Am I Too Critical of Drop Shipping?
Let me go on record to state that I love the concept of drop shipping. I mean, who wants to store pallets of product and risk not being able to sell? Drop shipping is a great alternative to keeping inventory. But, it has its problems, too! This article explores the question, am I too critical of drop shipping?
What Is Drop Shipping?
Let's start with learning about drop shipping. It's a concept where manufacturers or distributors ship single products from their inventory. Instead of selling you bulk orders, they allow you to sell one or two items.
The process works as follows:
- You make a drop shipping arrangement with a supplier.
- The supplier gives you a catalog of prices and fees for the products.
- You list products on your website and take care of payment processing.
- You mark up the price of the products listed on your website.
- You pay the supplier the price of the product that you given in the catalog and fees such as shipping and drop shipping.
- Hopefully, the price you charged the customer is greater than the price plus fees that were charged by the vendor.
Suppose you find a vendor willing to let you drop ship computer mice. You determine these mice to be hot sellers. The manufacturer charges you $10 per mouse and a $5 drop shipping fee. This will cost you $15 to sell these mice.
For now, let's forget the shipping costs as the location of your customers will impact this. But, when you start drop shipping, these costs must be considered. Taxes are also excluded for simplicity.
You decide to list the product on your website for $21. Your customer pays via your payment processor, the full $21 (again, not including shipping).
A customer buys from you. On the supplier's website, you enter the order details, including the number of items bought and the address of your customer. This address will be used as the shipping address.
You pay the supplier $15. As you can see, you made $6 on this sale ($21 - $15). You did not have to carry any inventory. The $6 represents a profit of 40% ($6/$15).
What Are the Benefits?
The above example seems like drop shipping is a no brainer concept, right? In theory, it is. Here are some of the benefits:
- No inventory
- Less capital needed
- Wide selection of products to offer
- Can test products to see which sell, keep ones that sell, discard ones that don't
- It's relatively an easy business model to set up
- Can use drop shipped products to attract customers to your website (loss leader)
- When you find the right products, selling is somewhat passive. Just process the orders and tell vendors where to ship
- Supplier handles the fulfillment
What About the Challenges?
- You deal directly with customers, including returns and complaints
- You are at the mercy of suppliers. If items are out-of-stock, you are out-of-luck
- Suppliers can also raise prices to squash your profit margins
- Competition is fierce, especially now that gurus are touting the benefits of drop shipping. Competitors will also watch for hot-selling items
- Pay shipping, drop shipping fees, and taxes. These all eat into margins
- Hard to package products, especially when dealing with multiple vendors
- Constantly have to look for higher-margin products, when competitors break in
- Payment processors can cause you annoyance, but this is true when you sell bulk, too
Who Says I Am Critical of Drop Shipping?
On some trade groups I belong to, I made the case about how drop shipping may not be the best solution. I explained my experience with the business model. The comments I received were mixed. Several people stated I was being a Debbie Downer and that I should not be so negative. I did get people thanking me for letting them know the risks, however.
I am unapologetic about helping people recognize risks with any business model. I refuse to sugarcoat something simply to spare the feelings of sensitive people.
I don't know about you, but I would rather know the risks than to have to learn them the hard way. In fact, I learned them the hard way and that is why I let others know what they are in for.
This doesn't mean people shouldn't pursue drop shipping. It just means they should be aware of the pros and cons. That's all!
I Have Made Money In Drop Shipping
In the spirit of full disclosure, I have made money with drop shipping. I have contacted several suppliers and made arrangements with them. I was doing okay, except that I ran into the challenges described in this article.
This led me to find a better business model that could answer most of the challenges. I found one which I will get to further in this article. Stick with reading this.
Is Drop Shipping Right for Everyone?
You probably can guess that I will state that drop shipping is not right for everyone. If you feel you'll get frustrated with the challenges I described, perhaps you too, should find an alternative business model.
You can make drop shipping work. People have done it and continue to do it. I know of people how make a decent living from it.
More Power to them!
Feel free to pursue it yourself, if you are so inclined. I just hope that you are one of the people who learns about the risks before jumping in.
Are There Alternatives to Drop Shipping?
There are many ways to make money, especially online. You may find several different models and perhaps use a combination of them. You could sell books on Amazon. You could become a freelancer. You can start an agency and manage a bunch of freelancers.
The possibilities are limited only by your imagination.
I make my money exclusively online. I haven't worked for a boss for quite some time now. You can have that as well.
When you seek out alternatives to drop shipping, you'll want something that:
- Is easy to set up
- Doesn't require inventory
- Doesn't require payment processing or fulfilment of products on your part.
- Don't have to deal with customers directly.
- Is relatively easy to learn
- Has decent profit margins
- Has less-intensive competitive pressures
The Big Reveal - Drumroll Please!
