When you use drop shipping, you do not physically keep inventory in stock at your location. Instead, you take the order from your customer, then transfer that order to the drop shipper, who then packages and sends the order to your customer in packaging that is customized with your company details (this process is known as blind shipping).
Your profit is the difference between your selling price and the cost price you pay to the drop shipper for the merchandise. Typically, the shipping costs charged by the drop shipper are passed on directly to the end customer.
What are the advantages of drop shipping?
- No investment in inventory.
- No need to have an inventory clearance sale for items that haven’t sold
- No need to maintain a pick/pack/ship function for your business.
What are the disadvantages of drop shipping?
- You’re not in control of the inventory
- You may have to reconcile multiple drop shipper policies to your customers on your site
- You will pay a higher fee for products to cover the cost of individual handling.
Is it worth it?
In many cases, yes, because this method eases the demands on cash flow and keeps issues such as inventory management and shipping in the hands of experts. But, you’ll have to do your own analysis to be able to tell for sure.
CAUTION : One of the biggest issues a retailer faces in using the drop shipping method is connecting with a legitimate, reliable drop shipping group. Use this set of tips for selecting and verifying drop shippers.
1) Drop shippers vs. Drop Ship Services vs. Scam Artists
There are three possible scenarios you may encounter when looking for a drop shipper:
1. Legitimate drop shippers – These are wholesalers who also ship individual orders to clients’ customers. How can you tell someone is a legitimate drop shipper?
They will generally:
- Ask you for a business ID. As wholesalers they cannot normally sell retail quantities to the public.
- Ship within three days at the outside.
- Accept reasonable returns from your customers.
- Provide client references upon request, so you can verify their authenticity.
- Offer a secure payment method, so you are protected against online fraud.
They will not:
- Charge a membership fee to their dropship programs. (Some drop shippers will charge a setup fee to create your account that is refunded with the first order; that’s a fair way for them to cut down on “tire kickers”.)
- Ask for any other additional fees
- Suggest that you recruit other sellers
2. Drop Ship Services – A drop ship service maintains a list of wholesalers and goods. When you order from the service, they order from the appropriate wholesaler then package and ship to your client. They are, in effect, a “middle man” but they provide an aggregating and shipping service. Drop ship services are legitimate businesses that are entirely upfront with their clients about how they do business.
In effect they function as a middle man business between you and the wholesaler.
It’s a reasonable service and may be worth the extra cost to use. The point is, you understand that there is an extra cost and you can determine whether or not it’s worth it to you.
3. Scam Artists – These people set up websites to give the false impression that they are drop shippers when they are providing the same service as the drop ship service without the honesty. That means that you don’t know that you are paying higher prices that can make you less competitive.
2) How can you tell if a company or individual is scamming?
They will often:
- Offer complete websites then collect membership fees, maintenance fees and other fees that add to the cost of the product.
- Be new in the business (because they frequently close sites and open new ones as they are found out)
- Suggest that you can make more money by recruiting affiliate sellers.
- Suggest that you use Western Union or some unknown escrow company.
Don’t do business with one of these.
3) Finding a Drop Shipper
It can be tricky to find legitimate drop shippers. Here are some dos and don’ts.
- Use reputable trade portals.
- Check out vendors approved by EBay. Another good vetting organization.
- Check with your current wholesalers, if you are already in business. Many wholesalers will also drop ship but they tend not to advertise drop shipping since it’s more complex and probably less profitable.
- Buy lists of dropship wholesalers that are advertised. Traders who have done so find that they are useless or nearly useless.
- Do a basic Internet search. Legitimate drop shippers are not out there advertising for your business; scammers are.
4) Verifying a drop shipper
Before you get involved in negotiating a deal with a drop shipper, you should be sure that you are dealing with a legitimate company. Here are some tips for verifying drop shippers (or any other wholesaler).
1. Every company, regardless of country, has a business registration number of some kind. Ask the company to send you proof of its registration. However, don’t assume that a registration document is adequate proof. Document forgeries are simple and common on the Internet. The registration number is your first step. Second, find the business verification site in the country where the company is registered and check for the legitimacy of the number you have been provided.
Caution: Scam artists register their companies so it’s very possible that you will find a middleman or scam artist listed as a legitimate business when you check. Part 2 of that check is to determine how long the company has been in business. Most scammers don’t make it past one year. If the business has a track record that’s longer than one year, that’s a good sign.
2. Verify that the email address the company’s representative is writing from is in fact owned by the company. It is not uncommon for scammers to impersonate a legitimate company by using a free email address. Contact the company from their official website and ask them to confirm that the email you are corresponding with belongs to them.
3. Ask the supplier for customer references from buyers, including the reference company name, contact person, business address and contact number. Check the references by phoning them; call them at several times of the day and ask for general information. In addition to speaking with the reference company by phone, do the research to be sure they are legitimate, e.g., search for a website. Be aware that this method may not always be effective. Some suppliers may be unwilling to provide information on their customers or they may worry that you are a competitor trying to take business away from them.
