Drop Shipping: A Viable Business Model if You Can Avoid the Scams

You’ve probably seen eBay PowerSellers offering discounted brand name items through dozens of posted auctions at a time. Alternately, you may have noticed how some Amazon sellers never offer fewer than 100 items on their featured sites. Perhaps you’ve wondered where and how these sellers get their merchandise and then are able to sell it so cheaply. Additionally, how much money do they make in such a business? More often than not, such sellers obtain their bulk merchandise through drop shipping intermediates.

What is Drop Shipping?

Drop shipping is a special type of retailing technique where the retailer keeps no merchandise in stock but instead transfers the responsibilities for holding product and fulfilling customer orders to a wholesaler or distributor. The retailer typically makes his/her profit from the difference in retail versus wholesale product price. The wholesaler or distributor, meanwhile, saves money by not operating a retail store and by having a salesperson that can sell product quickly.

Almost anyone can get started with drop shipping and make money from it. There is no government oversight of drop shippers and you do not need a special license to start listing wholesale items on your website or an auction site like eBay. However, it may be a good idea to obtain a general business license from your home state or municipality, since you are running a legitimate business and need to operate legally. Your state or city government small business office or the SBA (U.S. Small Business Administration) can help you out.

There is also the matter of sales tax; most states require sales tax collection if the company that sells the products is located in the same state as the customer. With drop shipping, however, this situation gets complicated since the question arises of who actually sold the product to the customer. While you, the drop shipper, advertised the product and collected payment on it, you never actually owned or possessed the product itself. In such a case, it doesn’t hurt to enlist the services of a business accountant in your state.

Beware of drop shipping scams!

Before you can start drop shipping, you need to find wholesalers and distributors. Many online sites claim that they will get you in contact with lots of wholesalers and/or distributors whose products you can easily click and drag to your online store. These sites are called drop shipping aggregators (or drop ship warehouse companies) and are essentially middlemen between you and the wholesaler/distributor. The problem with using aggregators is that there isn’t much of a price difference between the merchandise offered to you versus what’s being offered on eBay or Amazon. Thus, it’s very difficult to achieve any significant profit margin on what you end up selling (since most of the price difference has been claimed by the aggregator). Oh, and did I mention that you will also need to pay a membership fee to establish your store and sell products under the aggregator?

What really shocked me was finding out just how ingenious these aggregators are. Some aggregator sites like WorldWideBrands, Salehoo and Doba charge you a membership fee on the premise that they find the wholesalers for you, thus cutting out a significant portion of your workload. Other sites, however, know that you are looking for the “Holy Grail” of wholesaler/distributor information and will pretend to be the actual wholesalers/distributors. For example, an “objective” article on Yahoo! Voices claimed to provide a first person account of how the author used three wholesale sites to find and sell discounted products. When I clicked on these three different links, all of them directed me to the same squeeze page that wanted $200 for a list of wholesalers. Um…no!

I’m not saying that there aren’t legitimate aggregator sites that provide actual contact information for wholesalers. However, after perusing various online scam reports, I found out that most of the provided wholesaler/distributor lists are horribly outdated. Furthermore, since many hapless individuals have already purchased the advertised lists, those wholesalers are probably working with a number of retailers and don’t need you. In summary, it’s unlikely that you’re going to get anywhere by searching online for wholesalers/distributors.

So, how do you find wholesalers and distributors?

Arguably, finding your first two or three wholesalers/distributors is going to be the hardest part of the entire drop shipping business. However, here are some steps you can take to get started:

• Direct inquiries
  Email and/or call given manufacturers to find out if they do drop shipping and, if so, do they deal with retailers directly or through a distributor. Doing this will entail that you know the business first-hand; for example, if you wish to sell Bath & Body Works products, you should know that it operates under the parent company Limited Brands in Columbus, Ohio. On the company’s online FAQs site, it does appear that Limited Brands works with suppliers and subcontractors. Going on this information, you could contact Limited Brands and inquire about whether or not it participates in drop shipping.
• Trade publications
  Many business-to-business (B2B) publications are available for free through sites like Free Trade Magazine Source. You might consider subscribing to a few magazines that are within your desired selling niche. These publications frequently list product manufacturers as well as who should be contacted directly.
• Basic legwork
  If you know of a factory or manufacturer in your geographic area, don’t hesitate to go over there (after first making an appointment) and find out if it would be interested in a drop shipping arrangement. Making personal contacts could be the best way to get you in the drop shipping door.

What’s next?

Once you have a few direct product lines set up, highly consider obtaining a domain name for your business and creating a website. Also, establish a merchant account with Paypal so that you can start accepting larger sums of money and not have customers leaving your site while paying for an item. Look into shopping cart platforms while you’re at it; Magento, OSCommerce, and 3DCart all work well with Paypal and give your website a professional retail look.

Of course, you can just sell your products through places like eBay and Amazon; however, the commissions on your sales may eat into a significant portion of your profits. Furthermore, many customers will want to see what other products you are offering through your website. It’s a lot less work to have a sales page posted on a web page than to always be listing new auctions on eBay and Amazon.

Advantages and disadvantages of drop shipping

There are several big advantages with having a drop shipping business:

No inventory. You don’t have to rent space to hold inventory or fill your house with merchandise that might be damaged or stolen.

No need to ship. The wholesaler/distributor packs and ships your sold merchandise, saving you the time and hassle of weighing packages and going to the post office.

There are also some disadvantages:

Little control over merchandise. You’re going to have some issues with accurately describing your items to potential customers, especially if they want additional information like product measurements or material composition. In most cases, obtaining such information will require that you contact the supplier on the customer’s behalf.

Little control over shipment. If the wholesaler/distributors ships something and it gets lost or breaks, this is going to reflect badly on you and not the shipper. Again, you will need to work with your wholesaler/distributor to rectify the situation.

Retailer responsibility. No matter whose fault it is, you are ultimately responsible for making things right with the customer. You must never give out your wholesaler’s/distributor’s information and ask your customer to contact the company directly; not only is this highly unprofessional, it also negates the customer’s need to deal with you (i.e., the customer can now get the wholesale discount on his/her own).

The Bottom Line

If you can do your homework and make the necessary contacts with several wholesalers/distributors, drop shipping may be a good source of income for you. Some people even do drop shipping as their full-time business, making a good profit from the hundreds or even thousands of products sold every month. For example, Chris Guillebeau of The $100 Startup writes in his book section “Stumbling onto Freedom” how he “…started by importing coffee from Jamaica, selling it online because I saw other people making money from it; I didn’t have any special skills in importing, roasting, or selling.”

Beware of any shortcut methods when obtaining wholesaler/distributor lists, however; most list sites are scams and sell irrelevant lists that get you nowhere or put you in direct competition with a hundred other retailers. In short, don’t take shortcuts.