Using Drop Shipping to Successfully Sell Online
Many dream of the freedom of working for themselves from home and developing a cash flow independent of a 9 to 5 schedule, commuting, cubicles and mind-numbing labor. While some let their dream languish out of fear of the unknown, thinking they have to sacrifice security to build their own business, others have found a way to start living their dreams
by creating lucrative ventures selling online by using drop shipping—and they did it as a side job, without a lot of capital or risk, before they gave up any security.
Sound good? Consider this your primer on the benefits, shortcomings, essential knowledge, and path to creating a successful drop shipping–based retail business.
WHAT IS DROP SHIPPING?
The products we use every day have a life before they reach our hands. Each begins as an idea, which becomes a design, which is then made into a product by a manufacturer. From the manufacturer, a wholesaler or distributor typically stocks the product and sends it to its retail customers. This is, in short, the supply chain. Occasionally a manufacturer will ship directly to a retailer, but most prefer to work with wholesalers so they can focus on making products.
When a manufacturer, wholesaler or distributor does drop shipping, they fulfill individual retail orders and ship directly to consumers on behalf of retailers. This allows the retailer to simply provide the means to sell the product and manage customer service without having to physically handle inventory. Retailers who base their business on drop shipping usually sell online or through a catalog.
BEFORE YOU JUMP IN
As with any worthwhile endeavor, there are pros and cons to selling via drop shipper.
What to look forward to:
- No upfront inventory. Your distributor ships items directly to your customers, so there’s no initial expense in stocking and handling inventory.
- Positive cash flow. Your customer sends payment for the item he or she wants before you have to order and pay for it.
- Less capital investment. There are much fewer costs involved in getting started with drop shipping than with most other retail models.
- Simple model. Only the drop shipper needs to pick, pack and ship the item to your customer.
- Low overhead. Beyond inventory, you don’t have to pay for warehousing, offices, or staff to get going.
- Freedom. Your workplace can be wherever there’s an Internet connection—from a home office to your favorite coffee shop.
- Flexibility. As you grow, so grows your business. Drop shipping scales well, since you’re not committed to any particular space or even product.
- Variety. You decide the products you want to offer, which means you can sell as many or as few as you wish.
What to watch out for:
- Scams. There are many “businesses” out there willing to capitalize on someone who doesn’t know the ropes, so be careful.
- Poor suppliers. Do your homework and know how distributors are rated among other sellers, how well they communicate, how they manage stock levels, and how quickly they process returns. How they handle certain things can make or break your reputation.
- Low profit margins. Look carefully at all the costs involved—the product, shipping and handling, marketplace fees, and your own time. Make sure you’re going to come out ahead.
- The competition. Who else is selling the products you want to sell? Are they on the same sales platform you’ve chosen? Are you up against your own distributor? Be careful—trying to sell on price will burn your bottom line.
CHOOSING A SELLING PLATFORM
Have you been buying on eBay for years and always wanted to run your own eBay business? Have you wondered about independent sellers on Amazon? Have you ever used a retail website and thought, “I could put together something like that”? These are all samples of sales platforms in which smart retailers can market and sell their merchandise. Each one has benefits and drawbacks, and certain things work better on one platform than they do on another, so it’s wise to examine each choice carefully—especially as some marketplaces do not allow drop shipping. Here are some of the highlights of the most popular places to sell online:
The Good: It’s easy to start selling on eBay, and the world’s largest online marketplace offers a huge audience—tens of millions of visitors monthly—and reduced need for certain kinds of marketing.
The Bad: eBay is a selling machine, but one that offers little customization and which needs constant monitoring and relisting. It’s harder to brand yourself and develop customer loyalty. Watch the fees, too. And while you may make a tidy profit after all things are considered, in the end you won’t really have built a business that you’ll be able to consider an asset—it just won’t be salable.
The Ugly: There’s a reason eBay is called the world’s largest online marketplace, and it’s not just because of the traffic from buyers. Competition is fierce there, and the auction format has created an environment driven by low prices, which means low profit margins.
While you will need to stay on top of your orders, relisting isn’t really an issue on Amazon like it is with eBay. You still get access to a large market on a well-respected retail site. You also have some flexibility here if you want to add wholesale sourcing
to your business model: Send your bulk inventory to Amazon, and they can fulfill the orders for you.
