If you have been browsing the internet for a while searching for a business opportunity, the chances are you would have come across drop shipping. In the retail industry, this is becoming something of a growing trend in order to help cut costs and keep things local, but what is it and how does it work?
What is drop shipping?
Drop shipping is an arrangement between you and a wholesaler whereby you offer their products on your site but you don’t actually physically stock any inventory. If someone clicks on your site and purchases a product, notice is sent to you and the wholesaler, the wholesaler ships the product using your labels and logos, and you split the profits.
Drop shipping is very beneficial to smaller retail shops, internet-only storefronts and those who primarily use catalogues for sales. Customers who shop using these methods are used to a slight delay between ordering and receiving their items, so drop shipping would work well here.
Benefits of the drop shipping system
Many manufacturers also embrace the idea of drop shipping, because the retailer essentially becomes an additional salesman. Delivering large orders or bulky items to a retailer costs money in handling and fuel. With drop shipping, the manufacturer can use inexpensive shipping methods ( FedEx, local delivery companies) to get the ordered product to the customer directly. Manufacturers also own much more secured warehouse space than most retailers, so their products remain safe until ordered.
When drop shipping is available, many small retailers and internet-only stores discover it solves many more problems than it creates. Shipping is left up to professionals and there is virtually no inventory to track. Smaller shops can offer exotic or over sized products without worrying about importation costs or expensive storage. Manufacturers also benefit from reduced shipping costs and more sales exposure of their products.
In a nutshell, the main benefits of drop shipping are:
- No upfront inventory to purchase and a positive cash flow cycle. A positive cash flow cycle occurs because the seller is paid when the purchase is made. The seller usually pays the wholesaler using a credit card or credit terms. Therefore, there is a period of time in which the seller has the customer’s money, but has not yet paid the wholesaler.
- It eliminates duplication of effort as only one warehouse will pick, pack and ship the product thereby reducing costs in the supply chain.
- It reduces total inventory management and shipping costs which can be passed on to the customer by the retailer.
Drawbacks of dropshipping
As in any business, some risks are involved. For example, back ordering may occur when a seller places a shipment request with a wholesaler, but the product is sold out. Back ordering may be accompanied by a long wait for a shipment while the wholesaler waits for new products, which may reflect badly on the retailer. A good wholesaler will keep retailers updated, but it is the business owner’s job to be aware of the quantities that the wholesaler has available.
Some manufacturers will not allow for drop shipping at all. Some companies only deal in bulk orders to larger retailers, making it impossible for smaller outlets to custom order only a few items. The customer may have to assume the cost of shipping as well as the retail price, which could be prohibitive in the case of large items like furniture or high-end electronics.
Unfortunately, the internet is awash with scam artists who play on the emotions of those who are in desperate financial straits, and cite drop shipping as a lucrative internet based business that can be run from home. The victim who buys into this scam will be sold a list of businesses from which drop-shipment orders can be placed. These businesses may not be wholesalers, but other businesses or individuals acting as middlemen between retailers and wholesalers, with no product of their own to sell. These middlemen often charge prices that leave little profit margin for the victim, and require a regular fee for the retailer’s usage of their services. It’s important to know all the costs involved so you can calculate your profit margins accurately. Any wholesale company that wants to charge you a regular “participation” fee should be avoided – the only time you should have to pay a drop ship company anything is in connection with a specific order.
Questions to ask when looking for a dropshipper:
Shipping – Is the drop shipper using a reputable shipping company to deliver the goods? Where will they ship to?
Accounts – Will the drop shipping company automatically debit your credit card on each order you submit, or can you get monthly payment terms?
Support, returns and refunds– the last thing you’ll want is to be caught up in a nasty situation where you have a number of returns and have to foot the bill. Ask the drop shipping company about their returns policy, what kind of support they’ll offer you for their products and about any guarantees associated with their products – and get it in writing.
Credibility– How long have the drop shippers been around for? Do they respond to your requests for information rapidly and professionally? Young drop ship companies and wholesalers have the habit of going bust quickly, or growing too rapidly and as a consequence basic good customer service suffers.
So, how do you become a drop shipper?
- Set up a online shop. The Select.co.uk is a pretty reputable system to use to do this
- Find wholesale suppliers of products you wish to sell that will drop ship
- Open an account with the company
- Build your site, using content and images provided by the drop shipper or produced by yourself
- When an order is made your site should alert you and take payment
- Pass the customer details to the drop shipper
- The drop shipper should then bill you at the price you have agreed upon. Fulfills the order (in most cases with labels referring to your business/web site instead of the drop shippers).
Find your dropshipping niche
The temptation can be to sell everything on your site in the hope of turning a profit quickly. But this may prove to be counterproductive as you may find yourself working with a variety of drop shipping companies because the various merchandise you are proposing to sell may not be held by one company alone, and juggling the different terms and conditions of each one can be a big headache. If this is the way you want to go, it may be an idea to start small offering a few items while you are learning about the business and then build up to larger company offering a wider variety of products once you have learnt the ropes.
How do I find reputable drop shippers?
As with everything it is a case of doing your own research, but a few that are a great start are www.alibaba.com, http://www.ec21.com/ and http://www.worldwidebrands.com/ . But be sure to satisfy yourself that you are happy with the terms and conditions offered by these are any other companies before you proceed.