Section I - Introduction to Drop Shipping

Step 1 involves understanding drop shipping as a business strategy and determining if it will work for you. Let's begin by quickly reviewing the distribution chain as a way to understand how drop shipping fits into the model.

Traditional Distribution Chain

In a traditional distribution chain, you as the seller (sometimes known as the reseller) purchase an inventory of products from manufacturers, wholesalers or distributors.

• Manufacturer - the creator of the product
  
  
• Wholesaler - usually provides products to distributors; may sell directly to retail buyers
  
  
• Distributor - works to distribute products to as widely as possible. Purchases from manufacturers and wholesalers

If you purchase from the manufacturer, you pay the manufacturer's wholesale price (MWP). If you purchase from a wholesaler or distributor, you pay the MWP plus the mark-up charged by anyone else in the distribution chain. For example, let's say you purchase from a distributor who purchases from a wholesaler, and that the original manufacturer's wholesale price (MWP) was £10.00 per unit. Below is what you would pay in this example:

£10.00 (MWP) + the wholesaler's markup of 10% (£1.00) + distributor markup of 10% (£1.10) + handling/shipping (£.50/unit) = £12.60/unit.

You maintain an inventory of the product, market and sell it to your customers at a marked up price that will cover your costs of marketing, inventory and so on, for example, £20.00/unit. (£5.00 to cover your costs and £2.40 profit/unit).

You package and ship the product to your customer, charging your retail price plus the cost of shipping and handling. £20.00 + £3.00 shipping/handling. Your profit is £2.40/unit.

Drop Shipping Model

In the drop ship model, you arrange to sell products offered by selected manufacturers, wholesalers and/or distributors.

You do not purchase inventory. Instead, you promote the products through photos and information provided by the supplier and/or by showing sample products.

When the customer orders the product, you collect payment then transfer the order and payment to the supplier who then packages and ships the product directly to the customer, often with your shipping label or other branding.

In this model:

• You transfer shipping costs to the customer. (You will save £.50/unit; your customer will pay more for single order shipping.)
  
  
• You may be able to reduce your £5.00 overhead costs because you don't need to purchase in bulk, store and handle the merchandise. Say that saves you £1.00/unit.

Now you have two choices. You can either:

1. Sell the product for $20.00/unit and increase your profit to $3.90/unit ($2.40 profit + $1.00 saved on overhead + $.50 saved on shipping) or
2. Pass on some of the savings to your customers in order to be more competitive and sell a greater volume of products.

Sounds perfect, doesn't it? Well, you're absolutely right; drop shipping can be a wonderful way to build or expand a business for many reasons. Of course, there are some drawbacks as well. Let's take a look at the advantages and disadvantages of drop shipping next.

Advantages of Drop Shipping

Drop shipping truly offers exciting opportunities, especially for new and small businesses (though many major retailers use drop shipping as well).

1. You don't need to purchase and manage inventory. In a traditional retail or reseller setting, you purchase enough inventory to be able to fill customer orders as they come in, most of the time. If you are just starting out in business, the inventory costs can be huge. Even if you are established, it may be difficult to afford expansion into a new line or stocking up in anticipation of the holiday buying season or the spring growing season.
   
   
2. You don't need to store inventory. Unless your inventory is paper clips, tacks and staples, you will need to have some sort of storage capability. (Even small items can be difficult because they need to be stored so that they are accessible for the "picking and packing" process.) Storage is one more overhead cost that needs to be considered in your pricing.
   
   
3. You don't have to deal with unsold stock. Most companies try to have enough stock on hand to meet demand. If demand falls short, you have product sitting on your shelves that you need to move in order to either get some return or simply free up cash for the business. Companies often resort to "inventory" or "warehouse" sales, selling at very low prices, sometimes under cost, to move inventory remainders.
   
   
4. You don't need to handle the product. Shipping product requires manpower to do the picking and packing.
   
   
5. You don't need to manage relationships with shipping firms (UPS, US postal, etc.)
   
   
6. You can try out new products with almost no investment. If you are a web retailer, you just put up the new products on your website and if they sell, you make money. If not, you only lose the time you spent putting up new information.
   
   
7. Your customers never have to know that there is a third party involved. Most drop shippers will place your shipping label on the merchandise.
   
