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Use Drop Shipping To Set Up A Successful Online Store Selling Name Brand Products... Without Spending A Dime On Inventory!

Let's face it: Not everyone wants to develop, design, and manufacture their own products. You may be more interested in finding great products that already exist and then using your online marketing know-how to build a successful business.

But what if you DON'T want the hassles of things like tracking your inventory, setting up warehouse space, and maintaining a confusing shipping/receiving infrastructure? Wouldn't it be great if there was a way to set up a business online WITHOUT having to deal with all these issues?

Well, there IS a way to avoid these headaches: a technique known as "drop shipping." This model lets you sell quality, brand-name products on your web site for a hefty profit, and the drop shipper takes care of fulfilling the order. They warehouse the stock, pack the orders, and ship it out to your customers.

But be warned: There are both advantages and disadvantages to this model. Keep reading, and I'll tell you how to steer clear of the scam artists and identify great partners who will ship brand-name products for you... on your behalf... all while generating solid profits for you!

How Drop Shipping Works:

"Drop shipping" is simply an arrangement between you and the manufacturer or distributor of the product you sell whereby the manufacturer or distributor -- NOT YOU -- ships the product to your customers.

Here's an example: Let's say Mary wants to set up a site that sells skin care products. Instead of filling her basement with cases and cases of stock, and then going downstairs each time an order comes in, Mary puts together a drop shipping arrangement with a manufacturer who ships the products to her customers directly.

And the best part is that the manufacturer will happily ship the products using shipping labels with Mary's company's name, address, and logo instead of their own. The product arrives at the customer's house a few days later, and they never know that the product wasn't shipped directly from Mary's warehouse!

Let's say Mary has a product called the "Total Skin Care Package," priced at $97. A customer visits her site, places an order, and is billed $97 plus $11 for shipping and handling. Mary then sends her distributor an e-mail with her customer's order and shipping information. The manufacturer packs up the customer's order, puts Mary's shipping label on the package, and mails it out via UPS or FedEx, usually within 48 hours.

The distributor then bills Mary for the WHOLESALE price of the "Total Skin Care Package" -- in this case, $64 plus $11 for shipping and handling. Since Mary has passed the shipping and handling fee on to her customer, she has just netted a profit of $33. And all she had to do was send her manufacturer an e-mail!

Drop Shipping Advantages:

There are a few huge advantages to this model. First, it saves you the cost of building your own inventory. If you're like most people starting a small business, you don't have a ton of extra money lying around. The last thing you want to do is tie up your cash in inventory that you may or may not be able to sell.

No inventory also means no leftovers. If the product you sell suddenly becomes outdated, obsolete, or just plain un-trendy, you aren't the one with a house full of stock that nobody will buy. Many online retailers find themselves having to offer deep discounts -- and taking huge losses -- on old products just to get them out of their homes to make room for more inventory!

You'll also be able to skip the hassles of shipping your products. Unless you've already set up a shipping account with someone like FedEx or UPS, you'll be heading down to the post office every day to buy stamps and mail out your products.

And you'll be able to add new products almost instantly. Since you don't have to worry about ordering inventory, you can add products to your web site within a few hours. If you find that your customers are eager to buy a certain product, you can have that item up on your site in almost no time.

Choosing The Product:

Have you ever noticed that there are literally hundreds -- if not thousands -- of sites selling huge mish-mash selections of inexpensive gift items... things like plastic gnomes and porcelain figurines?

That's because there are a few HUGE drop shipping companies that import these items and then recruit web sites to sell them on their behalf. These companies have massive product inventories and make it very easy for people to get started selling their products for them.

Unfortunately, this is NOT the way for you to go if you are getting started with drop shipping. There are already a lot of giant gift sites out there -- and way too much competition for you to reasonably expect to be successful at it.

Instead, spend some time researching different kinds of products that you might want to sell. The products you choose should be in demand but not widely available online. As usual, I highly recommend targeting a niche market rather than trying to find a product that EVERYONE wants to buy.

