Update 2019 - I am no longer a fan of dropshipping. If you come across this page, you should realize that I have changed my position. The information below was written before I learned about the inner workings of the dropshipping business model. I am keeping the page active so you can learn about the business model.
Did you know you could get
paid to dropship?
Wait! You don't know what dropshipping is?
Or perhaps you've heard the term but weren't really familiar with what it was.
I will be exploring dropshipping in this article to not only help you understand what it is, but to help you determine if you should implement it.
Grammatical Side Note: The word dropshipping does not appear to be a single word. Officially, it is drop shipping. But it is always referred to by most as a single word. In fact, a quoted Google search for "dropshipping" brings up many more results than a quoted Google search for "drop shipping". It's the other way around for a quote Bing search. I will be using "dropshipping" throughout.
Dropshipping Defined
When a vendor chooses to incorporate dropshipping, they are not holding any product in inventory. Instead, when they receive an order for a product from a customer, the vendor will order the product from a third party supplier and that supplier will ship the order to the customer. The vendor charges the customer a higher price than the supplier charges the vendor, resulting in a profit.
Advantages of Dropshipping
- No need to hold inventory hence less capital outlay needed
- Fulfillment of orders handled by suppliers
- Diversification of products and/or suppliers
- Relative Ease of Setting This Type of Business Up
- Can be run from any location if its exclusively online
Disadvantages of Dropshipping
- Supplier could be out of stock
- Fees for dropshipping can eat into profit margins
- Shipping costs are controlled by supplier
- Dropshipper must handle returns unless other arrangements are made with supplier
- Some suppliers will not white label the shipping labels (to be explained)
- Customer orders several products in one order and they are sourced by different suppliers, resulting in shipping charges for each supplier
- Competition is fierce due to low barriers to entry
What's Your Verdict?
Based on the advantages and disadvantages it seems like it could go either way. If you look at the advantages you could get started very quickly and be up and running in practically no time.
The disadvantages are something that really need to be considered however. You can't take this lightly because the profit margins on this type of business model are tight. Any adverse situation will squeeze them further.
Preliminary Considerations
There is some housekeeping that needs to take place before you start listing your products. You will encounter problems with your dropshipping business if you ignore these! Click on the arrows for more details for each item:
Ask Supplier for Price List
Make Sure You Are Crystal Clear on Shipping Fees and Handling Charges
Understand the Supplier's Return Policies
Make Sure Your Profit Margins Actually Allow For Profit
Stay Away From The Hottest Selling Categories
Factor in Other Costs
Overview of Process Flow
The following is an overview of how the sales process works in a dropshipping transaction (click on each arrow to find out more information bout each item):
List The Product for a Price Higher Than The Supplier Gives
Buyer Purchases Item
Purchase Item from Supplier and Have Them Ship to Customer
Make Sure Your Customer Service is Impeccable
Other Considerations
When you make sales online, there are certain conditions that can require you to charge sales tax on your purchases. It used to be that sales online were pure and you didn't have to charge taxes on sales. That is still true in many instances but is getting much more fuzzy. Governments all over the world are looking for loopholes that can give them an excuse for them to get online retailers to charge tax. It stinks but it is a consideration. Whoever deals with the customer direct, is the one responsible for charging tax. That is usually the dropshipping entity.
Another factor is any kind of state licensing that could be required. Some products require special provisions in order to be sold. Also, along the lines of sales tax, you may need to obtain a sales certificate from your state specifying that you are exempt from being charged sales tax from your supplier. Many supplier may require this and won't do business with you if you don't possess this certificate.
Disclaimer: The information in this report is for information purposes only and should not be misconstrued as giving any kind of legal, tax, or even business advice. Consult the proper professionals to get the appropriate advise for your business.