How to strart a drop shipping business online

This blog post will give you a more detailed idea on how to start a drop shipping business online. Drop shipping is one among the best options available for anyone to make money online if done after proper research and in the right way.

What is drop shipping?

Drop shipping refers to a retail method in which a store doesn’t keep the products they are selling in their stock. In this approach, the store purchases the product from a wholesale supplier and plans for it to be delivered directly to the customer. In drop shipping, the retailer doesn’t come into contact with the product.

Drop shipping can also be used to refer to the service offered when a wholesaler offers to ship their goods directly to your customer on your behalf. Retailers can also provide the drop shipping service since but the prices will not be as fairer as the wholesalers. To get the best prices in drop shipping, you have to work with the wholesaler or manufacturer

What are the benefits of drop shipping business?

It requires less capital to utilise this retail method. In drop shipping, it is possible to start an online store without having any inventory, unlike the traditional models where you had to have a lot of capital to hold inventory. Drop shipping enables a retailer to purchase a product when the customer has already made a payment. It means that the retailer can sell as many products as they want because they don’t have to hold any stock. The capital investment when venturing into this model is very little because no inventory is required.

Starting an e-commerce business is straightforward. It is because you will not have to worry about: getting and paying for a warehouse, keep track of inventory, packing, and shipping of the orders and handling of returns. It is also a bit effortless to handle a drop shipping business compared to other business models. It is because even if the number of orders you are getting increases to a range than the supplier can handle, it won’t need much more effort or extra staff to fulfil the requirements from your side as a retailer. Therefore, only a small bit of work load on the side of the retailer compared to the wholesaler who might be busy with the shipping process too.

Drop shipping is very flexible concerning location. It is because you can run it from anywhere provided you have an internet connection. You only need to be in contact with the suppliers and your customers. This flexibility means that you can easily operate the business from your house. In this case, the overheads of running an e-commerce business are very low. An individual only needs a computer and an internet connection.

What are the disadvantages of drop shipping business?

Drop shipping has minimal profit margins. It is easy to start a drop shipping business, so numerous merchants will sell a product at low prices to attract customers. The initial capital investment is very little so that the retailers can survive on minimal profit. The idea that the retailer does not hold inventory also brings up a big challenge. It becomes hard to keep track of the products which are either in stock or out of stock. Inventory at the supplier’s warehouse changes regularly, and there are no real time updates to the retailer.

Sourcing from multiple suppliers also comes with some challenges. If a customer orders several products and all of them come from different suppliers, this will increase the shipping costs. This increase in prices will most likely be incurred by the retailer because customers will think you are overcharging them if you pass on this extra cost to them. The suppliers can also make mistakes when fulfilling the orders. The retailer has to accept responsibility and apologise to the customers to protect their business reputation.

How to do the order process in drop shipping?

Step1: The first step in this process is the customer placing an order on the retail e-commerce website. If the order is approved, the client will get an email confirmation that the order has been received. The e-commerce software automatically generates the email. The customer’s payment is captured as they finish the checkout process on the website and it is deposited into the retailer’s bank account.

Step 2: The second step will be the retailer placing an order with their supplier. The retailer will do this by sending an email to the sales representative of the supplier. The supplier has the retailer’s payment details, and therefore they will bill the retailer’s credit card the cost of the goods, shipping costs and any other processing fees incurred.

Step3: The third step is the supplier shipping the order. If the item is in stock and the supplier has been able to charge the retailer, they can then pack the order and ship it to the customer. Even though the supplier is the one who ships the item, it will have the retailer address on the return label. The invoice and the packing slip will also bear the logo of the retailer. The supplier will then email the retailer the invoice and tracking number of the package. It is possible to have the goods shipped in hours, so most of the retailers will have same day shipping on their e-commerce website.

Step4: The final step in the ordering process will be the retailer notifying the customer of the shipment. The retailer will send the tracking details to the client. When the order is shipped, the payments have been made, and the customer is informed, then the order has been fulfilled.

If a wrong product is delivered, then the retailer will organise to have the parcel delivered back to the supplier and the right product sent back. The retailer’s profit margin is the difference between what the customer pays and what they pay the supplier.

How to identify fake drop shipping wholesalers?

