Why a Drop Shipping Guide?
While drop shipping is getting more and more popular, I thought it would help to put together an Ultimate Drop Shipping Guide to help people who are either looking to progress to the next level by adding new skus, or just give an all inclusive breakdown for someone new to the idea.
If you have any questions, be sure to comment below, or contact me directly through the Contact Us page and we can setup some time to see how QStock’s Drop Shipping Module can help your business.
What is Drop Shipping
It is sometimes surprising the number of businesses who still ask “what is drop shipping?” Drop shipping is a critical supply-chain management technique that relieves many of the burdens that face retailers who cannot afford to keep high levels of inventory and excess stock on hand. Essentially, you are selling products you never actually own.
A business can set up an online store, mark-up the price to include profit, and sell products to customer and forward the order to your supplier. The supplier in return, ships the product to your customer on behalf of your company.
While drop shipping isn’t necessarily always an ideal business model (risks grow from not having control over your own supply chain), it may often be a great lean solution which can help scale quickly.
Drop Shipping Companies
If you wanted to add products to your existing fulfillment practice, there are a host of drop shipping wholesalers eager to help. My best recommendation is to connect with your current suppliers to leverage your current buying power to drive the drop shipping costs down.
If you are looking at your suppliers and wanting to expand your options, you might try a new supplier as a drop shipping wholesaler to test them out. A supplier who is willing to help you test new products by drop shipping is a very valuable asset to growth.
If you do want to look for a new drop shipping companies to help with your new drop shipping initiative, the following slides are a great way to find drop shipping companies specific to the products you are looking to add. I think you will be surprised how easy it is!
Drop Shipping vs 3rd Party Logistics vs Warehouse Fulfillment
Drop Shipping is a popular way to start a business with little capital or time investment. Once growth hits a certain point, it is time to go beyond drop shipping and into fulfillment through 3rd Party Logistics or 3PL. A 3PL gives more control over simply drop shipping, but not as much as traditional fulfillment. There are a number of great reasons to transition to a 3PL (see below) and many lifestyle business may stay with the 3PL model indefinitely.
For companies who want greater control over their supply chain, traditional fulfillment is the best solution. QStock Inventory’s Drop Shipping module can help those businesses add skus to their product line the lean way. Aside from drop shipping, QStock can help manage every aspect of managing your own inventory, ensuring your efforts are put towards only profitable efforts.
- Lower Inventory Investment: No inventory means taking on no additional risk.
- Greater Flexibility: Given the lack of inventory, drop shipping provides the option to test new product lines on eBay or in your online store.
- Hands Off = Hassle Free: For the typical do-it-yourself types, outsourcing inventory and shipping can free your time to focus instead on your core business.
- Fewer Discounts: Deep wholesale discount costs are harder to come by for buyers who drop ship.
- Greater Online Competition: If you are drop shipping a manufacturer’s product, it likely means other people are too, so you may face greater competition with online pricing. This can result in lower profit margins.
- Returns: If there is a shipping or product return problem, retailers must deal with the customer support hassle, and act as the middleman between the buyer and supplier.
- Product Availability: Occasionally drop ship suppliers run out of product, so you could potentially be selling a product that is out of stock.
Tip – Many drop ship suppliers will apply conditions to retailers – minimum price controls, sales conditions, return conditions, etc. — so investigate the terms before you sign-up!
3rd Party Logistics (3PL)
- Economies of Scale: It is far easier to add warehouse space in a 3PL than your own warehouse.
- Flexible & Customized Solutions: 3PLs often specialize in a particular industry. If your business in the food, pharmaceuticals/neutraaceuticals, or other traced industry their expertise may benefit.
- Importing or Sourcing Assistance: With the experience of multiple businesses, a 3PL can often help newer businesses with vast industry expertise.
- Increased Speed to Market: While not as fast as drop shipping, a 3PL is vastly faster than securing your own facility and staffing.