   
   

Disadvantages of Drop Shipping

Okay, so what's the catch?

1. Sometimes your supplier will mark up your products to cover their costs of drop shipping so the MWP price may be higher than the price for a bulk shipment. Usually the savings in your overhead costs more than covers the mark up.
   
   
2. You are not in complete charge of the customer relationship. If your drop shipper makes a mistake, the error will reflect poorly on your company.
   
   
3. You can become more vulnerable to rationing. For example, if you resell gaming electronics and ABC's newest version is selling like hotcakes, your orders may not be filled and you can't do anything about it.
   
   
4. You won't know about quality problems until you hear about them from your customer. When you handle and ship product yourself, you can be certain that the ceramic piece is not chipped or the model includes all of the accessories.
   
   
5. You could lose your customers to the manufacturer who decides to go retail. For example, if a manufacturer who drop ships cosmetics for you decides that, now that it has the name and address of your customers, it can send a reminder to replenish supplies by reordering on their website, you have been cut out of the loop. However, in reality, if a manufacturer chose to do that, they would quickly lose their distribution network and could be in breach of contract with their resellers. So, while customer encroachment is a possibility, it's not likely to happen. And, you will place restrictions in your agreement with the supplier to prevent this problem. (See Section III on Authorized Dealer Agreements.)
   
   
   

Is drop shipping a good strategy for you?

Every business situation is different but there are some general considerations that apply.

1. Drop shipping is an excellent approach to get into business. This approach allows you to start up with very little capital investment and very little risk. If you are starting out, this may be a great way to test the market.
   
   
2. If your company offers or intends to offer a wide variety of products, wholesalers or distributors are in a much better position to manage many different products; that's their expertise.
   
   
3. If your product demand is highly variable or apt to change quickly with fast-moving trends, you may be better off letting the supplier manage the ups and downs of the marketplace by keeping the inventory on his shelves, not yours.
   
   
4. Is your strength marketing and customer relations? It needs to be; you have essentially outsourced the fulfillment function and your business now depends on your ability to promote products and manage a relationship through third parties.
   
   
5. Does your industry offer drop ship opportunities? More and more industries do.
   
   
   

What have you learned?

By the end of this section, you should know that:

• Drop shipping differs from the traditional supply chain.
  
  
• Drop shipping offers many advantages such as low costs of entry, reduction of risk and elimination of many overhead costs and elimination of inventory management.
  
  
• There are some risks associated with drop shipping such as loss of control of the complete customer relationship.
  
  
• You should analyse your business situation to be sure drop shipping is the right solution for you.

Section 2 Developing a Product Strategy 

Product Selection

The task of figuring out which products to sell on a drop ship basis is difficult to separate from the task of selecting a drop ship supplier; the two tasks operate together. For the moment, however, we'll focus on the product side of the equation.

Narrow the choices

If you truly do not know what you want to sell, you have a big universe of products to select from. It is, of course, possible, to search for any available product at the right price that you can resell. There are certainly plenty of people on the Internet using that strategy right now, but it's not a very good strategy for success. Here's why.

Some wholesalers, distributors and scammers advise you to select items from their enormous catalogs, advertise the items at a marked up price on your website, take orders and payment then transmit to them for fulfillment. (You'll find some of these operators lurking in the "Make $20,000 a month working from home..." ads found throughout the internet.)

And ... there are many, many get-rich-quick wanna be entrepreneurs doing just that. If you follow that strategy, you will be competing with hundreds or thousands of others being supplied with the same products at the same wholesale price. That's an uphill battle. Plus, if you are choosing products based only on the possible markup available, you may not know enough about your marketplace to sell that product effectively.

If you are just entering ecommerce, take the smarter approach and narrow your choices a bit more. For example, you may prefer to focus on medical products because you have a medical background or you have an excellent on-line market niche through your participation in disease-specific chat rooms. Or you may want to sell sporting equipment because you're a former athlete and now a coach and you can write terrific articles on sports that will draw people to your site to buy products.