It is essential for you to be able to distinguish between a genuine wholesaler/supplier and a retailer pretending to be a wholesaler. It is even easier to find a fake wholesaler than to find a genuine one. It is because the genuine suppliers are very poor at marketing as compared to the new and fraudulent suppliers. The following tips will help you identify a fake supplier.

A fake wholesaler will charge a monthly fee. A genuine wholesaler will not think of charging their customers a monthly fee because it is a privilege that a client chooses to do business with them. When you find a supplier who asks for a service fee, then the chances are very high that they might not be genuine. You need to understand the difference between suppliers and supplier directories. A supplier directory is a list of vendors classified into their product types, and they are investigated to find out if they are genuine. Most of the directories charge either a one-time fee or an ongoing fee, and this should not make you think that they are not genuine.

A fake wholesaler sells to the general public. For a genuine wholesaler, you have to get a wholesale account to get the wholesalers prices. This measure is used to check whether your business is legitimate and approve it before you can begin placing orders. Therefore, any supplier you find offering products to the general public at wholesale prices may not be a genuine supplier.

For genuine wholesalers, there is a drop shipping fee you might be charged. The first one is per order fees which are charged depending on the complexity and size of the products being shipped. It is considered as a standard practice in the industry. Some wholesalers also have a minimum order quantity for the first order. It is done to keep away window-shoppers who will waste the supplier’s time but will not end up buying. For example, a vendor could have a minimum order quantity of £450, and your first customer might place an order for goods worth £200. In this case, the best option will be for you to offer to prepay the £450 upfront and have credit with the supplier that will be used for your future orders. You will be committing to buy goods worth at least £450 so that you can meet the minimum order quantity.

Finding the right Wholesale suppliers

We have covered the ways of identifying a fake wholesaler, and now it’s time to find a genuine one. They can be found through some ways, and we will go through the major ones. The first one is contacting the manufacturer. When you settle on what you want to sell, then you can call the manufacturer and request to be provided with a list of their wholesalers. You can then contact the wholesalers and try to find out if they drop ship and what they require to set up an account with them. It also allows you for sourcing many other items in the same niche. These also give you a chance of getting to know the best wholesalers in that market.

The second strategy is to search for the wholesalers on google. When searching on google, you have to search extensively because wholesalers are poor in marketing and promotion, so they are not going to be among the top search results. It means that you will have to scroll through a lot of page results before you find a wholesaler’s website. You also should not judge a wholesaler by the appearance of their website. A good site is an indication of a good supplier, but a lot of wholesalers have a very average looking website, and this shouldn’t scare you off. You might need to use a lot of modifiers in your search for wholesalers since they don’t do a lot of SEO. Some of the quantifiers that can be used are bulk, reseller, distributor, supplier, and warehouse.

The third method of finding a good supplier is ordering from your competitors. You will search for a competitor who you think is undertaking drop shipping, and then you place a small order with them. After you get your package, you can then google the return address to find out where the goods were shipped from. You can then contact the supplier to find out their business terms.

The fourth way you can use to get wholesalers is by use of supplier directories. A supplier directory is a list of screened wholesalers who are classified by their niche, market or product. Most of this directories charge some amount of fee to be able to access the list. Supplier directories provide a quick and convenient way of finding a significant number of vendors and might also help you to decide on which niche you should enter or the products you can sell. However, the supplier directories are not that necessary if you already know the product or niche you want to operate in because with the use of the previous methods you will be able to find the appropriate wholesaler.

There are many supplier directories available like the Worldwide brands supplier directory comes and they charge $299 for a lifetime membership. Worldwide brands provide a list of over a thousand wholesalers and over 10 million products. Another example is Salehoo supplier directory which lists over 8,000 wholesalers and drops shipping suppliers. Salehoo charges an annual fee of $67.

What you need to do before contacting Suppliers?

Before you engage in any business with the wholesalers, you have to make sure that your business is legal. Most of the genuine wholesalers will not allow you to set up an account with them if the business is not legal. When you are asking the basic questions like, “Do you drop ship”, you don’t need any documentation. However, when you want to view the wholesale prices, you will need to create an account first.

You don’t need to keep on pestering the wholesaler with a lot of questions. Suppliers hate it when you keep on bombarding them with a lot of questions and take up a lot of their time and don’t order anything. They will be delighted to help you set a drop shipping account but don’t pester them for discount pricing. If you do this, you will have a bad reputation with the supplier.