4. If the supplier has a website, use Whois lookup and Domain name search to verify who has registered the supplier’s web domain name. If the contact information provided publicly in the whois differs from the contact information offered by the supplier, ask for an explanation and evaluate their response.
5. Ask the supplier for a bank reference then check out the bank. Locate and call the bank and ask if the company does business at that bank. Be very concerned if you discover that the contact has provided a personal bank account rather than a business account; this may indicate that they are too new to have a business account or that they simply do not have a business at all.
TIP: Many banks will not release information on a bank account. Try this: explain them you are trying to transfer money to the supplier’s account and that you are experiencing problems sending them your payment and therefore need to verify their details.
6. Use a credit check company to run a financial check on the company.
7. Check the company’s name at “The RipOffReport”, (www.ripoffreport.com) a website dedicated to publishing complaints about companies from consumers. To be fair, if you check this website, you should also check Reports Ripoff, ReportsRipOff.com – A Resource for Negative Report Scams, a site created to counter crazy consumer reports that are published on The Ripoff Report. You’ll have to use your judgment about what to believe.
8. Search on the company’s name and the word “scam” “complaints” “rip off” or “fraud” in several search engines. Carefully evaluate any information that you find.
Remember that most of these methods are not entirely foolproof and you may get some contradictory information that you have to sort through. Your goal in verifying is to build a picture with facts then decide if you feel comfortable moving forward.
5) Evaluating the Drop Ship Business Deal
You should have a straightforward conversation with your drop shipper so that you understand exactly what they are offering. You will need this information to decide whether or not to go forward. In the event that you choose to use the drop shipper, you will need to convey the information to your customers and develop your own policies to integrate with your drop shipper’s policies.
1. Evolution of the Product List
You want to know that the product list evolves over time as the popularity of products surges and diminishes. However, you also want to know that products that are the foundations of your business will be available on an ongoing basis. That means you don’t want the availability to be based on liquidations or anything else that could mean that the source will dry up at some near term point.
2. Product Availability
Availability is a related concept. Availability means that the drop shipper maintains an adequate stock so that there’s almost always product available when ordered. You may want to inquire about the ability to integrate their electronic stocking levels with your website so you can show your customer stock availability.
TIP: You may want to have several drop shippers available as back up for popular items. It’s sometimes worth it to absorb a little extra cost from the higher priced drop shipper if it means that your customer will get the product they ordered quickly.
CAUTION: Remember that if you use multiple vendors (which you probably should) you have to reconcile their policies on your site. The easiest way to do that is to establish fairly generous policies yourself and make up any gaps. For example, offer a 30 day return even though your drop shippers’ return policies vary from 15 days to 30 days. If you get a return on Day 23 to a 15 day policy shipper, just keep it on your shelf until the next customer orders it then ship it yourself. Alternatively, you can specify a returns policy each time you list a new product on your site, depending on the returns policy of the dropshipper that supplies you that product.
3. Sales/Copy and images
Drop shippers often supply these images because you, of course, do not have them in stock. Beware, however, that the clever customer will right click on your image and if comes from another site, it will be clear that you are not in possession of the product. You would do well to incorporate the images into your site in a direct way and label them so that they are displayed as your images.
Obviously pricing is key. You will need to research pricing offers to determine the price point that you can sell at and evaluate whether or not you can create a satisfactory return at that level.
TIP: When the drop shipper tells you the pricing, ask if that’s the best price available. It can’t hurt and you may get a better deal. You can also ask if the price can be lowered once you start ordering at a certain monthly quantity.
5. Shipping Time/Price/Packaging
Shipping is a key customer satisfaction issue. Most reputable drop shippers ship in three days maximum, with some delivering next day. Be sure that your drop shipper has worked out favorable shipping terms with major shippers so that your customers are not scared off by shipping fees.
You should also be sure that your drop shipper ships in plain packaging or offers to label the package with your brand name.
6. International Issues
24/7 availability can be important if you are using a drop shipper in a different country. You want to be able to process orders quickly, without time delays.
The availability of international shipping may also be important if you want a global audience.
7. Return and Refund Policy
You should expect your drop shipper to have a reasonable return policy. If they don’t, don’t use them.
TIP: The typical return scenario entails getting an RA (return authority) number from your drop shipper before you can return a product. Once they have issued the RA and you have returned the item, they will issue a refund. You don’t want to make your customer wait through that process; issue your own refund to them promptly and wait for the drop shipper to reimburse you.
Be sure that your drop shipper is willing to agree that they will not solicit your customer in any way for additional business, including using the name/address information as part of a separate mailing
Follow these tips and you are much more likely to establish a successful relationship with a reputable drop shipper.