Drop Shipping for Beginners

This page is dedicated to beginners, getting into or looking to get into owning and running a successful drop ship business.  Its purpose is to give you information, resources, links to tools, FAQ's, access to colleagues, and everything you'd need to get your business off the ground, and starting to grow.

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The Common Questions & Answers of Drop Shipping

What is Drop Shipping?

Drop shipping is a fulfillment model that allows you to buy products individually from a wholesaler and ship them directly to your customer.

Instead of purchasing a large amount of inventory, you simply partner with a drop shipping supplier and list their merchandise for sale. Then, once you receive an order you forward it to the supplier for fulfillment. The supplier will ship the product directly from their warehouse to your customer, and charge you only for the price of the shipped item.

What are the benefits of drop shipping?

The drop shipping model has a number of advantages:

Lower Capital Requirement: With drop shipping, you don’t need to invest thousands of dollars in inventory. Instead, you only purchase a product when you have an existing order to fill.

Wider Product Selection: When you don’t have to pre-purchase all the items you sell, you can offer a significantly larger number of products to your customers.

Reduced Risk: Without thousands invested in inventory, the risk involved with starting an online store is dramatically reduced. If things don’t work out, you aren’t stuck with thousands in inventory you have to sell at a loss.

Location Independence: Because you don’t have to worry about fulfillment or running a warehouse, it’s possible to run a drop shipping business from anywhere with a laptop and an internet connection.

Highly Scalable: Because you don’t need to manually fulfill each order, it’s relatively easy to scale a drop shipping business.

Is drop shipping a profitable business model?

Like all businesses, success and profitability rely on a number of variables. But when done correctly, it’s possible to create highly profitable online businesses with drop shipping. Drop shipping isn’t a magic formula – and real success takes significant work and time – but it’s a viable online business model with very low risk. Drop shipping was the model I used to start my own online store, allowing me to permanently quit my corporate job.

How much can I make with drop shipping?

Again, like all businesses, profits and success range widely based on a number of factors – most notably, the commitment and dedication of the business owner and the niche selected. But with a long-term commitment, hard work and the right approach it’s possible to create a drop shipping business that provides a six-figure income.

A business of this scale will take time to build – likely years – but it’s definitely possible. And once a drop shipping businesses is up-and-running, it’s fairly straightforward to automate and/or outsource most of the day-to-day aspects of the business.

What kind of profit margins can I expect with drop shipping?

Profit margins will vary greatly depending on the products you sell. For expensive electronics, margins are thin and will likely be in the 5% to 10% range. But for low-priced accessories, margins will often be in the 100% range.Your margins will also depend heavily on your ability to offer value to your customer, which allows you to charge a premium price over your competitors. This is instrumental to the success of a drop shipping business, and a topic we cover in-depth in our free eBook on how to create an online store.

Where do people sell drop shipped products?

People sell drop shipped products just about everywhere! Many sales on eBay and Amazon are fulfilled through drop shippers, as are items on thousands of eCommerce sites, especially smaller ones.

And even the big boys utilize drop shipping to expand their product catalog and offerings. It’s likely that large companies like Sears and Home Depot utilize the drop shipping model for some of their less popular items. This allows them to offer a broad selection while limiting the inventory they have to maintain.

While it’s possible to sell drop shipped items in a number of ways, creating your own eCommerce site offers the best chance of building a scalable, profitable and successful drop shipping business in the long run.

What do I need – and much does it cost – to start a drop shipping business?

To properly set up a drop shipping business in the U.S., you’ll need:

  • To incorporate a business with your state (Approximately $150 to $300)
  • Request an EIN number from the IRS (free)
  • Request a sales-tax ID from your state (if your state charges sales tax, usually free)
  • Find and establish a relationship / open an account with a drop shipper (free)
  • (Recommended) Create your own eCommerce website (Approx. $10 to $50 per month)

The costs will vary based on your circumstances, but in most cases you should be able to get a drop shipping business up-and-running for less than $400. For more information on finding suppliers, please see the section on finding drop shipping companies.

Do drop shippers provide customer service and/or talk with my customers?

