Drop shipping is a common way to get merchandise to sell either in a web-based store, or on an auction site like eBay. It can be an excellent choice for starting a home business when you don’t have a lot of capital because you don’t pay for the merchandise until you sell it.
Drop shipping works like this: You find a drop shipping company and you pick out an item to sell from their catalog: a big screen TV. You put up the big screen TV for sale on eBay. Your minimum bid price is $800, your auction runs its course and the winning bid is $850. The winning bidder sends you the cost of the TV plus the shipping costs that you specify along with his or her shipping address. With the money you’ve received from the winning bidder, you place an order with your drop shipper for the big screen TV you sold and you pay your drop shipper’s wholesale price plus shipping and the drop ship fee, which amounts to a total of $700. You profit $150 on the deal.
The above is a rather simplistic view of the drop shipping process, but you
can see that it has some immediate advantages. However, it has some unique disadvantages as well.
-No stock to worry about: You don’t need to set aside room for your merchandise, or secure warehouse space to store it. This is a big advantage to anyone just starting out or running a business out of their home.
-No shipping concerns: Since the drop shipper is responsible for shipping the merchandise to the buyer, you don’t need to concern yourself with the logistics of getting the item packaged and prepared to ship and getting it out in the mail. This is especially important if the items you want to sell are large, like big screen TVs.
-No inventory costs: Since you only pay for merchandise once you have sold it, you don’t have any inventory expenses and there is less risk of losing money because you’re unable to sell stock that you’ve purchased.
-Item pictures provided: You don’t need to fiddle with taking pictures of the items you are selling since the drop shipping company will have pictures of the items in its catalog which you can use on eBay or your web store.
-It can be difficult to make a profit: While the price you pay the drop shipper is the wholesale price of the item, it is often higher than if you bought the inventory outright. This is because you are buying one item at a time and therefore you don’t have the advantage of the bulk discount rate. As such, profit margins can be slim, and in some instances, none, especially when factoring the other costs of drop shipping such as any fees or monthly membership charges.
-Out of stock/back-order issues: Since you don’t have any control over the merchandise, the item you are selling may turn out to be on back-order, making it impossible for you to fill your customer’s order in a timely manner. This can mitigated somewhat by finding a drop shipping company that is good about communicating any out of stock situations ahead of time.
-Drop Ship scams: There are some scam companies out there who claim to be wholesale drop shippers when in actuality, they are just middlemen, acquiring the product from true drop shippers or wholesalers, and selling it to you at a marked up price, all the while claiming to be charging you wholesale.
If you are going to start a drop shipping business, please take into account the advantages and disadvantages listed here as well as doing further research into drop shipping. As always, know the company you are dealing with and make sure that they are reputable.