- Lack of Visibility: Many 3PL companies do not have a way for you to view your on hand inventory. Without certain visibility you can be subject to outages at critical times.
- Costs: 3rd Party Logistics providers often have fees associated with counting, adjusting, and normal warehouse duties. Be sure that you are aware of all of the costs you are subject to.
- Loss of Control: You never have complete control of your inventory and are subject to loss and damage incurred by the 3PL staff.
Tips – Test your 3PL provider to see what visibility and reporting you can have access to and make sure they are up to date with systems like QStock Inventory to ensure accuracy and efficiency.
- Greater Inventory Control: Performing order fulfillment yourself means controlling your own inventory, and knowing you have what you need to ship on-hand.
- Faster Ship Times: Since you control the inventory and people, you can fulfill orders
- Increased Margin: Holding inventory can also mean increased margins for the retailer. Often drop shipped inventory will have a higher per-order product cost than if the retailer actually invested in inventory by buying a small wholesale amount.
- Fewer Stock-Outs: One of the dirty secrets of drop shipping is that suppliers often don’t inform their drop shippers when inventory levels are low. Sometimes the retailer will sell the product to the buyer only to discover the supplier no longer has the item. By buying a small wholesale amount you can avoid this hassle and ensure your buyers can get the products on time.
- Inventory Investment: Controlling inventory means paying for and taking possession of it. Some retailers don’t have the cash to invest in products that they haven’t historically sold.
- Space Needed: Holding inventory also means you need a place to store it. This is where an outsourced order fulfillment warehouse can help by giving you a location to receive, store and ship product.
- Capital Investment: A greater investment is required for buildings, people, training, and other fixed costs.
Tip – Partnering with a third-party warehouse can be a good alternative to renting a warehouse outright.
Drop Shipping Glossary
What Ultimate Drop Shipping Guide would be complete without a glossary of terms that are used in the industry? These are general terms you will hear often, but you will also hear many terms related more to ecommerce and internet marketing which is outside of the scope of this document.
3PL – Third Party Logistics. A separate entity who will house your inventory and manage the fulfillment for you.
Affiliate – A publisher or site owner that forwards qualified web traffic to an online merchant on a pay-for-performance basis in the context of online marketing.
Application Programming Interface (API) – An API is a protocol created to allow separate software solutions to communicate. Developers will use APIs to connect or integrate systems and services.
Authorized Distributor – A manufacturer-approved or designated distributor allowed to sell larger quantity of products to commercial customers.
Authorized Retailer -A manufacturer-approved or designated retailer who is allowed to sell products directly to consumers.
Better Business Bureau (BBB) – A non-profit organization in Canada and the United States that is focused on trust in advertising. The organization responds to consumer inquiries about business reliability, and accredits businesses. Accredited online merchants may display a Better Business Bureau badge.
Brick & Click – A retail outlet or business with at least one physical location and at least one ecommerce enabled website.
Brick & Mortar – A retail outlet or business with at least one physical location.
Business to Business (B2B) – Businesses who sell exclusively to other businesses. Often dealing fewer defined customers in larger volumes with a reduced price. Often a manufacturer going to a distributor.
Business to Consumer (B2C) – Businesses who sell directly to a consumer. These businesses have many customers with fewer orders per customer.
Chargeback – When a customer forcibly reverses a transaction, taking funds from a merchant and returning those funds to the consumer. Nearly all chargebacks are the result of a consumer complaint, including claims that the transaction was not authorized, not fulfilled, or not as described.
Content Management System (CMS) – Software that helps build and manage content, like a website, in a way that does not require a programmer.
Customer Relationship Management (CRM) – Software specifically devoted to organizing, synchronizing, and automating a business’ customer and vendor relationships and sales processes.
Delivery Confirmation – A service offered by many package carriers, like the United States Postal Service, FedEx, and UPS, that provides the shipper with information about when a package was delivered.
Drop Ship – Fulfilling product through a separate entity, either a distributor or manufacturer where you never own the inventory.