No. As the retailer, you’re 100% responsible for dealing with customers. You’ll need to build and market your website, handle customers support issues, solve problems and deal with any issues that arise. You’ll act as the intermediary between your supplier and your customer.

How do I submit orders to suppliers?

Each drop shipping wholesaler will be different. Most suppliers (but not all) will accept orders via email. Many will accept them over the phone, and those with more advanced websites will accept them online. A few sophisticated suppliers will even allow you to submit your orders in bulk via a specially formatted XML or CSV file.

What is the turnaround time for fulfilling a drop shipped order?

This will vary based on the quality of the supplier, and their location. Most decent suppliers should be able to process, pack and ship out an order the same-day if it’s received by noon their local time.

How do I get tracking information for orders?

This will also vary by drop shipper. A quality drop shipping wholesaler will provide tracking information via email in plain text or in a specially formatted .CSV or .XML file. Tracking information should be received immediately after the shipment is processed or by the end of the day the order was shipped. Once you receive a tracking number, it’s your responsibility to pass it along to your customer usually through your shopping cart interface.

One mark of a poor drop shipper is delays in sending you order verification and tracking information and/or making you log-in to their website to retrieve tracking numbers.

How do I pay my supplier?

Starting out, a drop shipper requires you to have a credit card on file to pay for orders. When getting a business credit card, make sure you get a Visa or Mastercard as many suppliers won’t accept Discover or American Express.

Once you’ve built up a relationship and track record, you may be given the option of ‘Net 15′ or ‘Net 30′ terms. This means that the supplier will extend you credit, and simply keep track of what you owe. Then, you’ll need to pay them by check within 15 or 30 days.

I have established, multi-year relationships with numerous drop shipping suppliers and still prefer to pay by credit card over ‘Net’ terms. Why? It’s more convenient, I don’t have to write and mail a check, and I can rack up some serious reward points using the right rewards credit cards. In fact, I was able to accumulate enough rewards to pay for a trip around the world.

Who pays for the shipping costs on orders?

While a drop shipper will usually use their own UPS/FedEx/USPS account to pay for shipping, they’ll pass along the cost to you when billing you for the order. It’s up to you how much to charge your end customer for shipping.

Do orders appear like they came directly from my company?

Yes! This is one of the great things about the drop shipping model. Most drop shippers will put your company’s name and logo on packing slips and invoices, as well as your return address. So it appears like the package was shipped directly from you.

How do returns from customers work?

Most drop shipping companies will have restrictions on what can and can’t be returned. So you’ll need to make sure you clearly communicate (both before the purchase AND before accepting the return from the customer) that it meets these criteria.

Most suppliers will issue you a RA (Return Authorization) number. This unique number will identify the return in their system. Once received, simply pass along this RA number along with the address of the warehouse to your customer.

Once the supplier receives the return, they should send you a notification along with a credit invoice showing that they’ve credited you for the item. Then, you in turn refund the customer who purchased from your store.

Who pays for return shipping on returns?

This will vary from retailer to retailer, but here are the policies I have in place and highly recommend:

For Defective Items: If a customer received a defective item, I feel it’s my business’ responsibility to pay all the associated costs to get them a working product! Some store owners will argue:

We didn’t make the product! It’s not our fault! A defective item is the risk a customer takes for purchasing.”

…but I think that’s a poor way to do business, and provides a very bad experience for your customer.

I recommend paying for the return shipping costs incurred by the customer to send back the item, as well as the costs involved with shipping out a new replacement. In the event the product is very low-value (costs $20 or less), I’ll often ship the customer a free replacement without requiring them to return the old product. This is often easier, faster and cheaper than paying to have a customer return a cheap defective product.

On the bright side, if a product is genuinely defective, most drop shipping wholesalers will pay for the shipping cost of sending out a new item, which means you’ll only need to cover the cost of shipping from the customer to the warehouse.

For Non-Defective Items: If the customer decides to return an item due to incorrect selection – or because they simply changed their mind – they will usually be responsible for paying for return shipping fees. However, if the product was incorrectly advertised or presented on the website, the business should cover return fees if this was the cause of the problem or incompatibility.

Do drop shippers ship internationally?