Once you've found a product that you think may be the right one for your business, you'll need to do a little "competitive analysis." This simply means finding out what potential competitors are charging for the products you want to sell and calculating how much of a profit you'll be able to make.

Choosing Your Drop Shipper:

So how do you go about finding a reputable drop shipper for your business? Well, here's where doing your homework will pay off. Whenever possible, you'll want to set up drop shipping arrangements directly with the manufacturers of the products you want to sell. The fewer middlemen you have to go through, the bigger your profits will be!

Let's say you want to sell wooden toys on your web site. After spending some time combing through the search results for "wood toys," you'll have come up with a list of manufacturers of wooden toys that you might want to carry. From there, you'll want to contact the manufacturers directly and ask them if they drop-ship their products.

Some will let you know right away that they are set up to drop ship for you. Others will tell you that they simply don't offer drop shipping. Smaller manufacturers may never have heard of the concept!

If the manufacturer of the product agrees to drop ship for you -- GREAT! You can be fairly confident that you'll be getting the best price possible. However, if they don't offer drop shipping, you'll have to keep looking for another alternative. This usually means tracking down a distributor. (A distributor is simply a company that maintains a large inventory of another company's products and distributes those products to smaller companies.)

The best way to locate a distributor is to simply ask the manufacturer of the product to recommend one. Most manufacturers have established relationships with at least a couple of distributors, and they should be happy to put you in touch with one of them.

Another great way to find a distributor for the type of product you wish to sell is by looking through related trade magazines. You'll often be able to find listings of manufacturers and distributors advertising in the back of these publications. A couple of resources to check out for listings of trade magazines are SmallBusiness101 and Yahoo!'s listing of trade magazines. In addition, Drop-Shipping-News.com sells a "Consumer Products Source Directory" that claims to provide listings of dozens of trade magazines.

You may also be able to find distributors and manufacturers using the Thomas Register. They provide listings for thousands of companies broken down by product, brand name, and company name. It takes some time to get used to navigating through this site, but it can be a great resource.

What To Expect From Your Drop Shipper:

Once you've tracked down a few manufacturers and distributors, you'll need to get on the phone and contact them directly. Before you start dialing, though, you'll need to have a few things in order, including your official business name and your Tax ID or Resale number.

Your Business Name and Tax ID Number

Take the time to set up your business as a legal entity before you get started. The U.S. Government's Small Business Administration maintains a web site that has all the information you need to get your company up and running and explains how to apply for a Tax ID or Resale number in every state. You can search for the requirements in your state by clicking here.

The process of setting up your business legally is actually a LOT easier than most people think. In many states, you can get all the paperwork done in about a day, and it shouldn't cost you much more than a few hundred dollars if you do everything yourself. Of course, there's no shortage of lawyers and accountants to help you incorporate your business if you'd rather not deal with the paperwork.

Some companies will also ask for a credit reference... but don't panic! A manufacturer will probably only require a credit reference from you if they will be billing you monthly. Since most manufacturers will bill you at the time of purchase, this shouldn't be a problem. If they do require credit references, though, you can usually just provide them with the name and telephone number of your bank.

IMPORTANT NOTE FOR NON-U.S. BUSINESSES
Drop shippers based in the U.S. are generally NOT willing to drop ship internationally. There are simply too many hassles with customs -- especially since September 11th. Also, companies like FedEx and UPS charge a fortune to ship internationally. The cost of the shipping can often be more than the cost of the product!

If your target market is in Australia, for example, you'll want to locate manufacturers or distributors based in Australia so that you can avoid the hassles of international shipping. You -- and your customers -- will end up with a LOT fewer headaches this way!

Questions You'll Need To Ask

Most companies that you contact will be more than happy to speak with you -- after all, you are going to be selling their products for them. When you call, simply ask to speak with someone about becoming a vendor for their products. Once the switchboard puts you through to the right person, they'll be able to answer any questions you have, including:

  • What is the wholesale price they can offer you on their products?
    You'll need to make sure that the wholesale price they offer is low enough that you will be able to generate a good profit based on what you will be able to sell their products for.

