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Understanding Wholesale Clearance and Liquidation Sales

Dropshippers are primarily middle men; they take on the hassle of the sale to avoid the headache of the inventory by mediating between buyers and manufacturers. As a dropshipper, you're like an electrical wire; the current passes through you from the power plant to the appliance. In the process, some of the juice leaks out. This is your slice of the pie, your cut of the profits. Often, this is smaller than you'd like, but at least you're not tying up any of your own money.

Sometimes though, it can be tempting to go against the grain when given a chance to get items at really low prices. This could be the wholesale clearance bargains offered on eBay's Wholesale & Job Lots, or if you come across a liquidation or overstock sale. If you handle it right, you can make a killing even if you have to do the fulfillment yourself. But before you plunge neck deep into this venture, you have to understand what wholesale clearance and liquidation sales are and how they work.

Terminology

There are some basic concepts you have to get your head around if you want to be a successful online retailer. You already understand the concept of wholesaling, but why do retailers sell at wholesale prices? Simply put, because inventories exceed sales.

Wholesale inventory vs. stock

Let's now look at clearance and liquidation.

​Clearance

Clearance sales or overstock sales are pretty much what they sound like: sales of items that need to be cleared out because the owners want to stock new ones. They could have also received too much stock and want to sell to get back the money, so they can spend it on other items. Either way, wholesale clearance items are typically brand new with tags still attached, and they may still be in their original packaging.

Liquidation

On the other hand, liquidation sales are for items that are still in inventory when a company or retail establishment closes down. This does not necessarily mean that the business failed; some big-name retail brands close down some outlets to streamline operations or to relocate to a better site. When this happens, they don't always want to bother with packing up and transporting the stock.

These items have also never been used, may still be in their original packaging or have price tags attached if they have been taken off the display shelves. In many cases, liquidation sales offer better deals than clearance sales because “everything must go.” The time element is crucial, so as the deadline approaches, many items such as wholesale shoes go for a song.

Returns

Another category that may not always be featured in ads is customer returns. Returned items are not necessarily faulty; they could have been the wrong color, size, or model. They could also have been returned because the customer changed his or her mind. However, unlike the first two categories, most returned items are considered used and may be classified as:

  • Working
  • Not working
  • Damaged
  • Untested

However, when a customer returns the item still sealed in its original packaging, this can be considered brand new in box (BNIB) and advertised as such, although there may be signs of wear on the box itself.

Obviously, when buying customer returns, you only want the BNIB, working or undamaged items unless you can get the damaged/untested/not working items for a ridiculously low price and re-sell them for parts. A good rule of thumb for damaged, not working, or untested items is to anticipate that only 1 out of 10 will be salable, and adjust the threshold for the purchase price accordingly.

Caveats

Many clearance, liquidation and customer return sales are typically sold online or through wholesalers specializing in these types of items. They are sold in small lots or pallets, and you can pretty much find anything you need. However, there are some things that you should be careful about. Seasoned overstock sellers can smell a neophyte a mile away, so make sure you wash that new-buyer smell off before taking them on.

Price matters

Buyer psychology is the same everywhere; get one whiff of a “bargain” and you're panting to get at it before someone else snatches it up. The painful reality sets in when you try to unload your “deal” and find out that you paid too much.

It's all in the advertising. A pallet may be advertised as heavily discounted from the retail price, and if you are too excited to check, you may find that the posted retail price is inflated and you have actually paid full or nearly full price for the “discounted” items.

If you're already a registered SaleHoo wholesale directory user, you can find out how much these items are actually selling on eBay by checking it out with the SRL. This will give you an idea of how much you can afford to invest in a pallet to make it worth the effort of stocking items instead of simply dropshipping them.

For example, if there is a big sale at the Nike outlets and you want to know how much Nike currently goes for, you can simply type in “Nike shoes,” and voila!

You can see here that while the success rate is good and the competition is medium, the average price for which a pair of Nike shoes sold was $62.46. If you get a pallet with 10 pairs of new Nike shoes priced at $199 total, you can either make a 40 percent profit by selling them individually, or sell everything you've got at a lower-than-average price. Let's say $50, giving you a perfectly respectable 20 percent profit or so, all else being equal.

Pallet Description

Most retailers offloading stock will grade their pallets according to the condition of the items inside, and when the pallet is a mixed one, the items are listed with important details, such as model and brand. These are important considerations because they can spell the difference between a good buy and a bad one.

Stay away from “mystery” boxes unless you like to gamble with your money, hoping to win the lottery. You have about as much chance of getting a good pallet. In most cases, these are the runts of the litter, basically overpriced for the condition and/or type of item or not worth re-selling.

Shipping

You need to find out how you're going to get the pallet before making a purchase. Most companies will ship it to you for a fee. So you need to factor in the additional cost to the overall price of the pallet. Divide that by the number of the items to see if the retail price will cover your costs and your desired profit. Even if it's a local company and you can pick it up, you still need to factor in the price of gas and the value of your time.

Some wholesalers do offer free shipping for a minimum order, so you can also consider that.

Best of Both Worlds

As a dropshipper, you want to avoid keeping an inventory. At the same time, you want to make the most profit possible, which is more likely when you get from clearance and liquidation sales because prices are jaw-droppingly low. It is possible to take advantage of clearance sales and still avoid buying stock. You can do this by buying from eBay retailers instead of wholesalers. When retailers (those that keep stock) on eBay decide to sell their old stock, you can sell the same items at a slightly higher price, order it from the retailer, pay for it, but have it delivered to your buyer's address.

Of course, buyers can always buy direct from the retailer at the lower price, but if you have all your ducks in a row, you should have better exposure with your individual listing. At any rate, you lose nothing but a little time if the item doesn't sell, and you can always re-list. You need to check that the retailer still has the item available at clearance sale prices, though.

Final Thoughts

Buying wholesale clearance or liquidation pallets is not the end of the world for a dropshipper. There is no pressure to continue doing so if conditions are not favorable. When you do buy from clearance sales, just make sure that you have done everything possible to ensure what you buy can be resold at a reasonable profit. With some high-priced lots, you can lose money even if just one item turns out to be a dud.

Want to learn more about buying from wholesalers and liquidators? I thought you might. Click here.

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