This varies widely by drop shipper, so you’ll need to check. I would say approximately half of the drop shippers I work with will ship internationally.

International shipments can quickly get expensive, and getting accurate quotes regarding shipping fees, customs and duties for hundreds of countries is complex. It also takes a drop shipper significantly more time to process an international order as there is more paperwork involved. Some will charge an additional fee while others simply won’t bother.

Also, issues with returns and fraud get a bit more complicated with international shipments. If an international customer receives a defective product, getting them a replacement will be significantly more expensive. And the likelihood of fraud and abuse increase with international shipments.

How do I find drop shipping companies/wholesalers?

There are a number of ways to find drop ship suppliers:

Contact the Manufacturer: If you know which product you want to sell, the manufacturer should be able to point you to authorized distributors of their who may also may be willing to drop ship.

Search on Google: When searching in Google, make sure to dig deep! Wholesaler drop shipping companies are notoriously bad at marketing and you’ll likely have to dig through 5 to 10 pages of irrelevant or spammy listings before you come across a legitimate drop shipper.

Subscribe to a Directory: While there are a lot of drop shipping directories online, many of them are low-quality and provide little value. However, there are some legitimate directories, and the one I recommend is World Wide Brands (aff link). Their directory offers access to a searchable database of thousands of pre-screened drop shipping companies.

Should I drop ship or buy products in bulk?

Starting out, it’s usually best to test a market with drop shipping before committing to purchase a large amount of inventory. Then, once you understand a bit more about the market – including how much volume you can realistically expect to sell – you can explore purchasing in bulk to save money.

What’s required to work with a drop shipper?

In the United States, legitimate drop shippers won’t work with you unless you have a legal business established and have an EIN, or an Employer Identification Number. You can think of an EIN number as a social security number for your business. Depending on if your state charges sales tax, you’ll also need a sales tax ID from your state.

In the U.S., creating a legal business structure isn’t nearly as complicate as you think, and can often be done in an hour or two on your State Dept. of Commerce website, or a site like Legal Zoom. Often, incorporating your business will cost less than $200. Once you have an official company established with your state, requesting an EIN number from the IRS is an easy process.

However, it’s very important that you spend the time to properly research which corporate structure is best for you. You will want to research this extensively, and if your’e unsure, we recommend consulting with a professional such as an attorney or accountant.

What kind of fees do drop shippers charge?

There are two potential fees you’ll likely encounter with drop shippers:

Per Order Fee: It’s common for drop shippers to charge a per-order fee to cover the expense involved with packaging and shipping an individual product. These fees are usually in the $2 to $5 range, although they can be higher for items that are extremely large or difficult to process.

Monthly Fees: Some “drop shippers” may try to charge you an ongoing monthly fee for the privilege of doing business with them. Most of the time, this is an indication of a poor quality and/or “fake” drop shipper. Very few legitimate drop shipping wholesalers will require you to pay an ongoing fee, and you should be wary if they ask you to.

Purchasing Minimums: Some legitimate drop shippers may require a minimum purchase size, either for your first order or on a monthly basis. If you don’t meet these sales threshold, they’ll charge you a fee. They do this to filter out non-serious business owners who will likely be more trouble than they are worth.

What is the difference between a manufacturer, a wholesaler and a drop shipper?

A manufacturer is the actual builder of a product. For example, Nintendo is the manufacturer of the Wii gaming console. A wholesaler is anyone who buys directly from the manufacturer and resells to retailers at discount wholesale prices. A drop shipper is anyone who will ship a product for you directly to your customer.

So it’s possible for both a manufacturer and a wholesaler to be a drop shipper. If you find a manufacturer who is willing to ship their products directly to customers for you (rare), they will be acting as a drop shipper. Similarly, any wholesale distributor who will ship to your customers directly on your behalf is a drop shipper.

How do I know what products to drop ship?

There is a LOT you need to consider when picking a drop shipping product or niche! Researching and understanding market demand, pricing, competition, available suppliers and the value you can add are all critical to the process. It’s a topic beyond the scope of this article, which is why I’ve written a free eBook dedicated to selecting a profitable drop shipping niche.

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