  • Do they charge a handling fee for drop shipping? If so, how much?
    Most companies who drop ship will simply add the cost of UPS or FedEx shipping onto your wholesale price, but some will also charge you a handling fee (generally between $1 and $5). This is to offset their cost of picking, packing, and processing the order for you.

  • Do they have a monthly minimum OR maximum of products they will drop ship?
    Some companies will require that you sell a minimum dollar amount of their products each month (usually around $100 per month). A few will also have a monthly maximum of units they will ship for you. If you think that you will be selling more than this number each month, they'll refer you to one of their distributors.

  • How do they ship their products?
    Almost every company that drop ships products will use a major nationwide delivery service like UPS or FedEx. Ask them to include tracking numbers with the order confirmations they send. This will save you many potential problems when customers ask, "Where is my order?"

  • How do they bill you?
    Most drop shippers will bill your credit card the wholesale price of the product plus shipping and handling as soon as they receive an order from you. With others, you may be able to set up a monthly billing cycle where you submit payment for all orders at the end of each month.

  • How do they deal with product returns?
    Be sure to find out what their policy is regarding returns. Most reputable companies will offer some kind of guarantee or warranty on their products and will deal with returns for you. This way, if a customer contacts you with a return, you can simply tell them that the manufacturer will be happy to speak with them directly. If your manufacturer doesn't accept returns, look out! You will be the one stuck replacing defective merchandise for your customers.

You'll also need the manufacturer to send you product information, such as descriptions and images of the products for you to put up on your web site. Many companies will simply tell you to take the images directly from their own site. Others will e-mail you a link to their product information. Companies with large inventories may want to mail you a CD-ROM of their product images and descriptions.

When setting up an account with a distributor, ask lots of questions about shipping and order fulfillment, as these are the two areas that can potentially cause you the most problems. Make sure that they are able to confirm your orders quickly, and that they can provide you with tracking numbers. You need to be confident that you will be able to deliver your customers' orders promptly.

Avoid These Common Drop Shipping Scams

Wow, all of this sounds great, doesn't it? And the truth is, there ARE lots of people making tons of money using the drop shipping model. But there is also no shortage of crooks and scam artists just waiting to take your money in exchange for the promise of "Instant Drop Shipping Riches" or "Ready-Made Online Drop Shipping Stores."

Here are a few things to watch out for when you're researching drop shipping:

  • Companies offering to sell you lists of drop shippers for $3, $4, $7. The old saying about "You get what you pay for" applies here. Spend $4 on a drop shipping list, and you'll get an e-mail listing 200 company names, addresses, and maybe phone numbers. A few calls to out-of-service numbers and you'll realize that the list is years old and basically useless.

  • Companies charging you a "monthly fee" to be your drop shipper. Think about it: Why would a company charge you to sell you things? Answer: Because their products are either worthless junk or they're marked up WAY too high. In either case, they know your online store won't be able to sell any of them, so they need to make their cash from you through a monthly fee.

  • Companies offering you a turn-key online business, complete with web site, wonderful products (that can ONLY be purchased from them), and a merchant account that allows you to accept credit cards. The strategy here is to get you to spend YOUR money advertising and selling their products that they are buying from REAL wholesalers, marking up, and selling to you. These companies usually also charge a one-time and/or monthly fee.

Here's the bottom line: No one is going to do your work for you. If you want to set up a real online business, you're going to need to do some legwork. Any company that seems to be making your job easier by providing you with lists of products to sell or setting up your site is just going to be eating into your profits! As always, ask yourself if their offer seems too good to be true. If it does, you can be sure that they'll be taking their cut!

Based on our research, I'm NOT going to recommend spending money on any of the "drop shipping resources" that are for sale online; anyone should be able to locate potential drop shipping partners by doing a little research and making a few phone calls.

