May 12th, 2010 by Louise - Posted in How To Make Money
Dropshipping is becoming a very popular way of making money on the web. Individuals and small companies can sell a wide range of products without having the hassle of holding stock or dealing with shipping and returns.
For niche bloggers and website owners it is an ideal way to generate revenues from product sales without shifting focus from writing content to e-commerce.
This guide provides an introduction to dropshipping.
What Is Dropshipping?
Dropshipment or dropshipping is a type of e-commerce where a website sells products, but rather than holding stock they pass the orders to a manufacturer or wholesaler who dispatches the goods to the customer.
The website owner makes their profit on the difference between the wholesale price and what they sell the product for. For example, if a site about fishing sold a fishing rod for $100, they would send the order to the fishing rod manufacturer. The manufacturer would then invoice the website owner for the wholesale price of the rod, the postage & packaging and a handling fee:
Fishing rod sale price – $100
Fishing rod wholesale cost – $50
Post and packaging – $12
Handling fee – $10
Profit – $28
The Advantages Of Dropshipping
Dropshipping has many advantages and is a low risk way to get started with e-commerce:
- No need to hold stock – With dropshipping the manufacturer or wholesaler holds the stock. The website owner does not need to pay for any storage or warehousing (or fill their spare room). This is a huge advantage; no tied up capital, no wastage, no obsolete products, no risk
- No hassle with post, packing and returns – The more successful you are, the more hassle and time-consuming dealing with physical products and customers becomes. Dropshipping passes all this hassle onto someone else. These administration activities are reflected in the prices you will charged by the wholesaler but it is money well spent if e-commerce is not your core business
- Offer a wider range of products – Using dropshipping allows website owners to offer a much greater range of products because they don’t hold stock
- Bulk wholesale pricing – Usually wholesalers and manufacturers can offer dropshippers good pricing because they handle such high volumes
- Focus on what you do best – Any activity that distracts you from your core business, which for online publishers is creating great content, can have a negative impact on your success. Dropshipping keeps the distraction to a minimum whilst bringing in extra revenue
- No wastage and obsolete stock – Every retailer knows that a percentage of their stock always ends up damaged, unsold or obsolete. Dropshipping eliminates this risk as no stock is held
- Experimentation with new products – Dropshipping enables website owners to instantly add new products to their site. They can experiment with new stuff or quickly react to changes in the market
The Disadvantages of Dropshipping
While the advantages of dropshipping are compelling, you must also be aware of the disadvantages:
- Your reputation is at stake – As far as your customers are concerned you are the retailer and supplier of the products they buy from your website. If their orders are incorrect, late or damaged, they will (rightly) blame you. If your dropshipper proves to be unreliable get rid of them quickly; it’s your reputation that’s at stake!
- Look out for extra charges – Some dropshippers offer low product prices but then load on lots of extra charges. These can include administration, after hours processing, dealing with returns, customer service calls, etc. When choosing a dropshipper be sure you understand ALL the charges
- Uncompetitive prices – Some dropshippers take advantage of inexperienced website owners and charge unreasonable and uncompetitive prices. Always try to get prices for the same products from several suppliers
- Cheap, poor quality couriers – Delivery is a big part of the customer experience and there is a massive difference between the quality of couriers. If the products are not small enough to be delivered via standard post and pushed through a letterbox, find out who the courier company is. Few things will upset your customers more than having to take a day off to take delivery or drive 20 miles to a courier’s depot for collection
- Payment terms – Some dropshippers will ask for payment before they dispatch the products to your customers. This is understandable, particularly if they don’t know you. However you need to understand how they handle returns, refunds, chargebacks, etc. Many try to pass on all the risk to you. The better ones share the risk or at least have a fair process for sorting out issues. After you have built up relationship with a supplier ask for credit terms e.g. one invoice a month with 30 days to pay it. This will help reduce your time spent on admin and improve your cash flow
- Returns policy – Returns are a big issue. Good dropshippers handle them for free or have a reasonable fixed fee for dealing with them. Poor dropshippers have a handling fee AND charge the retailer for the full price of the product(s). They will argue that a returned product cannot be resold. This should be their risk . . . or at least a shared risk. Get their returns policy in writing
Finding a Dropship Partner
The best value dropship deals are usually offered by the product manufacturer. With no middlemen they can offer the best prices and they tend to have more pride in their customer service. Approach manufacturers directly to ask if they offer this service.
If a manufacturer does not dropship then ask them for the name of their distributors who do.
If you are looking for a dropshipper who offers a range of products from lots of different manufacturers use Google. For example, if you were looking for fishing equipment, try phrases like:
- fishing drop ship
- fishing dropship
- fishing drop shipping
- fishing dropshipping
- fishing equipment distributor
- fishing equipment wholesaler
It may take a bit of investigation to find relevant suppliers, particularly for niche products.
Another good source is drop ship forums where members discuss dropship opportunities. In the UK have a look at www.dropshipforum.co.uk.
Ask Your Dropshipper The Right Questions
Once you have found a dropshipper with the products you want, make sure you ask the right questions. This will reduce the chance of being ripped off or scammed:
Question #1 – “What are the wholesale prices I will pay for your products?”
You’ll need to make sure the wholesale price they offer is low enough that you’ll be able to generate a good profit based on what you’ll be able to sell their products for.
Question #2 – “Do you charge a handling fee for dropshipping? If so, how much?”
Most companies that dropship simply add the cost of the courier or postage to the wholesale price, but some also charge a handling fee (generally between $1 and $10). This is to offset their cost of picking, packing, and processing the orders for you.
Question #3 – “How do you ship your products?”
Almost every company that drop ships products will use a major nationwide delivery service like UPS or FedEx. If they don’t do some research into the reliability of the courier they do use. Ask them to include the tracking number with the order confirmation email. This will save you having to field lots of calls from clients asking “Where’s my order?”
Question #4 – “How do you bill?”
Most dropshippers will want to bill your credit card for the wholesale price of the product plus shipping as soon as they receive an order from your site. But try to get 30 days credit. This will help with your cash flow.
Question #5 – “How do you deal with product returns?”
Be sure to find out what their returns policy is. Reputable companies will offer a guarantee or warranty with their products and will deal with all returns. If the manufacturer or distributor doesn’t accept returns, be wary! You’ll be stuck replacing defective merchandise and dealing with angry customers.
Question #6 – “Can I have my branding and address on the parcel?”
The more sophisticated dropshippers will allow you to brand the parcel and label, or even insert some of your marketing material in the package. This will help you generate repeat orders so it can be valuable.
Finally, try to get some reference clients who you can call to ask how the dropshipper performs.
The Dropshipping Process
It’s fairly easy to get started, the barriers to entry are low and you shouldn’t have to invest much money up front.
- Set up a online store on your website
- Find wholesale suppliers of products you wish to sell that will dropship
- Open an account with the company
- Add the products to your store, using content and images provided by the dropshipper or produced by yourself
- Add payment processing. PayPal is the easiest and quickest
- When an order is placed on your site, you should be alerted by email
- Pass the customer details to the dropshipper
- The dropshipper should then bill you at the price you have agreed, plus any extra charges
- The dropshipper then fulfils the order
Dropshipping can be a fantastic way of generating revenues from your site. It enables you to start selling products without investing in stock with all the risks this involves.
However there are a lot of scammers and poor quality dropshippers so you need to invest time to find reliable and honest partners. Once in place you should see your revenues rapidly grow.