Think about your market

Think about a market niche that you believe you can sell to (because you understand the market, you have access to the market, etc.), e.g., soccer moms, the elderly, people who travel internationally, high income pet owners, people with arthritis. Then think about that market's needs and how you might be able to meet those needs with a product or products. For example, high income pet owners tend to treat their pets like substitute children by purchasing clothing, accessories, toys, gourmet foods, etc. You understand what these consumers want to buy because you used to work for an exclusive pet boutique.

Speaking of markets, it is usually wisest to begin your business by appealing to a defined market niche. It can be difficult to put up the resources to appeal to the general public in the beginning.

Now you know something about the products you want to sell. Next, you need to find those products, available through drop shipping, at a wholesale price that can be marked up and sold successfully at a profit.

Determine wholesale price opportunities

Get a feel for how much you will pay for the product you wish to sell. You will have to contact suppliers and negotiate price. We'll talk more about developing that relationship in Section II.

Do the competitive analysis!!!

This is where the rubber hits the road. In order to perform a competitive analysis, you need to figure out:

• How much it will cost you to sell the product
  
  
• How you will need to price the product to cover costs and enjoy a profit
  
  
• How your price compares with others selling the same or similar products
  
  
• Who else is selling and how they are doing
  
  
• How you are going to sell this product more effectively than your competitors

If, at the end of your analysis, you believe you can sell this product to your targeted market at the right price and the right quantity to meet your business goals, you're ready to establish a relationship with a supplier!

What have you learned?

By the end of this section, you should know:

• How to decide which products to sell with the recommendation that you select products for a market you know how to access
  
  
• How to analyze the business case for your product.

Section 3 Selecting a Supplier 

Locate possible suppliers

There are many ways to locate possible suppliers for your products. We'll describe a variety of options then give you our recommendation for the most effective method of finding suppliers.

1. If you know the products you want to sell, find out the name of the company that manufactures the product and inquire about their willingness to sell to you on a drop ship basis. If the company does not operate that way, ask if they have a wholesaler or distributor who might strike this type of relationship with you.
   
   
2. If you know the type of product you want to sell, but do not have a specific manufacturer in mind, you can try Googling the "product + drop shipping". This method should yield some possible candidates for a drop shipping relationship. However, it's a real challenge to make individual contacts and evaluate all of those suppliers, plus you are much more likely to run into middlemen.
   
   
3. You can buy drop ship distributor lists, sometimes very inexpensively. However, in our experience, you get what you pay for when it comes to cheap lists. These lists are often not updated regularly so you may find that contact or other information is not accurate. Our advice - simple lists and directories aren'y usually worth the money or the effort to use them.
   
   
4. Go to trade shows or scan trade publications. Drop shippers want your business. They are looking for you through matching services, directories, ads in trade publications and exhibits at trade shows. You'll never find each other if you're not looking in the right places.
   
   
5. You can use a matching services such as eSources.co.uk. eSources offers buyers an opportunity to announce their need for a drop shipped product and for sellers to describe their products and their terms of sale.

Our advice is to use matching services such as ours (there are also good alternatives available, however watch out for cheap wholesale lists, they are not worth much at all). Here's why you should choose a matching service such as eSources.co.uk:

1. Suppliers are vetted, information is constantly updated and monitored.
   
   
2. You will find suppliers who may not be savvy enough to get their websites noticed by search engines but who have indicated they are looking for new business.
   
   
3. You can view dropshippers by accessing specific categories, such as our UK dropshippers and International Dropshippers categories. This way you can deal directly with those suppliers that are prepared to deal with you on a dropship basis.
   
   
4. You can announce your needs so that suppliers who can meet your needs will solicit you, creating a highly targeted group of supplier candidates to explore.

Once you have created a short list of candidates, begin the evaluation process.

Supplier Selection

Explore these issues as you go through your selection process.

Supplier Location

Although it would make sense to say that it should make no difference where the shipper is located, there are some issues to consider.

If your target market is in Canada, you may want to locate your suppliers in Canada since many shippers do not want to deal with the hassle of customs processing. (If your goods are low cost, they won't meet the threshold for customs declaration so this may not be an issue. However, it pays to sort out international delivery issues upfront.)

If you are having products shipped into the U.S. or any European Union country (and many others countries as well), those products must meet stringent standards for safety, etc. Be sure you know the rules that apply to your product. (You can learn all about importing by selecting one of our country-specific importing courses or our course on importing strategies.)

