label on the merchandise.
   

Disadvantages of Drop Shipping
Okay, so what's the catch?

1. Sometimes your supplier will mark up your products to cover their costs of drop shipping so the MWP price may be higher than the price for a bulk shipment. Usually the savings in your overhead costs more than covers the mark up.
2. You are not in complete charge of the customer relationship. If your drop shipper makes a mistake, the error will reflect poorly on your company.
3. You can become more vulnerable to rationing. For example, if you resell gaming electronics and ABC's newest version is selling like hotcakes, your orders may not be filled and you can't do anything about it.
4. You won't know about quality problems until you hear about them from your customer. When you handle and ship product yourself, you can be certain that the ceramic piece is not chipped or the model includes all of the accessories.
5. You could lose your customers to the manufacturer who decides to go retail. For example, if a manufacturer who drop ships cosmetics for you decides that, now that it has the name and address of your customers, it can send a reminder to replenish supplies by reordering on their website, you have been cut out of the loop. However, in reality, if a manufacturer chose to do that, they would quickly lose their distribution network and could be in breach of contract with their resellers. So, while customer encroachment is a possibility, it's not likely to happen. And, you will place restrictions in your agreement with the supplier to prevent this problem.
   

Is drop shipping a good strategy for you?
Every business situation is different but there are some general considerations that apply.

1. Drop shipping is an excellent approach to get into business. This approach allows you to start up with very little capital investment and very little risk. If you are starting out, this may be a great way to test the market.
2. If your company offers or intends to offer a wide variety of products, wholesalers or distributors are in a much better position to manage many different products; that's their expertise.
3. If your product demand is highly variable or apt to change quickly with fast-moving trends, you may be better off letting the supplier manage the ups and downs of the marketplace by keeping the inventory on his shelves, not yours.
4. Is your strength marketing and customer relations? It needs to be; you have essentially outsourced the fulfillment function and your business now depends on your ability to promote products and manage a relationship through third parties.
5. Does your industry offer drop ship opportunities? More and more industries do.
   

What have you learned?
By the end of this section, you should know that:

• Drop shipping differs from the traditional supply chain.
• Drop shipping offers many advantages such as low costs of entry, reduction of risk and elimination of many overhead costs and elimination of inventory management.
• There are some risks associated with drop shipping such as loss of control of the complete customer relationship.
• You should analyse your business situation to be sure drop shipping is the right solution for you.