The Bad: As with eBay, you’ll need to be aware of the fees. Also, Amazon focuses on providing a seamless shopping experience for users, so creating a brand for yourself is nearly impossible on their site. You will create even less of a salable asset by selling on Amazon than you would if you’d sold through eBay.
The Ugly: Amazon has received some flak for their practice of noticing what moves well for third-party sellers and then stocking and marketing those products themselves. Since they can buy in bulk and fulfill orders directly, you could do all the work of creating a profitable niche on Amazon just to see it snapped up by the giant at a lower cost.
Your own site
This is your best option for drop shipping. You are your own marketplace, with exclusive focus on your products. You have complete creative freedom. Develop your brand. Become an expert on your products and give your customers as much information as possible to add value. You can choose ready-to-customize stores
to make designing your site easy. You’re not just making a profit here; you’re creating an asset for yourself, something you can sell if you’d like. While there will be costs for the domain, hosting and possibly software, you won’t need to sacrifice your profit to commission fees.
The Bad: Since you’re creating something out of nearly nothing, you’ll have less free traffic coming your way. Managing your store will be more complex than posting or listing items on other sites, and you will have more upfront costs than you would if you’d taken a simpler route.
The Ugly: You need to become more than an expert on your products—you need to become an expert on search engine optimization (SEO) in order to market your site well. Our best tip? Source products which are hard to find elsewhere, and you’ll almost automatically create a niche market, which is a huge step toward targeting customers.
CHOOSING A MARKET
Some retailers who drop ship choose their products based on their own interests, which helps make them passionate promoters from the get-go. But whether or not they already had an idea of what they wanted to sell before they got started, all smart retailers have one thing in common: They did their homework on their products’ market opportunities before investing their time and money into selling them.
We assume you’re going into business to make a profit, so here are some key qualities to look for when investigating a product’s potential return on your investment. For the maximum profit margin, look for products which possess more than one of these advantages:
- Hard to find. Retailing a product which few others do is a great way to carve a niche for yourself. Just be sure there’s a demand for what you want to sell—we suggest measuring demand with our free Market Research Lab.
- Marketing possibility. Acquiring customers will be one of your chief concerns. Make it easier on yourself by choosing a product which lends itself to creative marketing approaches.
- Lots of accessories. Choosing a product that has a lot of possible “extras” to augment it is a great way to focus a store and create repeat business. As any sales expert will tell you, it’s cheaper to market to existing customers than to find new ones.
- Low turnover. If you decide to run your own site, you can eliminate a lot of maintenance work by choosing products that don’t change models frequently.
- Lightweight or small. Customers can be put off by shipping and handling fees, which increase with the size and bulk of items. Smaller, lighter items are less expensive to ship and give you the possible advantage of offering the highly-desired added value of free shipping if the profit margin is high enough.
- Less expensive. The more expensive the product, the more likely your potential customer will want detailed information and upfront support before the sale. If you’re running your drop shipping business part-time, this is not always realistic.
Many people make the mistake of thinking offering a wide variety of products will net them a wider potential customer base, but the reverse is actually more likely to help you make your marketing more productive: Choose a specialized market and you will have a better chance of targeting the right audience.
If you’ve decided you want to use eBay as your sales platform but are still scratching your head for product ideas, we have a video guide to help you
CHOOSING A DROP SHIPPER
It’s essential to identify and partner with a drop shipper that provides quality products and service. Depending on how much footwork you want to do, there are several ways to locate, and develop a relationship with, such suppliers:
Finding a drop shipper
- Through the manufacturer. Contact the manufacturer of the product you want to sell and ask for a list of their distributors (it may be worth asking the manufacturer if they drop ship their own products). Just note there is no guarantee any of their distributors will drop ship.
- Through a search engine. Be careful with this method. You’re likely going to have to dig deep as a general search will produce a lot of sites, including retailers—and some of those retailers will claim they’re drop shippers or wholesalers. Also, don’t be put off by a poorly designed site; wholesalers and drop shippers don’t often put a lot of energy into creating attractive sites.
- Through a trade show. This tactic requires you to have settled on a product, or at least a specific market. This can be an expensive route, but you’ll get to meet drop shippers face-to-face and get a great start on developing strong relationships with them. Use our free directory to find a trade show in the industry in which you want to sell.