Company History, Reputation and Service

Ask about the history of the company. How long have they been in business? Google the business name plus complaints or reviews and see if there are any negative reports about them floating around on the Internet. If so, either move or at least ask the company to explain their side of the story.

Consider the professionalism of this staff. Are your questions answered in an informed and straightforward way?

Product quality

This is absolutely critical! Do you know that there are many ecommerce resellers who have never seen the product they sell? Don't rely on a picture or a description. Order a sample and be sure that the quality is up to your standards.

Price

What price will you pay for the item? Are there other charges that apply? Beware of suppliers that ask for a monthly "membership" or "participation" fee. These are often scammers. Legitimate drop shippers make their money on a per piece basis. There are a few exceptions to this rule, however generally you should stay away from dropshippers that charge a fee to join their dropshipping service.

Payment

Drop shippers work in one of two ways. Either they will bill your company credit card for each individual purchase or, in some cases, they will bill you on a monthly basis. If you can arrange monthly billing, you may be required to supply a letter of credit. In general, payment should not be an issue because you will collect payment from your customer before you place the order with the shipper.

Volume

Ask your supplier if they require a minimum volume of monthly sales to maintain an account. The minimum monthly quota should be a nominal amount; it should cover the administrative cost of carrying your account; nothing more. Be sure that you will be able to meet the quota.

Inventory

Ask about inventory levels and arrange for real-time inventory reporting so you can quickly advise your customers of any stock-outs or back order situations.

Shipping

Be sure that:

• The supplier uses a reputable transport firm such as UPS, FedEx or the postal service.
  
  
• Your shipments to your customers will always have a tracking number so they can be traced.
  
  
• The shipper will include the tracking number in their order confirmation.

Ask about the option of placing your name on merchandise or at least on the shipping package. There's great value in keeping the source of your products a secret from consumers; you don't want them to bypass you and go directly to the source (if that's possible). One of the hazards of tracking numbers is that the tracking number reveals the source of the product. You can handle this problem by referring to the shipping origin address as your remote warehouse location.

Refunds

Be sure you understand and can live with the dropshipper's refund policy. You will need to make this policy clear to your customers. If you don't and there's a problem, you may find yourself underwriting refunds.

Avoid Scammers

We've touched on several of the red flags that may indicate a situation to avoid. They are worth repeating along with a few other cautions.

1. Avoid companies that want to sell you a list or directory of distributors at a low price; they're usually not worth it. Plus, everyone else will be buying those lists and accessing the same deals.
   
   
2. There are a number of legitimate, large scale drop ship companies that advertise a huge inventory of items to choose from. However, some of these maga dealers may simply represents products, essentially the same way you do. When you transmit your drop ship order, this middle man company transmits the order to the true supplier. The result? One more fee to increase the final selling price of your product. Ask your supplier candidate if they actually stock the products you will be purchasing in their own warehouses;
   
   
3. Beware of companies that offer you package deals with web presence, payment system, distributor lists, etc. These deals can be so costly that you will be hampered in making a profit.
   
   
   

How many distributors are too many?

The fewer suppliers you use, the better. More suppliers means more differences in shipping charges and return policies as well as more management responsibilities for you. Every business is different. Try to use the fewest suppliers possible to support your business needs.

What have you learned?

By the end of this section, you should know:

• How to locate possible suppliers for your products with the recommendation to use a matching service.
  
  
• How to evaluate suppliers.
  
  
• How to recognize red flags that can mean a problem supplier.
  
  
• That your best strategy is to work with fewer suppliers, if possible.
  
  
  

Section 4 Set Up Logistics

Set up an account with the drop shipper.

Supplier requirements vary but most drop shippers will ask you to fill out an online or paper seller application. Be prepared to give your company or business ID number (for the UK you can use dropshipping without having a company, whereas most US states and provinces require some sort of business identification number), your formal business name and, possibly, a reseller's certificate or evidence of VAT or VST registration. The need for the reseller's certificate or VAT/VST registration is essentially to prove to the supplier that you are a legitimate retailer who should not be charged sales tax or whose VAT or VST tax can be reclaimed, so it is advantageous to be registered for VAT. (Do you know enough about sales or consumption taxes? If not, brush up on these important responsibilities by taking our country specific company formation ecourses.)

