When I launched my business in 2001, I literally had a few hundred dollars in the bank and was feeling really crappy after getting laid off. After reading Rich Dad, Poor Dad, I had learned that successful Entrepreneurs use other people’ time, money and resources to start their own business ventures and I wanted to do the same. However, the book is more about the concept and business psychology than the how-to portion. In “How to Create and Launch a Drop-Shipping Business”, I will provide the how-to portion and will include some valuable resources you can start using today to start your very own drop-ship empire like I did.
What is a Drop Shipping Business?
A drop ship business provides you with maximum leverage. By using other people’ time, money, resources (such as manual labor) and expertise, you literally have people working for you (indirectly) while you’re getting paid by the customer. Then, depending on how you built this relationship with the vendor, you can pay per order as it is shipped or pay weekly or monthly. Your customer receives the products with your “to and from” shipping label (excluding the vendor) and your customer has no idea that the products were drop-shipped by the warehouse. You collect the customer’ money up front while you pay the vendor after the order ships. Nice!
Searching For a Drop-Ship Company
When searching for a drop-ship company, it is best that you follow my “Business is an intellectual sport” philosophy. To give you a synopsis, just find a product that people are searching for on the internet (using Google keyword research tool), buy it low and sell it high and do not make an emotional choice about selling your favorite doodad or trinket, just what works. If you find 10 different types of items to sell with very good profit margins, then you can pick and choose on your favorite product. Here are the steps to finding a good drop-ship company:
- Wholesale Central is a great resource. I have found many great vendors to ship products for my web sites over the years. While it is not a drop-ship directory, I would go through the directory with an open mind and once you’ve found products, call the company and find out if they will drop ship and how much your cost is going to be per item. Chances are, you’re not the first person to call about this and they may drop ship. If the company does not drop-ship, continue calling more until you find some that do. There are literally thousands of vendors out there that want your business.
- Do a google search with the modifiers “distributor” , “reseller” , “bulk” , “warehouse”, “supplier”, “wholesale” and “Drop-shippers” to find vendors.
- Wholesale and drop shippers are really not the best designers nor do they put that much emphasis on looks so don’t be thwarted by an old 1990’s style site.
- Real drop ship companies DO NOT have any initiation fees upon signing up – if you do find a company like this, just move on.
- Some companies will charge a $5 drop ship fee per order. This is to cover the cost of time and labor and its your call if you want to do business with them but its not unusual if it happens.
How to find out which products have good margins?
Drop shipping is a retail business and if it is your first time dealing with retail merchandise, then your first order of business is to learn more about profit. when calculating profit, don’t forget to subtract all other costs such as shipping costs (which the customer should be paying anyway), credit card processing fees, packaging, etc. Here are some highest profit margin products. Do a search on the internet for more or use the Google keyword research tool.
- Cosmetics
- Greeting cards
- Mattresses and furniture
- Clothing
- Jewelry (diamonds, watches, etc)
- Sunglasses or eyeglasses
Is a Drop Ship Business Right For You?
When I drop shipped, I absolutely loved it. Imagine waking up daily to thousands of dollars in sold merchandise that you won’t ever have to touch. The drop ship business is great for a beginner but seasoned business veterans also find it highly lucrative. This is a great business model because you really don’t need a lot of money to start the business with less than a few hundred dollars in the beginning. This is also the type of business for the Entrepreneur who doesn’t want to ship the products, hire any employees or have any other overhead like rented space.
Which platform To Use
Over the years, I’ve used the X-Cart shipping cart program for all of my stores but lately, I’ve been hearing very great things about Shopify. There are also programs like Magento and Volution. My personal favorite for beginners and experienced alike is Shopify – it is beautiful with several beautiful layouts to choose from. Then there are monthly payment plans to keep the shop running. There is no need to hire programmers or design a site from scratch. I really wish Shopify was around when I started my business. I also forgot to mention that it is amazingly quick and superb for SEO.
How to automate the heck out of the business
Recently, I wrote a post about how to use Elance and Odesk effectively – I suggest you check that out but in the meantime, it is really simple on how your drop ship business can be automated:
- Your Virtual Assistant (VA) will cost you $3-5 per hour.
- Hire someone from the Philippines based on my Elance and Odesk tips (link above)
- Learn the business first (for the first month) then teach him or her how to answer emails, take your calls, send orders to the vendor, etc.
Your time as an Entrepreneur is valuable. How to tell when its time to hire someone? Simple calculation – How much are you worth per hour? (calculate based on how much you make per month, then by weeks, then by days, then by hours of profit the business brings in) and if you make $25 per hour in profit, you can afford $3-$5 in VA work. This saved time allows you to spend more time on the nuts and bolts of the business so you can help it grow, while your VA pushes and pulls all the levers that you’re too qualified to do yourself. Easy right? Business is easy, people are complicated. Ha!
How to Set Up Payment Terms With The Vendor?
Since you’re just starting out, businesses will not be able to give you net-15 or net-30 (15-30 days to pay). However, you should discuss net terms with the vendor after you find someone good to work with anyway. Vendors typically send you a business reference letter which will ask for your personal details as well as 3-5 other vendors / businesses you have done business with over the years. Since you’re just starting out (assuming you’re if you’re reading this), then its probably in your best interest to structure the relationship this way from the beginning:
- Tell the vendor that you want net-30 terms right away.
- The vendor will send you a credit verification form.
- Tell the vendor that you will fill out this form but you do not have history with any other vendors.
- You will most likely not get net-30 terms so the next best thing to ask is “Can I get net-15 or weekly terms?
- If they still refuse terms, then go an extra step and ask “if I can prove to you that I will have a successful business (in a month, 3 months, 6 months, whatever) will you provide me with net-30 terms? Tell them that you want to be a good customer and net terms will make your life easier.
- If you get terms, great. If not, pay them on a daily basis to ship all of your orders and always communicate as if your last meal depended on it. This company is doing you a favor, in the beginning, they are the BOSS, not you. Once you prove yourself, you have more wiggle room to call the shots.
Setup a legal business Entity
If you’re serious about starting a business and I hope you’re, then you will setup a legal entity for yourself. I am not going to provide you with an explanation as to why its important to have a legal entity on this post but I do suggest checking out legal zoom.com to setup a corporation. Setting up a corporation gives you an EIN number (employer identification number) which most vendors need anyway and a corporation is necessary to shield you from any legal matters if they come up later on. Finally, its important to setup a corporation but it should be done as your last step after you have your web site ready to sell and your customers have already started buying from you. A lot of people make the mistake of setting this up first and its almost always not necessary. If an EIN number is necessary for you to drop-ship or do business legally, this can be setup very easily without setting up a corporation. You can download the form online for your state or have your tax professional do it for you for a nominal fee.
“Go big or go home!” – William Shaker
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