| Let's face it: Not everyone wants to
develop, design, and manufacture their own products. You may be more interested in finding
great products that already exist and then using your online marketing know-how to build a
successful business.
But what if you DON'T want the hassles of things like
tracking your inventory, setting up warehouse space, and maintaining a confusing
shipping/receiving infrastructure? Wouldn't it be great if there was a way to set up a
business online WITHOUT having to deal with all these issues?
Well, there IS a way to avoid these headaches: a technique
known as "drop shipping." This model lets you...
SELL QUALITY, BRAND-NAME PRODUCTS ON YOUR WEB SITE FOR A
HEFTY PROFIT
... and the drop shipper takes care of fulfilling the
order. They warehouse the stock, pack the orders, and ship them out to your customers.
But be warned: There are both advantages and disadvantages
to this model. Keep reading, and I'll tell you how to STEER CLEAR OF THE SCAM ARTISTS and
identify great partners who will ship brand-name products for you... on your behalf... all
while generating solid profits for you!
HOW DROP SHIPPING WORKS:
"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 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 online 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.
CHOOSING THE PRODUCT:
Have you ever noticed that there are literally hundreds --
if not thousands -- of sites selling huge mish-mash selections of inexpensive gift
items... things like plastic gnomes and porcelain figurines?
That's because there are a few HUGE drop shipping companies
that import these items and then recruit web sites to sell them on their behalf. These
companies have massive product inventories and make it very easy for people to get started
selling their products for them.
Unfortunately, this is NOT the way to go if you are getting
started with drop shipping. There are already a ton of these giant gift sites out there --
and way too much competition for you to reasonably expect to be successful at it.
Instead, spend some time researching different kinds of
products that you might want to sell. The products you choose should be in demand but not
widely available online. As usual, I highly recommend targeting a niche market rather than
trying to find a product that EVERYONE wants to buy.
Once you've found a product that you think may be the right
one for your business, you'll need to do a little "competitive analysis." This
simply means finding out what potential competitors are charging for the products you want
to sell and calculating how much of a profit you'll be able to make.
CHOOSING YOUR DROP SHIPPER:
So how do you go about finding a reputable drop shipper for
your business? Well, here's where doing your homework will pay off. Whenever possible,
you'll want to set up drop shipping arrangements directly with the manufacturers of the
products you want to sell. The fewer middlemen you have to go through, THE BIGGER YOUR
PROFITS WILL BE!
Let's say you want to sell wooden toys on your web site.
After spending some time combing through the search results for "wood toys,"
you'll have come up with a list of manufacturers of wooden toys that you might want to
carry. From there, you'll want to contact the manufacturers directly and ask them if they
drop ship their products.
Some will let you know right away that they are set up to
drop ship for you. Others will tell you that they simply don't offer drop shipping.
Smaller manufacturers may never have heard of the concept!
If the manufacturer of the product agrees to drop ship for
you -- GREAT! You can be fairly confident that you'll be getting the best price possible.
However, if they don't offer drop shipping, you'll have to keep looking for another
alternative. This usually means tracking down a distributor.
(A distributor is simply a company that maintains a large
inventory of another company's products and distributes those products to smaller
companies.)
The best way to locate a distributor is to simply ask the
manufacturer of the product to recommend one. Most manufacturers have established
relationships with at least a couple of distributors, and they should be happy to put you
in touch with one of them.
Another great way to find a distributor for the type of
product you wish to sell is by looking through related trade magazines. You'll often be
able to find listings of manufacturers and distributors advertising in the back of these
publications. To find listings of trade magazines, try:
http://www.smallbusiness101.com/trade_ctr/trademagazine_ctr.htm
... or do a search at Yahoo! for "trade
magazines."
In addition, Drop-Shipping-News.com sells a "Consumer
Products Source Directory" that claims to provide listings of dozens of trade
magazines at http://www.drop-shipping-news.com
You may also be able to find distributors and manufacturers
using the Thomas Register at http://www.thomasregister.com They provide listings for
thousands of companies broken down by product, brand name, and company name. It takes some
time to get used to navigating through this site, but it can be a great resource.
WHAT TO EXPECT FROM YOUR DROP SHIPPER:
Once you've tracked down a few manufacturers and
distributors, you'll need to get on the phone and contact them directly. Before you start
dialing, though, you'll need to have a few things in order, including your official
business name and your Tax ID or Resale number.
-- NOTE: Your Business Name and Tax ID Number --
Take the time to set up your business as a legal entity
before you get started. The U.S. Government's Small Business Administration maintains a
web site that has all the information you need to get your company up and running and
explains how to apply for a Tax ID or Resale number in every state. You can search for the
requirements in your state at http://www.sba.gov/regions/map/#region10
The process of setting up your business legally is actually
a LOT easier than most people think. In many states, you can get all the paperwork done in
about a day, and it shouldn't cost you much more than a few hundred dollars if you do
everything yourself.
Of course, there's no shortage of lawyers and accountants
to help you incorporate your business if you'd rather not deal with the paperwork.