Authorised Dealer Agreement

Your supplier may ask you to enter into an authorised dealer agreement (ADA). This type of agreement spells out the products involved, pricing and any other charges, supplier or manufacturer requirements for how you handle the product, dispute resolution, etc. Most of these issues are the typical components of a contract. The special area in an ADA involves product handling requirements. Examples of these special requirements include:

• Only approved product descriptions are published on your site to ensure that there are no false product claims.
  
  
• You may not sell for less than the purchase price to be sure that you do not undercut other resellers.
  
  
• You may not sell to overseas buyers in order to avoid customs issues.
  
  
• The supplier may not contact your customers except regarding the status of a particular order, e.g., no "special offer" advertising.

A proper agreement should offer protections to both parties.

Establish the payment method

As we explained earlier, the shipper may bill you as each item is ordered or may agree to bill you monthly.

Establish the mechanism for transmitting order information

Many drop shippers offer the ability for a direct link to their site to place order information. With many dropshippers you can build your site to incorporate the link into your own ordering page.

Establish a payment collection method for your business

Your website will need to include a method for accepting payments from your customer. Please review our setting up your own ecommerce website for useful information on available options.

Incorporate the drop shipper's transaction procedures into your site

Be sure that you have carefully identified shipping options, return policies, shipment tracking availability, complaint resolution procedures. If you are buying from a number of suppliers, you may run into the problem of differing policies. If possible, negotiate a set of standard practices across all suppliers.Your ability to achieve that level of standardization will depend on the size of the supplier, the volume of product you sell on their behalf, etc. If you find yourself needing to accommodate differing policies, be sure you communicate those policies to your customers on an item by item basis.

The final logistical step involves incorporating product information onto your site. This step is so key to selling success that we will discuss that process separately.

Product Incorporation

In almost every case, you will be placing pictures and descriptions of products onto your site. That information will come from your supplier. Unfortunately, not every supplier is as good at product promotion as we want you to be so you may have to take some additional steps to be sure that the products you intend to sell are presented in the most appealing way. Here are some tips.

1. Evaluate the product picture quality. Resolution should be at least 300 dpi to be usable. If images are fuzzy or not high quality enough, spend the time and money to order samples of all the products and have your own pictures taken. After all, your customer can't visit a store and touch the product - the only way they can evaluate your product is by looking at the picture. Don't shoot yourself in the foot with poor quality photography.
   
   
2. Look beyond technical quality to the setting of the product. Yes, you may want a close up, detailed image of those handmade African beads against a plain white background. But, you should also place those beads in a setting that allows the customer to envision how they could be used, in a beautiful hand-crafted necklace or making a striking statement as the edging on a tablecloth with colors that bring out the richness of the beads.
   
   
3. If you are selling a product where dimensions are important, such as a lamp, use a photo of the lamp in a proper living room or bedroom setting so your customer can see how the scale of the lamp fits with a standard sofa or bed.
   
   
4. If you can't afford professional photography and/or photo styling, you may be able to improve the selling value of a photo by using a photo editing program. For example, you might superimpose pet accessories on a photo (that you own the rights to) of a comfortable family home with Fido frolicking or waiting expectantly for dinner with that hand painted ceramic bowl prominently inserted in front of him.
   
   
5. Be sure that product descriptions are accurate, do not contain any typos, etc. If you feel that the descriptions can be made better, work with the supplier to make changes. Be sure your supplier agrees with any new wording.
   
   
   

Product Promotion

Remember, when you use drop shipping, your selling advantage is not only in the pricing deal you've achieved but also in your ability to reach your market and convince them to buy. This e-course doesn't cover the enormous area of Internet marketing. However, you may want to check out our other ecourses at this link.

What You Have Learned

By the end of this section, you will know:

• The step-by-step process for setting up a drop shipping relationship with special attention to the issues that should be discussed and agreed to between you and your suppliers.
  
  
• The issues you need to address on your site with special emphasis on communicating policies clearly.
  
  
• The value and importance of well-staged and produced photographs of your product.
  

