Drop shipping is a method of order fulfillment that does not require a business to have an inventory. Instead, a store sells the product and a third-party supplier ships it to the customer. Drop shipping has become an extremely popular business model in the past few years. However, with so much competition and barriers, is drop shipping still worth the effort?
What is Drop Shipping and Why is it so Popular?
In this Surge Session, we talk about drop shipping. Just to describe drop shipping, you don’t have to stock products. You go and you make an agreement or get an agreement with an existing manufacturer or an existing supplier, and you say “Well I’m here to sell our products. Give me a data feed of all your products. Give me images. I’m going to load this in Amazon or eBay or on my site and I buy it from you.” Let’s say, I’m buying this right. I buy it from you for three dollars. I list it at six dollars. I sell it for six dollars. I turn around and I tell the manufacturer “Ship this for me. You ship it to my customer under my name and I make three dollars profit.” That’s what drop shipping is.
You don’t have to keep an inventory. You don’t have to have a warehouse. We’re going to talk about the benefits of drop shipping as well as the negatives of drop shipping and if it makes sense nowadays to drop ship anything.
Let’s talk about why drop shipping is popular. Why does everybody wanna drop ship? No overhead. You don’t have to spend money on merchandise. You don’t have to buy anything in bulk. You get started very quickly. And you can be anywhere you want. You can list on Amazon. You can list anywhere and all you have to do is spend money for a website or list on Amazon or list on a platform.
Very low overhead. So, you see a lot with maybe, new brands, new startups coming out and want to test the waters with the new product rather than getting the inventory and holding on to that inventory not knowing if it will sell or not. They’ll test the waters with drop shipping. If they’re successful, sometimes they’ll even continue dropshipping or they decide to actually get the inventory and stock.
Correct. So, for anybody that’s listening. If you are looking for a very, very easy, fast idea to start drop shipping. The fastest way to do it, I think, is on Amazon or on eBay. Right? Or on Etsy, if Etsy allows you. Just go to Aliexpress.com. Tons of products that you can get in a week or two. Cheap. Get one. Get like fifty of them or get. You can’t really drop ship one by one. But get them and then re-list them on Ebay or re-list them on Amazon. And you can make a few hundred dollars here and there. But to be able to make thousands of dollars and hundreds of thousands of dollars of drop shipping has become very very difficult in the past few years.
Let’s talk about the negatives of drop shipping. So what do you think the primary negative of drop shipping is? It’s extremely competitive. Finding a product that isn’t already saturated. So the resource part of it. So there are tools such as I think Jungle Scout, it’s one of those tools that you can research Amazon and different market places. So, if you are just getting into drop shipping and if you want to invest money into this. Look at websites like Jungle Scout. Look at websites like keyword.io, to try to see and do some research on which products are attractive.
You’re gonna have significantly lower profit margins. Why do I have lower profit margins? Well because you still need to pay the supplier. Right so if the item costs three, four dollars, in order to be competitive, you can’t market up too much. But at the same time, you wanna make a profit. That’s when it becomes difficult when you’re competing with other manufacturers, other suppliers that are selling direct to consumer the same exact product. So what happens is let say I wanna buy this mouse. There are two ways I can buy and sell this mouse. One, I can drop ship. Now if the supplier has this, the supplier ships this product for you. You advertise it one by one so you don’t have to buy stock or keep stock.
Let’s say as a drop shipper, I get this at five dollars and I sell it at ten dollars. But the company that dropships for me, needs to charge me shipping. Needs to charge me a pick fee, which means there are people in their warehouse are going to pick and pack this item for you. You don’t have any operations. You don’t have any employees. So they’re going to add on those costs. So this suddenly becomes from five dollars cost, another two dollars pick fee usually, seven dollars, another shipping fee for four dollars. Suddenly became 11 dollars.
So to make any money, I can’t sell it at ten. I gotta sell it a higher amount. Now, why is the supplier, if they drop ship for me, increasing the cost? Because they are incurring more cost and they’re doing me a favor actually. They’re saying, “I will drop ship. White label your operation in my name.” So they are providing that value for you. That’s why the price is high.
But, if I have ten thousand dollars and I go and I buy, five dollars a pack, two thousand of these. I’m gonna get a better price. I’m not gonna get it at five or eleven. I’m gonna get it at maybe four or three thirty because I’m buying in bulk. So the pros of drop shipping are that you don’t have to invest but the con of drop shipping is that the price will always be more expensive and not to mention that you have to be an incredibly good salesperson or a marketer because there are a hundred other people that are using the same drop shipper.
Should I Start a Drop Shipping Business in 2018?
So let’s talk about that. How do you compete with those people. What can you different? It’s tough. Like you said, you are already paying for the product, the picking fee, the shipping and now what is left for advertising cost? How do you gonna get the product out there to compete with these other individuals that are selling the same product? You are only gonna decrease your profit margins more. So it’s very difficult. It’s very very difficult.
I think that there’s just no magic trick here. At the end of the day, you have to invest into your company. You have to invest into your marketing budget. And then, like you were saying, perhaps today because the market is so competitive, drop shipping makes less and less sense. So the only way drop shipping will make sense is if you, if I know a supplier or a brand that is up and coming and, “my uncle works there”, or I’ve been working with this company that never sold online for years and they love me and they say, “Hey, why don’t you sell products online.” So only that kind of a deal will make sense from a drop shipping standpoint but the trick there is they have to be set-up for drop shipping. Right?