Common Drop Shipping Problems -- And Simple Solutions

Of course, no business model is without disadvantages -- and drop shipping your products can lead to some serious problems if you aren't careful. Below are a few of the most common problems, along with some tried-and-true solutions to help you save some serious time and money:

Problem #1: Shipping Delays

Remember how I told you that the best thing about drop shipping is that you don't have to worry about shipping your products? Well, this can occasionally create issues.

Let's say you send an e-mail to your drop shipper asking them to send an order to your customer, and it just so happens that they are sold out of that item at the moment. The longer it takes them to let you know that the item is unavailable, the longer it will be before you can pass that information on to your customer, and the worse you'll end up looking.

Solution: Insist on prompt order confirmation from your drop shipper. Ask them to send confirmation e-mails or faxes to you when they've processed your order, letting you know that the order has been shipped. If they find that they're out of stock, make sure they let you know IMMEDIATELY.

Problem #2: Tracking Shipping Status

Your customer calls you up a week after ordering a product and asks what the status of their shipment is. Unfortunately, since you didn't ship the product, you have no idea what to tell them. And if your customer is demanding a refund for an order that has already been shipped, YOU'LL be paying for it when your drop shipper sends you the invoice!

Solution: Most of the nationwide delivery services (like UPS or FedEx) now offer online tracking services. If a customer calls to check the status of their shipment, you can instantly tell them where their package is by entering their tracking number at the UPS or FedEx web site. Better yet, include the tracking number in your confirmation e-mails to your customers and let them track their orders themselves. Just be sure to ask your drop shipper to provide you with tracking numbers once your orders have been shipped!

Problem #3: Drop Shipper Backs Out

Occasionally, a manufacturer or distributor will simply back out of their drop shipping agreement with you. They may decide that the work involved in packaging and shipping their products for you simply isn't worth the trouble.

Solution: Unfortunately, you'll never really know how reliable your partners will be until you've placed a few orders from them. When you are setting up your agreements with your drop shippers over the phone, you should be able to get a good sense of how reliable they are based on how they answer your questions. This is one of those areas of your business where you'll have to follow your instincts!

Problem #4: High Shipping Costs

Finally, you can run into problems with shipping costs if you work with a number of different manufacturers and distributors. For example, let's say a customer orders 6 products from your web site, with each one being drop shipped to them by a different manufacturer or distributor. They'll have to pay shipping and handling costs on each individual item, and that can add up to a lot of extra money. If your customers see that they'll have to pay $40 to ship $80 worth of goods, they'll abandon their order every time.

Solution: You'll avoid those abandoned orders by just using one manufacturer or distributor on your web site. Keep in mind that many distributors deal with thousands of products (usually related to each other), so you can usually source all of your products with one distributor. Of course, your site may never run into this problem.

If you take my advice and focus on selling one or two niche products (like toasters), you can reduce the likelihood of customers ordering more than one product in the first place. (Who needs six toasters?)

Final Thoughts:

Drop shipping can be an easy way to get started selling online. Since the manufacturer or distributor takes care of warehousing and shipping, you'll be able to concentrate your efforts on building your web site and marketing your products. And this is what most entrepreneurs are good at!

As an experiment, we decided to contact several manufacturers to set up a drop shipping arrangement. When asked, we told the manufacturers that we had no previous experience running an online business. This didn't present a problem to any of them. Basically, a company will be glad to have a potential vendor contacting them... After all, it can only increase their sales!

When searching for a product to drop ship, don't spend money on "drop shipping directories." Think about it: Not only is their information frequently out of date, but the companies listed in these directories are the ones that everyone who buys the directories will be contacting. That means more competition for the products you'll be selling.

And take the time to choose your products carefully. Make sure there aren't already hundreds of sites selling these products at prices that you can't afford to compete with. Products that are aimed at a niche market will sell better online than products aimed at the general population. And remember to ask yourself: Is this a product I would buy myself?

Most importantly, remember that drop shipping isn't a magic formula to make you rich. Building a business DOES take a certain amount of hard work, and this is no exception. The real "magic" is that drop shipping allows you to invest your money in marketing rather than inventory, and a well-planned marketing strategy is what will ultimately help you build a lucrative online income!