Starting your e-commerce business can be fun, highly rewarding, often motivating and, not least, challenging. And some of those very challenges include, but are not entirely limited to, the following:
- Dealing with functionality issues during product development.
- Tracking inventory.
- Setting up warehouse space.
- Maintaining a complex shipping infrastructure.
If you’d prefer to avoid such hassles, then drop shipping may just be your answer.
What Is Drop Shipping?
Drop shipping is, essentially, a fulfilment system that allows you to purchase products individually from the wholesaler and then ship them to your customers directly.
According to Entrepreneur, drop shipping is “an arrangement between a business and the manufacturer or distributor of a product the business wishes to sell in which the manufacturer or distributor—and not the business—ships the product to the business’s customers.”
This process gives you the opportunity to sell quality branded products on your website for a significant profit while another party takes care of the product development and order fulfilment.
Advantages of Drop Shipping
- Saves costs: You don’t have to invest a significant amount of money in inventory as you’ll only need to purchase a product when you have an existing order to complete.
- Versatile product selection: When you don’t need to pre-purchase each item that you sell, you can offer more items to your customers.
- Fewer risks: Since you don’t have to spend a lot of money on inventory, the risks involved in launching an online store is significantly reduced. For example, if your business fails, you won’t be stuck with a warehouse full of difficult-to-move products which you would have to sell at a loss.
- Freedom of location: Since you don’t have to be concerned with fulfilment or running a warehouse you can run a drop shipping business from anywhere. All you need is a laptop and Internet.
- Scalability: Since each and every order is not required to be manually fulfilled, it’s comparatively easier to grow a drop shipping business.
Disadvantages of Drop Shipping
- Less control: You’ll have less control over certain issues such as packaging processes, shipping times and package branding.
- Inventory: There is a chance that your supplier could run out of products that you have listed for sale. If this occurs, you’ll need to apologize to an unsatisfied customer, then process a refund or find a quick alternative solution.
- Extra fees: Wholesales or suppliers may charge additional fees other than the price of the product and shipping fees because they will handle the storage and other services.
- No discounts: You’ll be unable to get discounts for buying in bulk up front. This is the trade-off for the supplier enduring the cost and risk of managing the inventory.
Is Drop Shipping Profitable?
Like all online businesses, the success of drop shipping depends on a number of different factors, particularly your hard work and dedication. The fact that there are little risk and effort involved makes drop shipping a viable supply chain management technique.
What Are the Expected Profit Margins?
According to eCommerceFuel, profit margins depend on the products you sell. Expensive electronic products will likely have margins in the 5-10 percent range. However, lower-priced accessories have it in the 100 percent range.
These are not exact figures as your own profit margins will depend on your ability to offer value to your customers, which will then allow you to charge a premium price over your competition.
Where Are Drop Ship Products Sold?
“People sell drop shipped products just about everywhere!” as eCommerceFuel claims. Similar to hundreds of e-commerce sites, a lot of sales on eBay and Amazon are fulfilled through drop shippers.
eCommerceFuel further explains that some major companies utilize drop shipping to expand their product repertoire. Companies like Sears and Home Depot use this model for their less in-demand products. This allows them to offer a wide selection of products despite limiting their inventory.
How Do I Find Companies or Wholesalers?
Here is a list of how you can find drop shipping suppliers:
- Contact the manufacturer: Once you know which product you want to sell, manufacturers can share the details of their authorized distributors who may also have an interest in drop shipping.
- Do a Google search: Don’t just search Google’s first results page or listing to be disheartened by the lack of information available. Wholesale drop ship companies tend to be pretty poor at marketing which is why you may have to sift through a couple of pages before you come across a credible drop shipper.
- Subscribe to a directory: Although there are many drop shipping companies online, some of them may not be trustworthy, and you should be vigilant about that. Legitimate directories like World Wide Brands offers a credible database of thousands of drop shipping companies that you could partner with.
What Are the Requirements to Work with a Drop Shipper Supplier?
In the U.S., in particular, legitimate drop shipper suppliers will refuse to work with you if you fail to prove the legality of your business. At the very least, you should have the following:
- Employment Identification Number (EIN).
- Sales Tax ID (if your state charges sales tax).
Creating a legal company structure can be done quite swiftly through your state’s Dept. of Commerce or a third party site such as LegalZoom. After you’ve officially registered your company, obtaining an EIN from the IRS is a simple process.
What Fees Do Drop Shippers Charge?
- Pre-order fee: To cover the packaging and shipping expenses, drop shippers will most likely charge a pre-order fee. Although the numbers will go up for more difficult-to-handle items, fees are usually in the range of $2-5.
- Monthly fees: Only a few drop shippers will request for an ongoing fee; most of the time this not necessary. If you come across suppliers that request monthly fees for their service, then you should see it as a red flag. Any company charging these fees are fraudulent.
- Purchasing minimums: A few credible drop shipper suppliers may want a minimum purchase size, either on a monthly basis or your first order. Failing to meet these sales brackets could result in penalties or extra fees.
So You’ve Decided to Go Forth with Drop Shipping, so Which Products Should You Sell?
The answer to this really comes from an understanding of the current market demand, competition, fees, suppliers, and some important factors. Just ensure you do enough homework before you select your drop shipping product or niche!