Drop Shipping: The Ugly Truth

Introduction

• Drop shipping is often seen as a get-rich-quick scheme.
• It's perceived as easy due to no need for inventory, shipping, or much startup money.
• Reality: Success in drop shipping involves many challenges and isn't as straightforward.

What is Drop Shipping?

• An e-commerce model where the online store doesn't hold inventory.
• Orders are fulfilled by purchasing from a supplier who ships to the customer.
• No upfront inventory cost as products are bought on demand.

Legality and Licenses

• Drop shipping is legal if using legitimate suppliers.
• Selling fake merchandise can lead to fraud charges.
• A seller's permit is needed in the US; a business license may also be required based on locality.

Profitability

• Margins are lower (~10-30%) compared to other e-commerce models (50-66%).
• Profitable items are usually higher-ticket ones.
• Best used for product research due to low margins.

Automation and Fulfillment

• Most processes can be automated except customer service.
• Electronic Data Interchange (EDI) helps keep inventory in sync.
• Fulfillment is automated but customer service remains the seller's responsibility.

Drop Shipping Platforms

• Own Website: Use platforms like Shopify, BigCommerce, WooCommerce.
• Amazon: Riskier due to strict compliance with Amazon’s terms.
• eBay: Similar rules to Amazon; must source from legitimate suppliers.

Payment and Suppliers

• Payment via credit card, ACH, or payment terms with suppliers.
• Two transactions: customer payment and supplier payment.
• Finding suppliers: directories, drop ship companies, trade shows.

Finding Products

• Use tools like Jungle Scout to analyze Amazon sales data for finding products.
• Drop shipping is great for testing and data collection for private labeling.

Drop Shipping Pros

• Risk-free and no inventory management.
• No upfront costs and scalable.
• Useful for testing products before private labeling.

Drop Shipping Cons

• Low margins require high traffic and revenue.
• Customer service and quality depend on suppliers.
• Lack of brand recognition and competitive pricing pressure.

Practical Considerations

• Shipping costs depend on suppliers; can be passed to customers.
• International shipping is costly and complex.
• Returns are managed by the seller, not the supplier.

Conclusion

• Drop shipping is viable at scale but challenging due to slim margins.
• Best used as a stepping stone to private labeling.
• Large retailers use drop shipping for certain products.
• Ultimately, private labeling offers better control and higher profits.