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.
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