Friday, October 21, 2011

Drop Shipping:Advantages & Disadvantages

Understanding Drop shipping

Dropshipping is selling something you don't own. That may sound illegal –but it’s not.
Dropshippers are companies that offer merchandise for sale that will ship the merchandise directly to your customer once you pay for it. Here is how eBay dropshipping works:
  1. You find a company that agrees to dropship. You list their merchandise on eBay, Amazon or your website for sale without first purchasing it.
  2. When the item sells, you collect the selling price (retail) and the shipping cost from you customer.
  3. Now you send the wholesale (lower) price + the shipping and handling fee to the dropshipping supplier.
  4. The supplier then ships the item to your customer.
  5. Your profit is the difference between the retail and the wholesale price

Disadvantages of Dropshipping

  1. Lack of control – When you dropship, you are at the mercy of the shipper. They control the packing and shipping experience. If they pack and item improperly or take too long to ship, the customer will blame you –not the dropshipper. Poor service from a dropshipper can negatively affect your customer satisfaction ratings on eBay and Amazon.
  2. No control over inventory – If a dropshipper fails to warn you about their low inventory level, you may sell an item that they cannot deliver. This puts you in a very bad position with eBay and Amazon. If it happens too often you could find your account suspended or closed.

Advantages of Dropshipping

  1. No up front investment in products - When you sell dropshipped products, you don’t pay for merchandise until it sells. This eliminates tying up money in inventory.
  2. Eliminates risk – If something doesn’t sell, your only risk is the listing fees
  3. Product depth and variety – When you buy products to resell, you are limited in the number and type of products you can sell by the amount of cash or credit you have to purchase. When you dropship, you can list many more products for sale

There are two types of dropshippers and it is important to understand the difference:

  1. Aggregators
  2. Manufacturers or Master Distributors
Let's look at each type before you decide what kind of company you want to work with.
1. Dropshipping Aggregators -- Aggregators, also known as Dropship Warehouse Companies, are basically middlemen.  They advertise heavily on the web claiming to have millions of brand name products you can sell online. Many of them also offer pre-made websites loaded with these products. These companies list products in a virtual warehouse that other, real wholesale companies, have in stock. Aggregators don't really have any products in stock.
If you sign up with one of these companies, you will soon find that most of the merchandise they offer is already selling on eBay or Amazon for about the same price they are offering it to you. I have been selling on eBay successfully for over 10 years and in my opinion, although there are some exceptions, it is very difficult to make money on eBay with these types of sellers.
In general these companies make their money from membership fees or handling fees. When you order something from them, they order it from the real wholesaler, mark up the cost and/or charge you a fee. Because of this it is very difficult to make any money as they have basically made a big piece of your profit.
2. Dropshipping Manufactures and Master Distributors -- There are hundreds of actual manufacturers who will dropship. Some of them do it directly while others use the services of a master distributor. When you work directly with a manufacturer of the product or their master distributor, then you are getting the lowest price available. This is where you can make the most money on eBay or a web site.

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