Ecommerce – Buying and selling products over electronic networks, including the Internet or mobile applications. The term may apply specifically to electronic transactions or more generally to the online retailing and online business.
Fulfillment – Order fulfillment is the process of completing an order, shipping a product or products to the customer. The term may also be applied to logistics companies that inventory products and ship orders on behalf of an online store, but is often used as a type of company who fulfills from their own warehouses.
Inventory – The value or quantity of a businesses current stock of products.
Inventory Control – The business functions on inventory to ensure accuracy and best practices.
Liquidator – A company that purchases closeout products for the purpose of resale at a discounted rate.
Logistics – The management of products or other resources as they travel between a point of origin and a destination.
Manufacturer’s Suggested Retail Price (MSRP) – The price at which a manufacturer recommends that retailers sell a given product. Based on relationship, this could be a firm or soft recommendation.
Margins – The difference between what a retailer pays for a product and what the retailer’s customer pays for the product. Margin calculations may account for only the cost of the goods sold or may take into account shipping and other variable costs.
Minimum Order Size – The minimum count a manufacturer or distributor may require retailers to place orders before shipment.
Multi-Channel Retailing – Retailing products through more than one channel: ecommerce stores, online marketplaces (Amazon, eBay), physical stores, catalogs, sales force.
Net Profit – The difference between a business’ revenue and all of its costs.
Net Terms – Credit term that a supplier extends to a retailer, allowing the retailer to pay for purchased items some number of days after those items have been shipped. Often net terms are described as “net 30,” “net 120,” or similar where net 30 means that a retailer has 30 days to pay for an order after that order has shipped. Frequently, net terms will also include a discount so that 5/10 net 30 would mean that a retailer would receive a 5-percent discount if the bill was paid in 10 days or less, otherwise the bill is due in 30 days.
Pay Per Click (PPC) – An online advertising model wherein advertisers pay only when a prospect clicks on an advertisement and is directed to the advertiser’s website.
Per-Order Fee – When a manufacturer or distributor drop ships an order directly to a customer on a retailers behalf, that manufacturer or distributor may change a per-order fee for processing.
Preferred Supplier – A vendor who is chosen as most favorable due to reliability, costs, or deliverability time.
Profit Margin – The difference between what a retailer pays for a product and what the retailer’s customer pays for the product. Margin calculations may consider only the cost of the goods sold or may take into account overhead and other variable costs.
Reseller – A company that purchases goods or services for the purpose of resale not consumption. In web economics, a reseller may also be a form of affiliate marketer, promoting a product or service.
Restocking Fees – A fee charged to customers who are returning products. Often the subtracted from the customer’s refund.
Retailer – A company that sells directly to the end consumer. Business to Consumer (B2C)
Shipping – The process of physically moving merchandise form a point of origin, like a retailer’s warehouse, to a destination, like a customer’s home.
Supply Chain – A network or system of businesses involved in moving a product from its manufacturing point to the customer. In online retailing, the supply chain usually represents the distributor and manufacturer of a product.
Tracking Number – An alphanumeric identification that shipping services like FedEx or the United States Postal Service assign to a specific package to facilitate monitoring and delivery confirmation.
Trademark – Government protection for words, symbols, or designs meant to represent a product or brand.
Trade Show – An exhibition created so that manufacturers and distributors may show or demonstrate new products or services. An excellent place to source new products or ideas.
Value Added Tax (VAT) – A tax added at each stage of a production process. Effectively, the tax applies each time “value” is added to the product.
Value Chain – A network or system of businesses, not only moving a product from its manufacturing point to the customer, but adding something that increases it’s value to the end consumer. In online retailing, the value chain can be bringing hrad to find products together or instruction and support like our own MSA Systems for barcode printers and scanners.
Vertical – An industry segment made up of similar business and customers.
Wholesale Price -The price manufacturers, distributors, or other wholesalers charge retailers for products.
Wholesaler – A manufacturer, distributor, or similar that sells to retailers.