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Pros and Cons of Dropshipping Using Online Auctions

According to the US Census Bureau, e-commerce sales generated USD $71.2 billion in the first quarter of 2014 alone, and it is an upward trend.

 E-commerce sales chart

Dropshipping is one of the channels in which any one can get a slice of the pie, and it's the "new black" in e-commerce business models. Dropshipping appeals to would-be entrepreneurs who want to try their luck and make mega bucks because it requires virtually no start-up capital and no inventory.

That, in a nutshell, is what dropshipping is — you sell items you don't actually have. Instead, you have a supplier on standby from whom you order: You sell it, pay for it and have the supplier ship it directly to the buyer. Sounds like a sweet deal, right?

Well, yes and no. Just like any business model, there are positives and negatives associated with dropshipping. Right off the bat, we can point out that dropshipping will only really work when selling online, but that can also be a plus and a minus depending on how you sell.

In this article, we will be focusing on dropshipping using online auctions because, let's face it; nothing is easier to set up than a seller account for online auctions. So off we go.

The Sweet

There are obvious advantages to drop shipping in general, and these apply especially when using online auctions to sell the products. Let's look at a few.

Little or No Startup Capital Required

The whole idea of dropshipping is that you don't keep any inventory; you leave that to the supplier. Since you don't keep any stock, you won't have to buy anything in advance; ergo, no out-of-pocket expenses. When you sell an item, the buyer pays you and you in turn pay the supplier to ship the item to said buyer. It is a very simple and straightforward process.

Greater Flexibility

Because you have no inventory, you are not limited with what you have in stock. For example, if you are selling a pair of shoes, you don't have to limit your offer to any size or color. You can have an auction catalog that is as extensive as your supplier's, which helps generate more sales.

Better Product Assessment

Not all items will sell equally well. Dropshipping is a great way to test the market to see what sells and what doesn't. If an item is slow-moving, it is easy enough to take it off your list of offerings so that you can concentrate on marketing the items that do sell. Of course, you can always keep the runts of the litter, so to speak, around in the off-chance that it will sell. You have nothing to lose, after all.

Useful resources:

Easier to Rank

When you sell in online auctions, you gain reputation points for each item you sell, so the more you sell on a bidding website, the higher you rank. On eBay, for example, power sellers are the most successful of the lot, and it is relatively easy to qualify as one: you just need to be in good standing, have a minimum 98 percent customer feedback score, and have at least 100 transactions totaling $3,000 or more over 12 months.

Power sellers not only have special privileges; they have high credibility with buyers. When you are a drop shipper, 100 transactions in 12 months should be easy-peasy. If you can't manage that or the equivalent in other online auction sites, you may be in the wrong line of business.

Image: Bid

The Bitter

And now we come to the not-so-obvious. The disadvantages of dropshipping can be difficult to spot considering how many people swear by it as a great way to earn a lot of money. But you need to know these things so that you will know what you will have to work out before getting started.

Tough to Get Started

Ahh…this is where it really bites. For new entrepreneurs, dropshipping in online auctions may mean little or no profit. You could end up with a final bid that is not much higher than the acquisition cost of the product.

Add in other costs such as per-order fees (supplier), listing fees, enhancement fees, packaging and shipping costs (for free shipping), and you may be just breaking even — or maybe not even that.

So are all those folks saying they make thousands by dropshipping lying through their teeth? In most instances, no. It is possible to make money with drop shipping if you plan very carefully and learn from your mistakes (i.e., choosing the wrong or too many products).

Expect that it will take time to learn the ropes well enough to make real money. Once you've managed the basics, you can expect a 30 percent profit margin maximum, but more likely 12 percent to 15 percent.  Of course, that's not too shabby if you have a lot of sales.

Below is a sample income statement, though this is for a retailer with an online store. Dropshippers using online auctions can expect to pay an equivalent amount in fees (depending on the marketplace), which is typically per item sold.

Dropshipping sales figures

Less Reliability

The advantage of having products on hand is that you know if you sell it, you can ship it immediately. When dropshipping, on the other hand, the customer with the winning online bid may have to wait longer to get the product.

This isn't a problem if you specify the expected delivery date in your listing, but it is if the supplier runs out of inventory for particular product. Remember that you are front-lining the transaction, so you can't shift blame on the supplier when your customer is annoyed with you. If your supplier is unreliable, then so are you and your reputation is ruined.

You have to be very careful about choosing your suppliers and maintaining regular communication to get product availability updates.  If you are clueless about how to go about finding suppliers, you should go to well-established dropshipping aggregates, such as the SaleHoo directory, which can give you listings of reliable suppliers for particular products.

Poor Niche Marketing

Online retailing is most successful when you identify the niche market for you and stick with it, and with dropshipping this can be a problem. When confronted with a lot of choices, most people tend to want all of it, and that can seriously undermine a seller's ability to focus. When you're all over the place with your listings, so is your online business. In this case, more is not better.

You will want to identify products that are trending and at the same time sustainable over a reasonable period. A flash in the pan (such as the pet rock) may make you money for a little while but you will not be able to build any true marketing around it.

Here is an infographic by Permuto that shows what people are currently buying and how much of the retail pie it makes up, still based on data from the US Census Bureau:

Infographic: what people buy online

And you can always find a product's profitability and popularity through the SaleHoo Research Lab

No Identity

Some sellers manage to establish a certain identity with the customers as the go-to guy for certain products. If you fail to narrow your product listings enough to get an identity, your sales will be pretty much hit-and-miss. You will have to rely on offering the lowest prices or the better freebies to get hits.

Why sacrifice your profit margins when, with a little effort and strategy, you can let your reputation be your main selling point? While you can apply a niche strategy for any kind of business model, it is especially apropos with dropshipping because of the aforementioned glut of available goods.

Should You drop Dropshipping from Online Auctions?

Not at all. Dropshipping is a great way to conduct your online retail business, and it fares peculiarly well with online auctions. However, it is important that you have your eyes wide open when you go into it so that you don't have unrealistic expectations. Work it properly, and it will work for you.

If you are thinking of using eBay for dropshipping, read about how works here. If you've already done it, what have you experiences been like? What have you learned? Let us know in the comments!


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Comments (1)

  Already a member? Login to comment
shazroyce on 12:15 12 Jun
Tried drop shipping with Ebay, very bad idea, first time we opened a shop, we lost $300.00 ouch second time we did it, no buyers, but without a shop. They have way to many fees.


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