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Drop Shipping: Riches or Ruin? Part 1

Weighing the risks of working with a drop-ship supplier

It’s easy to see why so many people consider drop shipping as a supply strategy for their e-commerce businesses. If you build a relationship with a drop shipper, you will take some enormous chores directly and immediately off your to-do list.

Dropshipping companies will store the products you sell, process your orders, pack your shipments and ship them to your customer. You save on warehousing costs and efforts, order fulfillment, packaging, and arranging delivery pickup. You’ll pay your drop shipper only once the item is sold, and only for those items that you do sell.

No sale, no risk? No risk, no problem? Well, let’s not get so far ahead of ourselves. Like everything else in life, that sounds just a little too good to be true. Drop shipping can be a fast leap off a steep cliff just as easily as it can be a launching pad to prosperity. That’s especially true considering the special circumstances inherent in selling in a large Internet-based marketplace.

We’ve gathered some advice from people experienced in both selling online and working with dropshipping companies. In this article, we’ll explore the challenges of working with drop shippers. In Part 2, we’ll provide some guidelines for making relationships with dropshipping companies work. If you decide to try to integrate this strategy into your business model, you’ll at least have some information from the folks who have gone before you.

Dropshipping aggregators earn money both from the fees members pay and each transaction they process

Know your drop-ship type

eBay seller and educator Skip McGrath divides dropshipping companies into two distinct categories: dropshipping aggregators and drop shipping manufacturers, or master distributors. Dropshipping aggregators have huge merchandise catalogs. They often have ready-to-use copy and stock photos of the items they offer. You can sign up as a paid member of one of these marketplaces, begin browsing for your next big hit, and use the copy and photos to create your own listings.

Dropshipping aggregators earn money both from the fees members pay and each transaction they process. Dropshipping manufacturers, on the other hand, actually produce and store their own goods and offer drop shipping to you as an additional service of the manufacturing process. Some of these drop shippers handle this part of their operation in house, while others go through a master distributor who provides drop shipping for multiple manufacturers.

If you go with a dropshipping aggregator you are one member of an enormous crowd. You’ll get easy access to a huge catalog of goods to sell, but so will everyone else in your marketplace. You’ll struggle valiantly to find a niche product in a corner of the market that isn’t already well represented by others who have also taken a chance with your aggregator. Even if you do successfully identify a profitable niche, how long will it be until your competitors notice and also start listing your little gem?

“Because these drop shipper’s items are everywhere, it forces the prices down, and you’ll be lucky to make any profit at all,” warns e-commerce merchant Cynthia Lizana.

A few details to consider

Competition isn’t the only hurdle standing between drop shipping and eBay success. Intrinsic in the agreement you make with a drop shipper is a potential brick wall that can crash your eBay business, and fast. Using a drop shipper means selling an item that you don’t actually own.

Despite your best research and plenty of promises, your drop shipper is only as good as the orders processed. If there are supply issues with your drop shipper, you are essentially selling something that cannot be guaranteed to arrive within the amount of time necessary to complete a successful eBay transaction.

“It is my understanding that eBay requires all sellers who use a dropship company to state that the auction is a pre-sale, just in case,” says long-time eBay seller Stephanie Inge. (Read eBay’s pre-sale policy).

eBay requires all sellers who use a dropship company to state that the auction is a pre-sale

When you sell a pre-sale item, you are telling your buyer that he is purchasing something not yet available for delivery. This strategy is often used for video games that are pre-sold before their release date. If, for example, you list a pre-sale item in a 10-day auction, you’ll have 30 days from the day the auction ends to ship the items.

“But, as we know,” Inge continues, “most buyers don’t read the fine print, and expect to receive their items in a timely fashion—and rightfully so.”

You may avoid violating eBay policy with the pre-sale listing strategy, but a handful of dissatisfied customers can crash your eBay business almost as quickly as a listing violation.

When you turn the fulfillment of your sale over to a third party, you relinquish control of perhaps the most vital part of your operation: the delivery, as promised, of the goods purchased. If your drop shipper makes a mistake, delivers damaged goods or fails to meet your delivery requirements, you risk angry feedback from your customers and sanctions from eBay for non-delivery of your products. This sort of thing can send your business into a tailspin. Not only that, if eBay identifies you as a seller who does not fulfill orders, you risk being barred from the marketplace and losing your eBay business.

Can you handle the risks?

If you decide to go with a drop shipper, now you’re paying both the drop shipper’s and eBay’s fees. It’s easy to see the profit margins begin to slip for each item you sell. Plus, since everyone who shops tries to get the best deal, having your drop shipper send your goods out in his boxes with his logo and return address will let your customers know exactly where you’ve purchased your items, for much less money than they’ve spent.

Clearly, we’ve found more than a few good reasons to be wary as you explore the opportunities of working with dropshipping companies. Does that mean we think you should never consider adding drop shipping to your business model? No, we wouldn’t say that.

There are plenty of successful, experienced eBay sellers who would never feel positive about turning over this vital step to a third party. But there are still many others who do it—and do it successfully—all the time. Those sellers tend to be well established and connected with their suppliers before they broach the subject of drop shipping. They are far more likely to be using the second type of drop shipper McGrath referenced, the drop shipping manufacturers.

Now that you have a clear understanding of the potential pitfalls of drop shipping, next time, we’ll look at how some sellers are working directly with their manufacturing partners to make drop shipping happen.

About the author

Brad & Debra Schepp
Brad and Debra Schepp are the authors of 20 books, including eBay PowerSeller Secrets and The Official Success Guide: Insider Tips and Strategies for Sourcing Products from the World's Largest B2B Marketplace. Their most recent book is How to Find a Job on LinkedIn, Facebook, Twitter and Google+. Brad is also a literary agent for Waterside Productions. For further information, visit the couple's website, Opinions expressed here may not be shared by The Online Seller and/or its principals.

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