Drop shipping is a wonderful, relatively simple way to make money on the Internet. However, you can only make money if you can sell the merchandise you are offering. In Section IV we talked a bit about the special issues of product promotion with drop shipped goods. Now let's look at how to work with your customer and, in particular, how to be sure that your customer is satisfied even when you do not control the supply chain.

Customer experience on your website

This is your expertise. Be sure that your site is designed to catch people's interest, the text speaks to their needs in ways that make sense to your target market and the pages are easy to navigate.

Product Information

As we discussed in Section IV, your pictures should be crisp, detailed and, if possible, depict your product in the right setting.

Product descriptions should give all the necessary information to make a decision about buying the product. For example:

• If you are selling clothes, be sure that you have a size guide. Clothing sizes should be fairly standard but they are not. You may want to add a screen that matches measurements to sizes. Or, amend descriptions to say, "generously sized" or "made for a smaller frame; if in doubt, order the next size larger."
  
  
• Provide dimensions, weight, material used (is that figurine resin or ceramic?) and any other defining characteristics.
  
  
• If your product is a consumable, made for children, needs to be used with caution, etc, be sure those issues are addressed, For example, "no peanut products involved in the preparation of this product" or "Small parts - not suitable for children under the age of three."
  
  
• If you are importing goods, be absolutely positive that the merchandise meets all relevant safety standards in the customer's location.
  
  
  

Ordering

Your ordering process should be easy to use. Be sure that your customer can move in and out of their "shopping basket" to look for more goods, decide on shipping options and so on. Many resellers lose customers at this point, just when they're ready to buy, because the ordering process is cumbersome. Remember, you are probably not the only vendor selling these products. Customers who place a high value on ease of use will pay a higher price elsewhere rather than wrestle with a bad ordering system.

Shipping Options

Explain the shipping options clearly. If you are using a variety of distributors, there may be several separate shipping charges that add up to more than your customer is willing to pay for shipping. You should either negotiate the same rate with all your suppliers or create an ordering system that accommodates S&H calculations using a variety of different structures. It's a sticky problem that you will have to solve the best way you can, given your particular circumstances. As we emphasized in Section III, keep your suppliers to the minimum needed to conduct your business.

Shipment Tracking

Be sure that both you and your customer receive tracking information as part of the supplier order confirmation process. Even if the customer can do the tracking, you want to be able to answer the phone and speak authoritatively about the status of the package, just as if you shipped it yourself.

Complaint Resolution

Some drop shippers also handle complaint resolution directly so you are truly out of the loop. Yes, that means no hassles for you but it also means that you don't really know if your customer is satisfied with the transaction. If you plan to build your business on repeat customers, you need to be absolutely sure that your customer is satisfied. One way to do that is to handle customer complaint resolution yourself. Another is to monitor supplier performance on a regular basis.

1. Become a "mystery shopper" on your own retail site. Order a product to be sent to a cooperative friend. Track the order to monitor delivery time. Inspect the packaging to make sure it matches your agreement with the supplier. Inspect the merchandise to be sure that you and your customers are getting exactly what you have sold them.
   
   
2. Pose as a customer and call with a problem. Evaluate how well you are handled.
   
   
   

Out of Stock, Back Orders

One of the most frequent problems with drop shippers is a delay in shipping because they are out of stock on an item. Unless your drop shipper offers real time inventory reporting, i.e., when the customer selects an item to purchase through your site, their electronic inventory is searched to assure that the item is available, there will be a delay in feedback about stock outs. If real time inventory reporting is not available, your customer will place an order with you and make electronic payment. The out-of-stock notice will come after you place the order with the supplier. To make this unpleasant situation easier, use the following approach:

1. Be sure your supplier sends an immediate confirmation to you and the customer.
   
   
2. Communicate with your customer immediately upon discovering an out of stock or shipping delay situation. Offer options such as money back or substitute item.

Delays and out of stocks happen, even with large suppliers. Your job is to manage the situation with your customer to make a difficult situation bearable.

What have you learned?

By the end of this section, you should know:

• Effective communication is the key to good customer service; communicate about products, about policies, about concerns.
  
  
• Make sure your website is easy to use.
  
  
• Don't let the supplier substitute their relationship with your customer for yours; that relationship is the lifeblood of your business.