What is drop shipping?
How does drop shipping work?
How can I make money drop shipping?
The concept is quite simple and there are thousands upon thousands of people making a living doing nothing but drop shipping. Let’s answer the common questions we get…
What is drop shipping?
Drop shipping occurs when you find a source, and sell that sources products at a higher price. Once that item sells, you place your order with the source, pay the amount they are charging, and whatever money is left over you keep as profit.
What are the benefits of drop shipping?
- Drop shipping requires little to no overhead to get started.
- You do not have to invest in any inventory.
- You never touch the product.
- You are just the middle man between buyer and seller and you take a cut for your efforts selling the product.
- You are a salesman and you can consider your profit a commission.
- The only costs associated with drop shipping is advertising and/or listing fees on marketplaces like eBay/Amazon/Shopify.
Does the source need to know you are drop shipping?
There are two business models available to you when drop shipping.
The first business model is when you contact a source and work out a deal where you send the orders and they fulfill the orders and handle returns for you.
With this model, the source is aware that you are drop shipping their product. Typically, you can negotiate a discounted rate below what they would be selling the item for themselves. The source should be able to provide you a daily list of inventory to keep your listings up to date.
The second business model is called “Retail Arbitrage”. This is where the source is not aware that you are drop shipping.
You sell the item at a markup and when you receive an order, you place an order at an online retailer that sells the item for less than what you received. When you place the order, you put your information on the billing address and the buyers information on the shipping address.
With this model, your profit margins will be a bit slimmer. You also have the risk of the item going out of stock. This business model can be risky since you have no control over the source. It is also a bit cumbersome to deal with returns since the packing slips will include the source’s information and not yours.
What are the drawbacks of drop shipping?
Of all the different kinds of ecommerce available, drop shipping has the smallest margins. Typical drop shipping margin rates are about 5-30%. This means for every $1 you sell in product, you receive only 5-30 cents in profit. Other forms of ecommerce such as white labeling can be in the hundreds of %. Wholesaling or flipping physical inventory typically are in the 40-200% range.
Inventory and copyright issues are your biggest enemies when drop shipping. If you have a drop shipping contract with a source, they will typically provide a data feed of inventory and give you all the images and descriptions for the products. However, if you are doing retail arbitrage, you have to handle updating inventory yourself.
You also are at risk of copyright infringements notices. Some brands are very particular on who is allowed to sell their product. You can receive copyright alerts and get your accounts on eBay or other markets banned if you select the wrong products.
What is an example of drop shipping?
I will use the word “widgets” loosely to describe the concept. I like widgets so I started a widgets business. In the beginning, my widgets business started out with drop shipping. I had a source I found on Etsy. She listed her widgets at $10. I listed the widgets at $30 (for simple math). When I get an order, I place a new order with her and put my buyers information on the shipping address. I then pay the $10 she requests. The $20 leftover is profit. I used this technique to start my business and to test the market needs. Once I was familiar with what would sell on eBay, I started selling my own widgets and increased my margins.
Is drop shipping legal?
The first and most common question I get when I explain this to people is “is this legal?”. The answer is yes! All of this is perfectly legal. All you are doing is participating in “arbitrage”. Arbitrage has been around since the beginning of time. You are buying low and selling high somewhere else.
You are a salesman that takes a commission for selling a product. It serves your source the benefit of double the exposure. Now there is more than one forum for their products to be sold. You sell more of their product. And you receive an income from it.
What is the best type of drop shipping?
The best type of arbitrage is when you can find a hole in the marketplace that needs to be filled. eBay offers a program called the “Global Shipping Program” or GSP for short. It allows you to ship items to over 100+ countries. Many online retailers are only based in the USA. By offering many of these items via GSP, you are providing buyers in 100+ countries around the world access to product that they would never had access to previously.
Buyers have their favorite stores. Some will only buy on Amazon. some may only buy on eBay. There are millions of products that do not exist on both marketplaces. This is where you come in. In exchange for you filling a void on these markets, you receive a commission for your efforts. Drop Shipping is just one of the many forms of arbitrage.
Is drop shipping allowed on eBay?
Technically yes. You can read eBay’s official statement here. eBay says you can drop ship all you want. However, their “out of stock” policies and copyright tools (ie. VERO) are quite strict. You really need to stay on top of your business to make sure you keep your account in good standing. eBay will not hesitate to suspend your account if you do not follow their policies.
I hope this answers some of your questions. Feel free to comment below. Thank you!
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