drop ship guide

About Drop Shipping

Here is how drop shipping is typically explained: "Drop shipping" is simply an arrangement between you and the manufacturer or distributor of the product you sell whereby the manufacturer or distributor -- NOT YOU -- ships the product to your customers.



 

Here's an example: Let's say Mary wants to set up a web site that sells skin care products. Instead of filling her basement with cases and cases of stock, and then going downstairs each time an order comes in, Mary puts together a drop shipping arrangement with a manufacturer who ships the products to her customers directly.

And the best part is that the manufacturer will happily ship the products using shipping labels with Mary's company name, address, and logo instead of their own. The product arrives at the customer's house a few days later, and they never know that the product wasn't shipped directly from Mary's warehouse!

Let's say Mary has a product called the "Total Skin Care Package," priced at $97. A customer visits her site, places an order, and is billed $97 plus $11 for shipping and handling.

Mary then sends the manufacturer an e-mail with her customer's order and shipping information. The manufacturer packs up the customer's order, puts Mary's shipping label on the package, and mails it out via UPS or FedEx, usually within 48 hours.

The manufacturer then bills Mary for the WHOLESALE price of the "Total Skin Care Package" -- in this case $64 plus $11 for shipping and handling. Since Mary has passed the shipping and handling fee on to her customer, she has just netted a profit of $33. AND ALL SHE HAD TO DO WAS SEND HER MANUFACTURER AN E-MAIL!

Drop Shipping Advantages

There are a few huge advantages to this model. First, it SAVES YOU THE COST of building your own inventory. If you're like most people starting a small business, you don't have a ton of extra money lying around. The last thing you want to do is tie up your cash in inventory that you may or may not be able to sell.

No inventory also means no leftovers. If the product you sell suddenly becomes outdated, obsolete, or just plain un-trendy, you aren't the one with a house full of stock that nobody will buy. Many on line retailers find themselves having to offer deep discounts -- and taking huge losses -- on old products just to get them out of their homes to make room for more inventory!

You'll also be able to SKIP THE HASSLES of shipping your products. Unless you've already set up a shipping account with someone like FedEx or UPS, you'll be heading down to the post office every day to buy stamps and mail out your products.

And you'll be able to ADD NEW PRODUCTS ALMOST INSTANTLY. Since you don't have to worry about ordering inventory, you can add products to your web site within a few hours. If you find that your customers are eager to buy a certain product, you can have that item up on your site in almost no time.

A More Detailed Explanation

Now let's get a little more technical and give you some useful information.

Selling products on the Internet is easy. Hundreds of thousands of people do it every day. The most difficult part of Internet sales is getting the products delivered to the customer, otherwise known as order fulfillment.

You must have an efficient fulfillment system. One of the reasons that brick-and-mortar stores are slow on the uptake when it comes to on line business, is that supplying retail stores is done with a pallet-size logistical system. But Internet retail requires an entirely different kind of fulfillment system. Internet retail is essentially mail order, with shipments going out in parcel sizes to end users.

Few brick-and-mortar retailers have a humming mail order business to draw from, and are starting from scratch with an entirely different kind of fulfillment system. An inefficient fulfillment system can lose for you the advantages in good customer service that holding the inventory gained for you. And running a fulfillment system is a full time and trying job.

One of the simplest order fulfillment models to use is the drop ship model.

Every successful business person knows the importance of focus. Business people articulate their focus by talking about their "core business" activity. In short, it means the primary activity that generates cash for them. Some people focus on selling. Some focus on running a warehouse. Some focus on manufacturing a product. Others focus on advertising.

Mail order catalog companies and professionals who use the Internet focus on selling. They are professional sales people who know their chosen target market and they find products to sell to their chosen market. These people do not manufacture product, run warehouses or run advertising services. They do not buy tons of inventory. They have manufacturers put products in fulfillment warehouses, at the manufacturers' costs and have the warehouses drop ship products their customers.

Let's put that another way. They have absolutely no stocked inventory and they spent absolutely nothing on inventory. They just have catalogs and web sites. They take an order from a customer. They keep the profit. They send the cost of the product to the fulfillment warehouse. The fulfillment warehouse puts the catalog company's invoice in the box and sends the product to the customer. The customer gets the product and thinks that it came from the catalog company's own inventory in its own warehouse. The fulfillment warehouse drop shipped the product for the catalog company.

Drop shipping has some very strong advantages and a few disadvantages. Let's look at the advantages first.

You don't have to pay for anything until after you sell it.

You have do not have inventory costs. You know that purchasing inventory ready to ship to your purchasers is expensive. In addition to the out-of-pocket costs, you need a place to store the inventory. Finally you have to pick, pull, pack, and ship the products once the order is placed. Having the distributor or manufacturer take all these costs and responsibilities lifts a real burden off your shoulders.

A drop-shipper is transparent. With most of your drop shippers, especially those with whom you do a regular business, you can send them labels and forms so their package looks like it is from you. Your customer probably won't know that your hands never touched the product. The customer will think that you have a warehouse.

You can sell many more products than you could if you had to buy and store them yourself. Drop shippers give you a wide choice of products so you can sell a lot more.

It almost sounds too good to be true. But there are two things that you should consider:

Lower margins. While the manufacturer may be willing to sell you product for 30% to 40% of suggested retail, if you want drop-shipping services expect to see smaller discounts and less profit to you. This is to be expected. There is a lot of work and expense in storing and shipping inventory. Someone has to pay for it.

On the Internet, some categories of products are very price-sensitive. If you are selling computer hardware, for example, and using the drop shipping model, you may find it hard to be competitive price-wise and still make a profit. The difference between making money and losing it may be only a few percent. So be sure to pick a product that makes sense to drop ship.

You will be using third party customer service so you will not have full control. Drop shipping is really outsourcing your order fulfillment services to a third party. You will be dependent on your drop shipper to have the products in stock, to deliver on time, and to properly pack and ship your products. So pick your drop shipper carefully.

At the end of the day, however, drop shipping exists because it works. And the largest catalog companies and web sites use it. And savvy small web sites and auction site sellers use it.