- Through membership with a selling community. You could just buy a list, but be warned that not all are created equal. If you want a list of suppliers already prescreened for reliability and drop shipping ability, look for a service that provides advantages beyond the list—perks like training, business development tools, the opportunity to network with other sellers, superior customer service and other tools built around drop shipping business models. For more information and a trial of SaleHoo’s supplier directory, visit our comprehensive outline of benefits.
Be sure to screen your supplier
Contact your potential drop shipper. You want to establish a personal relationship with the company you’re considering, but you also need to evaluate them in several ways. Do they have dedicated support for times when there are issues or questions? Are they focused on the industry in which they offer merchandise and do they have a staff of product experts? Are they tech-savvy with their inventory management and shipping ability? Do they accept email orders? Are they efficient and organized so they can respond quickly and reliably to orders?
A good way to gauge the way both you and your customers will experience your drop shipper’s service is by placing a small test order. That will allow you to evaluate the process, their shipping response, their follow-up with the tracking number and invoice, the quality of the packing job and the product itself.
You’re well on your way to creating a drop shipping retail business. We have a few more things you should take into account before heading out there with your brilliant ideas, just to help ensure your success.
The most important thing we want you to do is not see this as a “get rich quick” method. Like any worthy endeavor, a successful drop shipping business is built with careful planning, a lot of work and a commitment to customer service and staying educated. Yes, you can start selling practically immediately; however, your maximum profit is a direct result of your investment in time. Do it right from the start and rather than dealing with a lot of headaches later, you’ll get to enjoy the leverage your professional approach has given to your sales.
Since this is a business you’re going to cultivate, make sure it looks like a solid enterprise and get it legally formed. The easiest way to do this is with a sole proprietorship, but this is also the least legally protective form of business, leaving you wide open to being personally liable in a law suit. Somewhat more protective is an LLC, or limited liability company, which makes your business a separate legal entity. The ongoing fees to maintain the LLC make it more expensive than a sole proprietorship, but not as expensive as the next step, which is forming a C-Corp. C-Corps come with double the tax, but also the most protection for you. Make sure you pay attention to any local laws regarding acquiring a business license.
It’s a good idea to become a legal business before contacting your chosen drop shipper to establish an account; it’s practically necessary before you start asking them for reduced prices and other perks. Take a look at our guides for getting your business going
for more information.
You know that old adage “an ounce of prevention is worth a pound of cure”? Well, that’s great advice for creating your business. The best time for dealing with a problem is before it even happens. It’s inevitable that issues will crop up along the way, and by planning for these exceptions ahead of time, you’ll be able to resolve them quickly. Besides, having clear communication about your policies is a great way of showing your professionalism. But to communicate those policies, you first need to create them.
Before you start crafting your policies for returns, damaged items, fraud, international shipping, chargebacks and other somewhat common drop shipping business issues, you should look at the policies your drop shipper has in place and make sure you understand them. If you want to create a policy that doesn’t align with theirs, you need to accept responsibility for the difference or have a firmly documented agreement with the drop shipper on any variance.
One significant concern your plan should address is how you will handle inventory issues, like backordered items. It’s your responsibility, not your supplier’s, to keep an eye on your risk of not being able to follow through on an order. You may want to consider multiple suppliers in order to avoid out-of-stock item predicaments, though you will then need to figure out how to route orders if you do use more than one supplier. For some thoughts on this and other things to consider when dealing with drop shippers, take a look at our advice
A comprehensive business plan should also include how you’re going to market your products and website (if applicable). Learn about keywords and SEO practices and then put your knowledge in action as you develop your site. Also, while you’re creating your site, ask yourself how you are going to add value for your customers.
There’s still more to navigate when you’re operating a business, but the good news is that there are many resources you can access to educate yourself as you move forward with your dream. Get more in-depth information through:
- Our Seller Training Center – tips for before and after starting your business
- Our Blog – stay in the know about great products and marketing ideas
- Our Community Forum – network with other sellers
- Our Master Seller Training Course – free membership allows you to access this and gives you full forum membership, and is available through a link at the bottom of salehoo.com/forum
Though we’ve given you a lot to think about, and while we do want you to get a great start on your drop shipping business by doing it right, the important thing is that you do get started. Don’t wait to have everything in line and have the perfect business plan. Keep it as simple as possible. Do expect to run into issues and plan ahead for them, but don’t get bogged down in preparing for exceptions. Get out there and learn the ropes the best way there is—by doing.