Drop Shipping Explained
To understand drop shipping, we should first understand product distribution. Here's how it works.
Let's say LMN Manufacturers makes a product called Mom's Ankle Wax.
We'll say that Mom's Ankle Wax has been around for years.
It's a well-known brand name product that will, without a doubt, give you the shiniest ankles on your block.
Everybody wants some.
LMN Manufacturers makes Mom's Ankle Wax, but the company doesn't sell it directly to the public. It's a manufacturing operation. It's far too busy melting paraffin and waxing test ankles to go around building stores. It needs distributors, companies that will take the product and distribute it to places that will sell it.
Mom's Gets Around
For years, LMN Manufacturers has sold Mom's Ankle Wax to a company called OPQ Distributors. OPQ buys Mom's Ankle Wax by the truckload and pays $5 (U.S.) a case for it, which is a very good price. It's such a good price, it has its own name: the manufacturer's wholesale price.
OPQ Distributors works with a chain of retail stores called Wax R Us. These stores are on every street corner in every major city in the country. Wax R Us buys truckloads of Mom's Ankle Wax from OPQ Distributors for $10 a case. OPQ Distributors makes $5 on every case of Mom's Ankle Wax they sell to Wax R Us. This makes OPQ Distributors very happy.
Cases and cases of Mom's Ankle Wax arrive in the stockrooms of Wax R Us stores everywhere. The Wax R Us employees open those cases and pull 12 cans of Mom's Ankle Wax out of each case. With their pricing guns, they stick a price of $4.50 on each and every can.
Wax R Us stores make a total of $44 on each case of Mom's Ankle Wax.
Twelve cans at $4.50 per can totals $54. Subtract the $10 they paid for the case and the profit equals $44 per case.
Wax R Us is even happier than OPQ Distributors.
Waxing Happy
But the happiest of all are the people who can stroll into Wax R Us and purchase a can of Mom's Ankle Wax for only $4.50. They think this is a great price, and they're walking around with the shiniest ankles in town.
That's basic product distribution.
Drop shipping has been around for a long time, too. If you want to use a buzzword to impress a corporate type, call it "second-party addressing."
The Mom's Ankle Wax example describes the manufacturer-distributor-retailer relationship. When you use drop shipping to sell products on the Internet or anywhere else, you become the retailer in that relationship.
For our purposes, there are two kinds of retailer: the retailer who stocks products and the stockless retailer. Drop shipping means you become a stockless retailer.
Taking Stock
Let's imagine you want to open a retail store on the Internet. You have to have products to sell, right?
To stock products for your store, you'll have to rent warehouse space and pay for a shipping account with UPS or FedEx, unless you want to saddle up and trot down to the post office every day. Worst of all, you'll have to pay for those products up front.
For example, if you want to sell Mattel Toys, you can contact Mattel and they'll be happy to set you up as a retailer. I know; I've talked to them.
We had a nice conversation about setting up an account, placing orders and all the other wonderful things business owners discuss with each other when beginning a relationship. Toward the end of our conversation, this nice woman said to me, in an offhand manner, "By the way, your minimum first order must be at least $100,000."
That's one hundred thousand dollars, folks.
I nearly choked on my bagel. Needless to say, I do not stock Mattel products or anyone else's, for that matter.
Stocking products costs money. That's the bottom line. No matter what you sell, if you carry stock, you pay first and hope you sell later.
If you don't sell the products you buy, there'll be some very happy people at your next garage sale, and your bank will send you an amazing amount of undesirable mail.
There's a much better way.
Stockless Retailing
If you use drop shipping, you are not the drop shipper. The company supplying the products to your customers for you is the drop shipper. You become a "stockless retailer."
Here's how drop shipping works.
You open an Internet store with a shopping cart and the ability to accept credit cards.
You find a distributor willing to drop ship the products you want to sell.
You establish an account as a retailer with the distributor(s) you choose.
You receive images and descriptions of the products you want to sell from the distributor and post them on your Web site.
A customer visits your site and falls in love with a product you have priced at, say, $20. The item is purchased by credit card. Your store charges the credit card $20 plus your shipping fee.
Easy Terms
You e-mail the order to your distributor along with the customer's name and address.
The distributor sends the product directly to your customer, with your company's name on the package.
The distributor charges you the wholesale price of, say, $12, plus shipping.
Your customer gets a cool product from your store shipped to his door then tells friends about you; you make even more money.
There you have it. You just made $8 on one item. You didn't have to buy a whole bunch of the product and keep it in your warehouse, hoping you would sell it. You didn't have to pay to have it shipped to you and then pay to ship it to your customer. All you did was send e-mail to your distributor.
Keep in mind a lot of people out there want you to believe they are drop ship distributors. You need to find reputable distribution companies. A good rule to follow: A real wholesale drop ship distributor does not charge you a set-up fee for an account.
That's the drop shipping process in a nutshell.
About the Author:Chris Malta is host and writer of The Entrepreneur Magazine EBiz Radio Show, The Entrepreneur Magazine Product Sourcing Radio Show, and is Product Sourcing Editor for The eBay Radio Show, along with authoring four books, “What to Sell on eBay and Where to Get It”, “Starting your Internet Business Right”, “Understanding the Internet for Home Business”, and “Product Sourcing Scams Revealed”. Malta is also CEO of Worldwide Brands LLC.
