Drop shipping basics

24 Jul, 2009  Drop Shipping

According to Wikipedia drop shipping is

“a supply chain management technique in which the retailer does not keep goods in stock, but instead transfers customer orders and shipment details to either the manufacturer or a wholesaler, who then ships the goods directly to the customer. As in all retail businesses, the retailers make their profit on the difference between the wholesale and retail price.”

Drop shippers are wholesalers and manufacturers who are willing to ship products directly to a business’s customers, one item at a time.  This provides a great opportunity for whether you’re just getting started with your web business or are an existing company wanting to try out new products or markets.  Drop shipping allows you to sell brand name products in your store without having to first buy them.

Here’s how drop shipping works:

  1. You find a wholesale supplier will to drop ship the products you want to sell and open an account with them.
  2. You receive product images and descriptions from the wholesaler which you post to your web store.
  3. A customers searching your store decides to buy an item from you.  You charge their credit card or Paypal account the retail price of the item plus “shipping and handling”.
  4. You email the order to the wholesale supplier along with the customer’s name and shipping information.
  5. The supplier sends the item directly to your customer, with your name on the package.
  6. The supplier charges you the wholesale price of the item plus shipping costs and, usually, a small handling fee.
  7. Your customer gets the item they purchased and you get another happy customer.

You profit is the difference between the retail price of the items purchased and the wholesale price of the items plus a small credit card or Paypal transaction fee.  For example, an item is purchased for $60, wholesale cost is $36, and the credit card transactional fee is 30¢ plus 2.2%.  Your profit would be $22.38.

$80 – ($36 + $0.30 + $1.32) = $80 – $37.62 = $22.38

$1.32 is 2.2% of $60.  Not too bad, and you never had to touch the item.  This example assumes the postage and drop ship or handling fee charged by the supplier were passed on to the customer as the shipping and handling fee they paid.

The drop ship or handling fee charged by the supplier is to help cover their expenses for providing the shipping materials and packaging the item for you.  Remember, they need to hire extra employees to package and ship the products one at a time.  It also takes additional package materials to ship items one at a time than it does to ship several at a time.  The drop ship fee can be passed on to customers on a per order basis as a handling or added to cost of each item.

Most suppliers will charge the drop ship fee on a “per address” basis.  This means the fee will charged once for each address the supplier ships items to regardless of the number of items or boxes shipped.  Some suppliers will charge the drop ship fee on a “per boxes” bassis.  This means the fee is charged for every box shipped regardless of the number of items shipped or number of destination addresses.

To work with wholesale suppliers you must have a valid business name and a tax Id.  A true wholesaler cannot legally sell you products for resale without these.  Also, avoid wholesalers who want to charge you an “account setup fee” or a “monthly fee” just to open an account with them.  These are more likely to be someone trying to pass themselves off as a wholesaler then be a true wholesaler.

Here are a few companys dedicated to helping small businesses find wholesale suppliers willing to drop ship.  They do not carry products themselves or ship any product.  These companies have gone through the process of finding legimate wholesale supplier willing to drop ship.  They are a great resource to work with and will save you a lot of time, money, and headaches.  Each of these companies also provide a lot of educational materials to help you suceed in business.


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