At times most people are afraid of calling the supplier for any inquiry, and they rely on emails. However, on some issues, you need to get your phone and make a phone call to the vendor. Suppliers are already used to having customers call them. They will always be happy to answer your inquiries and help you. You only need to write down all the questions you want to ask before calling the supplier. This way it will be easier to get all the information you want without leaving out anything.

Payment options for suppliers

The most popular mode of payment on the internet today is by use of credit cards. Most suppliers in drop shipping also prefer you to pay using a credit card. Credit cards are the best options because they are very convenient for both parties. For you when a customer pays for a product on your website you will use the same credit card to pay the supplier, so you will not incur any out of pocket expenses.

Suppliers also provide a payment option of “net options” on the invoice. Net options mean that you have some days to pay for the goods you have bought. If you have been given “net 30 terms”, this means that you have 30 days from the buying date to pay the supplier. You can either pay the supplier by check or by bank draw. In the case of net terms, you have to provide credit references prior because the vendor is lending you money.

Factors to consider when selecting products

Getting the perfect price is key to your success selling online. For example, people will be very comfortable placing an order of £150 online than placing an order of £1500. If paying £1500, they will need to directly interact with the sales person before purchasing to ensure the product is good and to make sure the store is genuine. When you decide to buy high priced products, then you have to provide personalised phone support to your customers. You also have to make good margins that will take care of the pre-sale support.

Some suppliers will have a minimum advertised price (MAP) set of their products which require all the resellers of their products to price the product at or above specified prices. This price MAP is imposed on products that are easily drop shipped, and it ensures that there are no price wars and all the reseller’s make reasonable margins when selling the suppliers products. If you come across a supplier who enforces MAP pricing, then that will be a significant benefit. If the prices are the same across the resellers, then you can compete on the strength of your website without worrying that you might lose business to cheaper competition.

You need to consider the marketing potential of your products before you venture into the business. You need to look at the ways you could promote your business through either giving away products or writing articles to reach the online market. All these should be considered before setting up the business and not three months down the line when you realise getting customers is challenging. Products that come with a lot of accessories are the best. It is because high priced products give minimal margins as compared to low-priced products. For example, customers will spend a lot of time looking around for the best price of a smartphone but will not care much about the price of the phone case. They will mostly end up buying the phone case in the same-store that they purchase the phone.
It is not wise to sell products that change every year because maintaining your website is going to become a problem. You need to look for products that have a low turnover and aren’t replaced by every year by new designs. It will ensure that all the time and money you spent making the website will serve you for a reasonable period. Smaller items are usually better when looking for a product to sell online. Customers always expect free shipping, and this can prove to be a challenge when dealing with bulky and heavy equipment because they are costly to ship.

How to measure demand?

To gauge the demand for a product online, you need to look at the number of people searching for it through search engines such as Google. Google provides this searches insight to the public through the Google keyword tool. You required to type in a word or phrase, and the keyword tool will give you the statistics of the number of people searching for it per month. You need to pay attention to the search location and differentiate whether the search traffic is local or global. If you want to sell in a particular location, you only need to focus on the local traffic. Do not focus on the one or two-word phrases that a large number of search traffic. The long phrases that are more specific and generate low search volumes are the ones that get lower search traffic is more likely to give you more traffic from search engines. A search term with many variations will prove that the market is very wide and that is a potential market niche.

Apart from the google keyword tool we also have Google trends that gives much more detailed insights. Google trends provide an insight of how the search volume of a particular phrase over time. It is important when venturing into an online market because you want a market that is growing as opposed to one that is declining. It also provides a snapshot of the keywords that have been growing in popularity and the most popular related searches. It is essential in marketing and planning of the SEO of your website. You also need to know if the demand for a product changes at the different seasons of the year. The keyword tool can be misleading when you search for a product at the wrong season as it gives monthly statistics.

How to manage inventory and multiple suppliers?

When selling online, you need to manage inventory across your suppliers because telling customers that their order is out of stock is not good for business. It is one of the most challenging tasks you will face when undertaking a drop shipping business. Suppliers, on the other hand, don’t provide real time data on their inventory and you need to find ways of managing the inventory across your suppliers. I will give some of the best practices that will help to reduce the number of your out of stock orders.

