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Is Dropshipping Still a Good Business Model?

March 14th, 2019 by Skip McGrath

You may have some experience with dropshipping – but not everyone does, so let’s take a minute to fully understand it.

What exactly is drop shipping?

Drop shipping is selling something you don’t own. There are many companies that offer merchandise for sale who will ship the merchandise directly to your customer once you pay for it.

Here are the basics

  1. You find a company that agrees to drop ship. (Most people find them by Googling the term dropshipper or drop shipper).  You list their products on eBay, Amazon or your website for sale without first purchasing it.
  2. When the item sells, you collect the retail  selling price and the shipping cost from the buyer.
  3. Now you pay the wholesale (lower) price plus any any shipping and handling fee to the drop ship company.
  4. The drop ship company ships the item to your customer.
  5. Your profit is the difference between the retail and the wholesale price

There are three types of drop shippers and it is important to understand the difference:

  1. Aggregators
  2. Manufacturers and/or master distributors
  3. Direct Importers

Let’s look at each one so you can understand how they work

Aggregators

Aggregators are companies that search distributors and overstock dealers for wholesale merchandise, and put it in a virtual warehouse.   In other words they don’t actually stock any product. They offer the products for sale on a drop ship basis.   When an item sells, they go out and buy it.  In general, these companies make their money from membership fees or drop ship handling fees rather than profit on products.

Almost all aggregators charge a membership or a sign-up fee. They claim to do this to screen out people who just want to buy one or two items at wholesale prices for their own personal use.  But, in reality these fees are a big part of their income.

Some aggregators also offer pre-made websites filled with their product.  They usually charge an extra fee for this.  Never do this.  It’s almost always a scam, and search engines penalize websites like this and you will never be found.

In general, I suggest you avoid aggregators, or any company that charges a fee. Before you sign a long-term contract, or pay an application fee to any drop ship company, make sure they offer some type of guarantee or trial period.

My favorite research tool is Terapeak. With Terapeak you can research products to make sure they will sell and what price they will sell at before you waste your time and money on listing items that won’t sell or won’t make a profit.  Terapeak is optimized for eBay, but I find their information works well on Amazon also.

Manufactures and Master Distributors

There are hundreds of actual manufacturers who will drop ship. 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 and this is where you can make the most money on eBay, Amazon or a web site.

There is a way you can find manufacturers who will drop ship for free. Go to www.thomasnet.com. This is the home of The Thomas Register, the largest data base of manufacturers in the US and Canada. You will see a search bar on the home page –just select type in a product you are looking for into the search box. It’s best to be a bit general.  For example, I would search the term “men’s clothing,” instead of “polo shirts.”  Once you get to a category it will be easier to find specific products.  The Thomas register also offers names of manufacturers who will drop ship.

When you link to the drop shipping sources page on our website you will see that we have listed both aggregators and several manufacturing drop ship companies. Just because a company is listed does not mean we recommend it. You should check each company out carefully. If they charge a fee, make sure they offer a free trial period or a refund.  And, before doing business Google them for reviews and/or scam warnings.

Direct Importers

A Direct Importer is usually an overseas manufacturer with a warehouse in the United States.  The are generally reliable, but you should follow the same cautions I outlined above.  One word of warning:  Make sure they have an actual warehouse in the US (or Canada) and are not shipping from China.  Most of the companies who do that are very unreliable.

Pros & Cons of dropshipping

Pros:

Cash flow is the biggest pro.  You can start with very little money because you don’t have to pay for the products until they sell, and you collect the money from the customer.

The other pro is the savings on storage costs.  This is especially important for large items such as furniture and appliances.

Cons:

The biggest negative is that eBay and Amazon and Walmart.com don’t like drop shippers and are creating policies to make drop shipping difficult.  In fact, I suspect they will soon ban the practice.

One of the biggest problems with drop shippers is they run out of stock.  This means you can sell something and have to cancel the order because you can’t deliver.  Do this a few times and your selling account will be closed.

Another negative is price.  Because they are not selling in high volume most drop shippers will increase their prices, or add a steep drop ship handling fee.  This can kill you margins

Lastly, most drop shippers don’t care about your customer, and give really poor customer service.  I have seen situations where a drop shipper will take 4 or 5 days to ship a product.  And, even worse, I have had dropshippers ship the wrong product and then want you to pay for the return.

Another issue is fake or counterfeit products.  This is a major problem with general dropshippers (aggregators).  If  you read the fine print in their contracts (and you should), you will see a statement that says they are not responsible if you get fake merchandise.

So there you have it –my take on dropshipping.  Basically I am not a fan and suggest you avoid this business model.

Comments

Comment from rowel
Time March 20, 2019 at 10:45 pm

Useful advice! If you need a fulfillment solution, Easyship is the platform that I used to successfully launch my dropshipping website.

With warehousing partners in the US, E.U., Singapore, and Hong Kong, easyship offers innovative, regularly updated ecommerce shipping solutions.

You’ll also have access to over 100 shipping solutions and up to 70% off all shipping couriers. There’s no setup, subscription or cancellation fees. You just pay for shipping.

Go to the link below to get started:

http://scrnch.link/easyship

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