Some companies will also ask for a credit reference... but
don't panic! A manufacturer will probably only require a credit reference from you if they
will be billing you monthly. Since most manufacturers will bill you at the time of
purchase, this shouldn't be a problem. If they do require credit references, though, you
can usually just provide them with the name and telephone number of your bank.
IMPORTANT NOTE FOR NON-U.S. BUSINESSES
Drop shippers based in the U.S. are generally NOT willing
to drop ship internationally. There are simply too many hassles with customs -- especially
since September 11th. Also, companies like FedEx and UPS charge a fortune to ship
internationally. The cost of the shipping can often be more than the cost of the product!
If your target market is in Australia, for example, you'll
want to locate manufacturers or distributors based in Australia so that you can avoid the
hassles of international shipping. You -- and your customers -- will end up with a LOT
fewer headaches this way!
QUESTIONS YOU'LL NEED TO ASK:
Most companies that you contact will be more than happy to
speak with you -- after all, you are going to be selling their products for them. When you
call, simply ask to speak with someone about becoming a vendor for their products.
Once the switchboard puts you through to the right person,
you'll want to ask all of the following questions:
1) WHAT IS THE WHOLESALE PRICE THEY CAN OFFER YOU ON THEIR
PRODUCTS?
You need to make sure that their wholesale prices are
reasonably lower than the prices you'll be able to sell the products for -- to ensure that
you're left with a fair profit margin.
2) DO THEY CHARGE A HANDLING FEE FOR DROP SHIPPING?
If so, how much? Most companies who drop ship will simply
add the cost of UPS or FedEx shipping onto your wholesale price, but some will also charge
you a handling fee (generally between $1 and $5). This is to offset their cost of picking,
packing, and processing the order for you.
3) DO THEY HAVE A MONTHLY MINIMUM OR MAXIMUM OF PRODUCTS
THEY WILL DROP SHIP?
Some companies will require that you sell a minimum dollar
amount of their products each month (usually around $100). A few also have a monthly
maximum of units they will ship for you. If you think that you will be selling more than
this number each month, they'll refer you to one of their distributors.
4) HOW DO THEY SHIP THEIR PRODUCTS?
Almost every company that drop ships products will use a
major nationwide delivery service like UPS or FedEx. Ask them to include tracking numbers
with the order confirmations they send. This will save you many potential problems when
customers ask, "Where is my order?"
5) HOW DO THEY BILL YOU?
Most drop shippers will bill your credit card the wholesale
price of the product plus shipping and handling as soon as they receive an order from you.
With others, you may be able to set up a monthly billing cycle where you submit payment
for all orders at the end of each month.
6) HOW DO THEY DEAL WITH PRODUCT RETURNS?
Be sure to find out what their policy is regarding returns.
Most reputable companies will offer some kind of guarantee or warranty on their products
and will deal with returns for you. This way, if a customer contacts you with a return,
you can simply tell them that the manufacturer will be happy to speak with them directly.
If your manufacturer doesn't accept returns, look out! You
will be the one stuck replacing defective merchandise for your customers.
You'll also need the manufacturer to send you descriptions
and images of the products you'll be selling for your web site.
Many companies will simply tell you to take the images
directly from their own site. Others will e-mail you a link to their product information.
Companies with large inventories may want to mail you a CD-ROM of their product images and
descriptions.
When setting up an account with a distributor, ask lots of
questions about shipping and order fulfillment, as these are the two areas that can
potentially cause you the most problems.
Make sure that they are able to confirm your orders
quickly, and that they will provide tracking numbers. You need to be confident that your
customers' orders will be delivered promptly.
AVOID THESE COMMON DROP SHIPPING SCAMS:
Wow, all of this sounds great, doesn't it? And the truth
is, there ARE lots of people making tons of money using the drop shipping model. But there
is also no shortage of crooks and scam artists just waiting to take your money in exchange
for the promise of "Instant Drop Shipping Riches" or "Ready-Made Online
Drop Shipping Stores."
Here are a few things to watch out for when you're
researching drop shipping:
- COMPANIES OFFERING TO SELL YOU LISTS OF DROP SHIPPERS FOR
$3, $4, $7. The old saying "You get what you pay for" applies here. Spend $4 on
a drop shipping list, and you'll get an e-mail listing 200 company names, addresses, and
maybe phone numbers. A few calls to out-of-service numbers and you'll realize that the
list is years old and basically useless.
- COMPANIES CHARGING YOU A "MONTHLY FEE" TO BE YOUR
DROP SHIPPER. Think about it: Why would a company charge you to sell you things? Answer:
Because their products are either worthless junk or they're marked up WAY too high. In
either case, they know your online store won't be able to sell any of them, so they need
to make their cash from you through a monthly fee.
- COMPANIES OFFERING YOU A TURN-KEY ONLINE BUSINESS, complete
with web site, wonderful products (that can ONLY be purchased from them), and a merchant
account that allows you to accept credit cards. The strategy here is to get you to spend
YOUR money advertising and selling products that they are buying from REAL wholesalers,
marking up, and selling to you. These companies usually also charge a one-time and/or
monthly fee.