First of all, you have to get multiple suppliers offering the same products and having overlapping inventory. It will greatly help improve your order fulfilment ratio. It is very risky working with one supplier because if they raise their prices or decide not to work with you, then your business might collapse. It is hard to find supplier dealing in the same items, but suppliers operating in the same industry are likely to stock the best-selling products. Therefore, you need to pick the products you will be selling very wisely.

The other strategy you can use is generic product description. If you realise that two suppliers have identical products that can be interchanged, then you can apply generic product description to fulfil the customer’s orders from either of the suppliers. It is applicable for small accessories and products add-ons. You also need to check the product availability before you consider selling it. It can be done by contacting the sales representative and getting a list of the items that are always in stock 90% of the time. If you are faced with an out of stock scenario, then you need to have an alternative offer to the customer. You can give the customers a similar and even an upgrade of what they wanted. You might not make a sale from this, but at least you will retain the client relationship.

How to choose the best supplier to use?

You can identify one preferred supplier who is best to work within terms of customer service and superb products and work with them by default. You can then add the supplier’s email address as the recipient of all incoming orders. It will automate the ordering process, but you must ensure that the supplier stocks most of the products that you sell.

You can route your orders based on the customer location. If you have multiple suppliers who stock most of your products, then you can fulfil the order with the supplier who is closer to the customer. It will help save a lot on the shipping fees. Otherwise, you can also route them based on items availability. If you have several suppliers from where you get your products, then you will need to check the supplier with the item in stock. This option might take a lot of time especially if you are doing it manually. If one supplier provides better pricing than all others, then you can route the orders based on price. You will also need to consider the shipping rates and potential drop fees when looking at the pricing.

Security and fraud Issues

When dealing with drop shipping, you need to be prepared to counter fraudulent orders that can lead to a lot of losses to your business. The main and widely used measure that is used in fraud prevention is the address verification system (AVS). With the AVS customers are required to input the address on their credit cards records for their transactions to be approved. It is used to limit thieves who only have the credit card numbers from making purchases online. Fraud is very minimal because when orders pass through the AVS because they are then shipped to the customers billing addresses.

Most of the fraud cases occur when the billing and shipping address are different. On the other hand, if you don’t allow customers to have a separate billing and shipping address you might lose out on a lot of orders. However, if you still allow it then create room for fraudulent orders that you end up paying for. Credit card companies will make you pay the bill in case of a fraud case, and you ship an order to another address that is not card holder’s address.

Understanding chargebacks

Chargebacks occur when a customer contacts their bank or credit card company and contests a charge you made. The processor who transacted the payment will then deduct the disputed amount from your account and will ask you to provide proof showing that you delivered the goods or service to the customer. If you don’t have any evidence, you will lose the disputed amount, and you will also be charged an additional amount to cater for the chargeback processing fee. If you have very many chargeback cases, you could end up losing your merchant account.

Chargebacks usually occur when because of either fraud, when customers forget about the transaction or if they simply don’t like the product they received. In cases of chargebacks, you are only given a few days to respond, so you have to be quick. In this case, you have to provide documentation showing the initial order, tracking information that will show delivery and the suppliers packing slip which will show the item purchased and shipped. If you get a chargeback that is related to order that has been shipped to a different address which is not the same as the billing you are not likely to win.

How to deal with returns?

First of all before you as the retailer writing down your return policy you need to evaluate and understand your suppliers return policy. If the supplier offers a 45 days return period, then you can also offer your customers a similar return period. When a customer wants to return an item, they have to contact you for a request to return the item. You will then request your supplier to give you a return merchandise authorisation. The customer will then send back the item with the return merchandise authorisation indicated on the address. When the supplier receives the item, they will credit your account with the price of the item.

However, when dealing with returns, some suppliers will charge you a restocking fee for returning an item. These fees that you will incur as a business like it, not customer friendly to pass it on to customers. You also have to compensate the customers the return fee if they receive a defective product. For relatively inexpensive products you can just ship the customer a replacement without having them ship the defective one.

Bottom Line

If done in a proper way, drop shipping is one of the best possible method to make money online. What do you think about drop shipping?  Please feel free to add your comments below so that I can come up with more ideas for the forthcoming  posts.

 

Image Courtesy:Pixabay

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4 Comments

  1. Robin Khokhar August 19, 2017
    • Reji Stephenson August 20, 2017
  2. P V Ariel August 21, 2017
    • Reji Stephenson August 21, 2017

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