To understand Drop Shipping, we should first understand product distribution. People have been distributing products since before the first mastodon skinner traded a fur coat for a flint axe.
Here’s how it works.
Let’s say ABC Manufacturers makes a product called Mom’s Ankle Wax. We’ll say that Mom’s Ankle Wax has been around for years. It’s a very well known brand name product. It will without a doubt give you the shiniest ankles on your block, and everybody wants some.
ABC Manufacturers makes Mom’s Ankle Wax, but they don’t sell it directly to the public. They’re a manufacturing operation. They’re far too busy melting paraffin and waxing test ankles to go around building stores all over the place. They need distributors; companies who will take their product and distribute it to the places that will sell it.
For years, ABC Manufacturers has sold Mom’s Ankle Wax to a company called XYZ Distributors. The founder of XYZ Distributors knew Mom herself, back in the old days when she made her Ankle Wax by hand, out in the turkey barn.
Today, XYZ Distributors buys Mom’s Ankle Wax by the truckload. They pay $5.00 a case for it, which is a very good price. It’s such a good price, it has it’s own name: the Manufacturer’s Wholesale Price.
However, XYZ Distributors does not sell it to the general public either. They are a distributor. They distribute Mom’s Ankle Wax.
XYZ Distributors works with a chain of retail stores called Wax R Us. This place was founded by a retail business visionary who saw the incredible potential of Ankle Wax a long time ago. Today there are Wax R Us retail stores on every street corner in every major city in the country. Wax R Us buys truckloads of Mom’s Ankle Wax from XYZ Distributors for $10.00 a case. So, XYZ Distributors makes $5.00 on every case of Mom’s Ankle Wax they sell to Wax R Us retail stores. This makes XYZ Distributors very happy, because Wax R Us buys a LOT of cases.
Cases and cases of Mom’s Ankle Wax arrive in the stockrooms of Wax R Us stores everywhere. The Wax R Us employees open those cases, and pull 12 cans of Mom’s Ankle Wax out of each case. With their pricing guns, they stick a price of $4.50 on each and every can. Wax R Us stores make a total of $44.00 on each case of Mom’s Ankle Wax. (12 cans x 4.50 per can = 54.00, minus the 10.00 they paid for the case = 44.00).
So, Wax R Us is even happier than XYZ Distributors.
However, the happiest people of all are the people who can stroll into Wax R Us and purchase a can of Mom’s Ankle Wax for only $4.50. They think this is a great price, and they’re walking around with the shiniest ankles in town.
Well, that’s it basic product distribution. The manufacturer sells to the distributor, the distributor sells to the retailer, and the retailer sells to the end user (the consumer). The manufacturer, the distributor and the retailer all make money because the customer is willing to spend money for the product.
Drop Shipping has been around for a long time, too.
Above, we talked about the manufacturer-distributor-retailer relationship. When you use drop shipping to sell products on the Internet, (or anywhere else), YOU become the RETAILER in that relationship.
For our purposes, there are two kinds of retailer. There is the retailer who stocks products, and there is the stockless retailer. Drop Shipping means that you become a stockless retailer.
Retailers Who Stock Products
Let’s imagine that you want to open a retail store on the Internet. You have to have products to sell, right? Let’s also imagine that you like to suffer. Mental anguish is your favorite pastime. You aspire to financial ruin. In that case, you will want to stock products for your Internet retail store. To stock products for your store, you will have to rent warehouse space. You will have to have to pay for a shipping account with UPS or FedEx, unless you want to saddle up and trot down to the post office every day. Worst of all, you will have to pay for those products up front.
Yes, that’s right. Money. Probably lots of it. For example, if you want to sell Mattel Toys, you can contact Mattel and they will be happy to set you up as a retailer. I know…I’ve talked to them. We had a nice conversation about setting up an account, placing orders, and all the other wonderful things businesspersons discuss with each other when beginning a relationship. Toward the end of our conversation, this nice woman said to me, in an offhand manner, “By the way, your minimum first order must be at least $100,000.” That’s One Hundred Thousand Dollars, folks. I nearly choked on my bagel. Needless to say, I do not stock Mattel products. Or anyone else’s, for that matter.
Stocking products costs money, that’s the bottom line. No matter what you sell, if you carry stock, you pay first, and then hope you sell later. If you don’t sell the products you buy, there are going to be some very happy people at your next garage sale, and your bank will be sending you an amazing amount of undesirable mail.
There’s a much better way.
Stockless Retailers (Drop Shipping)
It should be noted here, if only to keep the Punctuation Police happy, that if you use the method of drop shipping in your business, YOU are not the “drop shipper”. The company(s) who ships the products to your customers for you is the drop shipper. YOU become a “Stockless Retailer”.
Here’s how drop shipping works.
1.) You open an Internet Store, with a shopping cart and the ability to accept credit cards.
2.) You find a distributor who is willing to drop ship the products you want to sell.
3.) You establish an account as a retailer with the distributor(s) you choose.
4.) You receive images and descriptions of the products you want to sell from the distributor, and post them on your Internet Store.
5.) A customer surfs into your Internet Store, and falls in love with a product that you have priced at, say, $80. They purchase the item with their credit card. Your Store charges their credit card $80 plus your shipping fee.
6.) You email the order to your distributor, along with the customer’s name and address.
7.) The distributor sends the product directly to your customer, with YOUR Store’s name on the package.
8.) The distributor charges you the wholesale price of, say, $48.00, plus shipping.
9.) Your customer gets a cool product from your store shipped to their door, and they tell all their friends about you, and you make even more money.
There you have it. You just made an $32.00 profit on ONE item. You didn’t have to buy a whole bunch of the product and keep it in your warehouse, hoping you would sell it. You didn’t have to pay to have it shipped to you, and then pay to ship it to your customer. All you did was send an email to your distributor.
Keep in mind that there are a LOT of people out there who want you to believe that they are drop ship distributors. You need to find REPUTABLE distribution companies. A good rule to go by: a real wholesale drop ship distributor does NOT charge you a setup fee for an account.
That’s the drop shipping process in a nutshell.
Chris Malta and Robin Cowie of WorldwideBrands.com are the Writers and Hosts of The Entrepreneur Magazine EBiz and Product Sourcing Radio Shows. Click Here for more FREE eBiz info from Entrepreneur Magazine Radio!