Now let’s talk about the reverse side of things. If you were a brand, if you were manufacturing products and if you wanna sell more of your products. You can go list it on Amazon, Amazon takes fifteen to thirty percent. You go sell on Ebay, it’s hard and competitive. You can’t do a website. You can’t pay pay-per-click. You gonna end up paying four, five, six, seven dollars a click. Advertisement is expensive.
So there’s an angle for sellers or manufacturers here to create their own white label operations for drop shipping. So they have instead of one website or one Amazon account selling their products, maybe they have twenty different people selling their products.
What do you think about that? Creating a drop shipping operation for actual manufacturers? Do you think it’s viable. It’s worth it for them to create that set up in their warehouse so they can drop ship for people? I think so because they are setting up off their marketing costs on companies they work with; so they can focus solely on the manufacturing part.
What do you think? Have we had many clients that created white label structures? Yup. We’ve had one and basically what they do is that they created a system where they get a product from the manufacturer and just puts it in to their own packaging. And they actually have one of their own packaging machines in the suppliers warehouse. So the supplier can just actually drop it in and ship it out with the branding of the company.
So the biggest problem again for drop shipping for sellers is the price point as well as the competition. Now, I actually got into E-commerce with a drop shipping website that was back in 2004. My first website that I ever created on Yahoo stores was a drop shipping website and did extremely well. But if try to do a drop shipping website today, even though I have a team of forty people and I have a marketing department and a development department, I still would not get into drop shipping business unless I have an incredible relationship with somebody that’s gonna say, “Hey, here. Sell all these products and I’ll give you a break because I know you are a good marketer and you’re my son-in-law or you’re my whatever. You’re my niece.” Right?
But so that still does not mean you cannot drop ship. There are people out there who don’t need to make millions of dollars. They’re just looking to quit their jobs and make four, five, three, six thousand dollars a month. I think drop shipping can still be viable but you have to fund that niche product. And that niche product, again, Jungle Scout is one of these tools you can use. You can look at Amazon for different types of tools. You have to find the right supplier. The price point needs to be good. The last step is you have to find a good place to sell it.
Tips and Tricks for Drop Shipping in 2018
Now, I know a lot of people who buy from drop shippers because there’s no minimum quantity and who sell in these flea markets. I know at least six or seven people that do that. So when you drop shipping, the idea is not that you have to sell it online. You can get it at a lower cost with no minimums and you can resell. That’s, I think, what drop shipping benefits. But if you must sell online, I think one of the… if you go through a website make sure you get a data fee. And if the dropship company has one thousand products get the data fee. The fastest way to do this is with a Bigcommerce or Woocommerce or Shopify website to test it out. You lower the products and they get indexed.
The first thing you do from an organic standpoint is to start it locally. But if you wanna make money, you have to be able to get…I guess you have to know Facebook really well. If you are good at Facebook, drop shipping makes sense because if you have products that are, that have high average or volumes like hundred dollars and plus and you can profit forty, fifty, sixty dollars by selling a product and drop shipping it, then Facebook makes sense.
Remember you are now going to be spending money on advertisements. So now you’re gonna need to factor in what your CPA is, on top of your cost of the drop shipping from the suppliers. So that’s why it’s really important. It only makes sense if you have a higher profit margin that you can go ahead and start advertising. And then when it comes to advertising, definitely, Facebook over Google PPC coz you’re gonna have a lower cost per click. And then you might just get lucky. You might find a supplier that’s willing to drop ship for you and they might have products or Amazon. They might have search volume on Amazon that never sold on Amazon. So you might just get lucky and find a supplier.
I would look for suppliers in the Midwest that have never done online and the way you find them is you have to be really good at research. You know, how can you find an organic food manufacturer or an organic dog food manufacturer in the States that’s not selling online yet? If you can get that guy and say, “Hey, I wanna sell your products. Can you do this for me? Can you drop ship?” And kind of work your magic if you’re a good salesperson, build those relationships, there’s definitely money to be made.
We have clients who drop ships and will make millions of dollars. But then again, they have established these relationships. For Amazon, if you wanna drop ship on Amazon, you have to be careful coz Amazon is very, very strict with this kind of stuff today. Remember, price is an essential point. If you already have listings for the products you wanna sell on Amazon, if they already have listings, you’re probably not going to be able to compete.
And the best way to be successful on Amazon nowadays, is you have to be the brand. So if there’s a way for you to find the product and then re-brand it somehow under your brand. Get a basic logo from Fiber. Get a quick website up with WordPress or Wicks and that would be the best way to do it. You gotta look at your average order volume and average profit. If you are making, if you are buying this at five and selling it at ten, don’t even get into it.
Stay with high ticket items. One of the items that I like to dropship is collectibles. Because collectibles sometimes you got five, ten and people are looking into it and it’s gone. I’ve sold thousands and thousands of collectibles ten years ago with drop shipping. I still opportunity with that. So find niche products.
So again with drop shipping, make sure you that find that niche. Make sure you find a reliable supplier. As a matter of fact, sit down, take a piece of paper, a blank piece of paper. One, two, three, four, five. Do an execution schedule.
If you are an existing brand who’s already selling millions of dollars, reviewing a good drop shipping guide might be a good start to begin increasing your revenue and sales volume by having multiple people sell for you; because tons of people sell in flea markets, on eBay, and you gonna have to hire these people. They can’t just sell for you and do volume. I would also look at gift shops. Gift shops are a good opportunity for big brands to be able to get into. And decrease your minimums. I mean, minimums kill business most of the time. If there’s a way operationally you can limit your minimums and decrease them. If your minimum order is a hundred, make it five, increase the price, because you’re gonna sell more. And that’s about it. We’ll talk to you next week.
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