Here's the bottom line: No one is going to do your work for
you. If you want to set up a real online business, you're going to need to do some
legwork. Any company that seems to be making your job easier by providing you with lists
of products to sell or setting up your site is just going to be eating into your profits!
As always, ask yourself if their offer seems too good to be
true. If it does, you can be sure that they'll be taking their cut!
Based on our research, I'm NOT going to recommend spending
money on any of the "drop shipping resources" that are for sale online; anyone
should be able to locate potential drop shipping partners by doing a little research and
making a few phone calls.
COMMON DROP SHIPPING PROBLEMS -- AND SIMPLE SOLUTIONS:
Of course, no business model is without disadvantages --
and drop shipping your products can lead to some serious problems if you aren't careful.
Below are a few of the most common problems, along with some tried-and-true solutions to
help you save some time and money:
PROBLEM #1: SHIPPING DELAYS
Remember how I told you that the best thing about drop
shipping is that you don't have to worry about shipping your products? Well, this can
occasionally create issues.
Let's say you send an e-mail to your drop shipper asking
them to send an order to your customer, and it just so happens that they are sold out of
that item at the moment. The longer it takes them to let you know that the item is
unavailable, the longer it will be before you can pass that information on to your
customer, and the worse you'll end up looking.
SOLUTION: Insist on prompt order confirmation from your
drop shipper. Ask them to send confirmation e-mails or faxes to you when they've processed
your order, letting you know that the order has been shipped. If they're out of stock,
make sure they let you know IMMEDIATELY.
PROBLEM #2: TRACKING SHIPPING STATUS
Your customer calls you up a week after ordering a product
and asks what the status of their shipment is. Unfortunately, since you didn't ship the
product, you have no idea what to tell them. And if your customer is demanding a refund
for an order that has already been shipped, YOU'LL be paying for it when your drop shipper
sends you the invoice!
SOLUTION: Most of the nationwide delivery services (like
UPS or FedEx) now offer online tracking services. If a customer calls to check the status
of their shipment, you can instantly tell them where their package is by entering their
tracking number at the UPS or FedEx web site.
Better yet, include the tracking number in your
confirmation e-mails to your customers and let them track their orders themselves. Just be
sure to ask your drop shipper to provide you with tracking numbers once your orders have
been shipped!
PROBLEM #3: DROP SHIPPER BACKS OUT
Occasionally, a manufacturer or distributor will simply
back out of their drop shipping agreement with you. They may decide that the work involved
in packaging and shipping their products for you simply isn't worth the trouble.
SOLUTION: Unfortunately, you'll never really know how
reliable your partners will be until you've placed a few orders with them.
When speaking with potential drop shippers over the phone,
you should be able to get a good sense of how reliable they'll be based on how prepared
they are to answer your questions.
This is one of those areas of your business where you'll
have to follow your instincts!
PROBLEM #4: HIGH SHIPPING COSTS
Finally, you can run into problems with shipping costs if
you work with a number of different manufacturers and distributors.
For example, let's say a customer orders 6 products from
your web site, with each one being drop shipped to them by a different manufacturer or
distributor. They'll have to pay shipping and handling costs on each individual item, and
that can add up to a lot of extra money.
If your customers see that they'll have to pay $40 to ship
$80 worth of goods, they'll abandon their order every time.
SOLUTION: You'll avoid those abandoned orders by just using
one manufacturer or distributor on your web site. Keep in mind that many distributors deal
with thousands of products (usually related to each other), so you can often source all of
your products with one distributor.
Of course, your site may never run into this problem. If
you take my advice and focus on selling one or two niche products (like toasters), you can
reduce the likelihood of customers ordering more than one product in the first place. (Who
needs six toasters?)
FINAL THOUGHTS:
Drop shipping can be an easy way to get started selling
online. Since the manufacturer or distributor takes care of warehousing and shipping,
you'll be able to concentrate your efforts on building your web site and marketing your
products. And this is what most entrepreneurs are good at!
As an experiment, we decided to contact several
manufacturers to set up a drop shipping arrangement. When asked, we told the manufacturers
that we had no previous experience running an online business. This didn't present a
problem to any of them. Basically, a company will be glad to have a potential vendor
contacting them... After all, it can only increase their sales!
When searching for a product to drop ship, don't spend
money on "drop shipping directories." Think about it: Not only is their
information frequently out of date, but the companies listed in these directories are the
ones that everyone who buys the directories will be contacting. That means more
competition for the products you'll be selling.
And take the time to choose your products carefully. Make
sure there aren't already hundreds of sites selling these products at prices you can't
afford to compete with.
Products that target a niche market will sell better online
than products aimed at the general population. And remember to ask yourself: Is this a
product I would buy myself?
Most importantly, remember that drop shipping isn't a magic
formula to make you rich. Building a business DOES take a certain amount of hard work, and
this is no exception.
The real "magic" is that drop shipping allows you
to invest your money in marketing rather than inventory, and a well- planned marketing
strategy is what will ultimately help you build a lucrative online income! |