What is this seemingly magical business model that seems to answer most of the challenges associated with drop shipping?
The business model is affiliate marketing.
If you aren't familiar with this business model, you can think of it as being paid for visitors to your website who buy products from vendors that you set up agreements with.
I'll describe the intricacies of the business model later (don't worry, it's not complicated, at all!)
You work with a vendor that sells computer mice. Only this time, instead of setting up a website with a product listing and payment processor, you place banners and links on your website. These banners and links are coded with an id that identifies that the traffic came from your website.
When a customer clicks on a banner or link and makes a purchase, the vendor credits you with a commission. This commission is usually agreed upon before the arrangement. It will vary depending on the product and the vendor.
Suppose you establish a vendor relationship and negotiate a 50% commission. Also, assume that the vendor is selling the mouse for $24. With the affiliate arrangement, when the visitor to your website clicks on the mouse link or banner, then makes a purchase, you'll receive $12 for the sale.
Will you always get 50% commission? Probably not. It depends on the vendor and the products. Some information products offer even higher commissions. In fact, commissions of 100% for information products are not uncommon.
Why would a vendor want to offer 100% commission on product? Because, he or she wants to receive the sign up from your customer to their mailing list. They give you the full amount of the sale in exchange.
Why Would Vendors Offer Affiliate Arrangements?
You may be wondering why a vendor would even get involved with such an arrangement as affiliate marketing. However, when you think about traditional businesses, they would hire a salesforce. The success of the business was usually tied to how well that salesforce did its job in brining in new customers.
Like anything else in life, some salespeople had stellar growth while the majority were average. Some stunk up the join, if you know what I mean. However, vendors were often left with paying salaries and benefits to both the good and the bad salespeople.
With affiliate arrangements, guess how much a vendor has to pay affiliates? Only the agreed upon commission on sales driven by the affiliate. That's it! There are not benefits or salaries. There are no expense accounts. That translates to significant savings.
What happens if an affiliate doesn't sell? Who cares? Companies don't pay them.
Of course, depending on the affiliate management software the vendor uses, there will be some costs per affiliate. But, it won't be much. On some platforms where this cost is high, vendors will simply dump the poor performing affiliates. But, there are plenty of platforms where the cost of housing affiliate tracking is minimal. And, it's the only cost the vendor will have to bear with respect to the affiliates.
For the vendor, having affiliates adds to the bottom line significantly. One affiliate may not do much. But, what about 1000? You an see how this can add up quickly.
Is Affiliate Marketing a New Concept?
It turns out that affiliate marketing has existed since the 1990s. 800 Flowers is regarded as being the first vendor to offer such an arrangement. By the way, have you ever used the services of AAA? If so, you are using one giant affiliate network. AAA doesn't offer direct roadside assistance. They find companies willing to do it for them and receive a commission.
Who Else Offers Affiliate Arrangements?
These days, a better question to ask is who doesn't offer affiliate arrangements. It's too lucrative for vendors to pass up. What this means to affiliates is that they can sell virtually every product.
Amazon offers an affiliate program. They call it an associates program. Same concept, though.
You'll also find companies that manage affiliate relationships on behalf of vendors. CJ.com and Linkshare.com are two well-known affiliate tracking companies. But, there are plenty of others.
Are Affiliate Businesses Really This Easy?
Actually, yes. However, there is a right and a wrong way to do everything, including affiliate marketing. Learn it correctly from the start and you'll be better positioned to make money.
How do you learn the right way? I am giving you access to training that will show you step-by-step, how to create an affiliate business.
There are two membership levels to this training, one is the free (or starter) membership, and the other is the paid (premium) membership.
Now, you may think I will try to encourage you to go for the paid, right? After all, I would receive a commission if you do.
While it would be nice to collect a commission, I would rather see you learn without feeling the pressure to earn. Many people get stressed out by paying for a membership and then not producing to justify the membership cost.
Of course, there are those who will excel with a paid membership. These subscription payment gives them the motivation they need to produce.
Everyone is different. However, joining for free is a low-risk scenario. That is why I prefer recommending you go that, even though I won't receive the full commission. I am okay with that as I would rather help people out than collect a commission. If you find later that you want advance training and tools, then you can choose to upgrade at anytime.
One last item - if you are a person who doesn't take action, then you should not sign up for this program. You won't get anything out of it. I am not saying this to be mean, just realistic. The membership is meant for people who are serious about starting an affiliate business.
It's okay if you are not serious. This business, just like drop shipping, is not for everyone. But, if you are going to sign up, I ask that you do so only if you plan on taking action.
I will help you if you are serious. Simply reach out to me and I'll answer any questions or concerns you have. Oh, and I am not the only one willing to help. There are literally thousands of other membmers who have succeeded with their affiliate businesses.
Disclosure: site owner may receive commissions on sales from clicks on this page.
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Please, only serious candidates should apply!