Why Use Drop Shipping Companies In Your Business?
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 shipping company 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 Companies 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 Shipping Company
So how do you go about finding a reputable drop shipping company 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 Shipping Company
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 shipping companies 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 drop shipping companies 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 drop shipping 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 drop shipping company 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 shipping companies 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 drop shipping 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 Companies 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 SHIPPING COMPANIES
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
SHIPPING COMPANY. 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 company 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 Companies 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 shipping company 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
shipping company. 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 shipping companies 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 Drop Shipping Companies Thoughts
With drop shipping companies you can 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 drop shipping 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 companies 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!
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