The Basics of Drops 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suddenly becomes outdated, obsolete, or just plain un-trendy,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.
If you are considering starting a small business, drop shipping
may be for you.
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