Your customer sees a marvelous array of products on your website. After thoughtful consideration, she purchases the product she wants. Amazingly, you have never actually seen the product. That is because your supplier shipped the order directly to her.
1. Problems With Stocking Inventory
After deciding what products you will sell, you are immediately faced with many challenges.
First: “To stock my products, will I need to rent store or warehouse space? I was hoping to sell by Internet, mail order, or export, but I don’t have much storage space for inventory at home.”
Second: “Will the supplier even deal with me if I don’t have a retail location? I was counting on keeping my overhead down by operating from home.”
Third: “I know that many manufacturers and distributors have a minimum order, sometimes in the thousands of dollars. I don’t have that kind of money!”
Fourth: “Even if I did have the money, why should I tie it up in inventory? How do I know if the product will even sell?”
Fifth: “I guess I will have to add extra insurance coverage for my inventory. Maybe I better upgrade my security system while I’m at it.”
Sixth: “The shipping charges are going to kill me. First, I have to pay to get the goods here (freight-in). Then, I have to pay to ship the goods out to my customers (freight-out).”
Seventh: “If I expand and hire employees, how will I control the inventory? How will I know if my employees are stealing from me?”
Eighth: “How much time and money am I going to spend packaging and fulfilling orders?”
These problems can be reduced or eliminated by drop shipping.
2. Drop Shipping to the Rescue
Drop shipping is a method of selling products without stocking inventory yourself. You don’t need to stock inventory, because you only order an item when a customer requests it.
With drop shipping, when you make a sale you contact the manufacturer or authorized distributor and make arrangements to pay for the order at your wholesale cost. Your distributor then ships the product to the customer with your invoice and shipping label.
For example, let’s assume that you have just sold a product to a customer for $100.00 plus shipping charges of $15.00. Having received the customer’s payment, you now need to fax or otherwise send your order to your drop ship supplier. You will need to pay your supplier, by credit card or other means, your cost of $50.00 plus $15.00 shipping. This leaves you a $50.00 gross profit. Your supplier will now ship the product to your customer.
With this arrangement of not having to stock inventory yourself, there are many advantages.
You eliminate the high costs of holding inventory. There is no need for you to rent expensive storage space, finance high minimum orders, get stuck with goods that don’t sell, or pay other expenses associated with maintaining inventory.
Indirectly, you do pay inventory costs. Your drop ship supplier must maintain his inventory and pay all associated costs, including freight-in, storage space, insurance, accounting, shrinkage, and so on. To make a profit, he must pass these costs on to you.
The real advantage to this drop shipping arrangement lies in keeping your costs variable. Instead of being stuck with these expenses up front, whether you sell or not, you pay only when you make a sale.
3. Profit From Drop Shipping
Many legitimate drop ship suppliers may not require you to have a retail location, but they will want to see evidence that you are in business. They may require you to produce a resale license or retail sales tax permit.
To be sure, there are pitfalls to watch out for in drop shipping. For example, some suppliers claim to sell at wholesale prices but are actually selling closer to retail. Also, margins are very slim in some competitive areas, such as electronics. However, with proper research and information, you should be able to avoid these problems.
Whether from your home, retail store, directly from your website or through an online auction, you can arrange to sell an item before you purchase it. That way you have nothing invested in inventory and won’t get stuck with stock that won’t sell.
Rather than financing and stocking inventory yourself, consider drop shipping your way to wealth.