What is Drop Shipping?
Besides being the most desired category of Internet Business Opportunity, by buyers, this category has held its’ value compared to other categories of Internet businesses. Although the overall trend shifted to a buyer’ market, in June this year, drop shipping sites have retained their historically purchase price range of a 1.5 to 2.5 multiple of Seller’s Discretionary Earnings.
This category never reached the higher multiples in the heated Seller’s market and continues to sell at between these earnings multiple.
To the online shopper drop shipping is transparent. The customer cares little whether you have the product in inventory, or that it is shipped from a third party.The customer cares about quality of service, on time delivery, and excellent follow up.
Of course, price is an important factor. Your ability to deliver on your customer expectations is in the hands of the drop shipper. Remember, in addition to your drop ship partner, you have other partners in the chain to that must perform well to meet your customer’s expectations. Such as your drop shipper’s shipper:
The Drop Shipping Model
On the backend of a drop ship business you will display the product on your web site, determine a retail price for the product, collect payment from your customer, send the wholesale portion to a drop shipper; and the item is shipped directly from drop shipper’s warehouse. The warehouse may be the manufacturer of the product, although more often it is an intermediary. In some cases the product may have legitimately been delivered to your customer through two intermediaries.
You’ll learn more about this later in the article series when I write about the new distribution channel from China. Where Chinese manufacturers are flattening the channel by setting up shop in the US, and other countries, to provide fulfillment. Chinese manufacturers that ship to the US to a wholesaler typically receive only 20% of the final retail price. Later in this ten part series on drop shipping you’ll also learn how to tell the difference between a legitimate drop shipping partner and another intermediary posing as a drop shipper . In other words is your drop ship partner placing your order from their inventory, or with another up stream drop shipper?
The more companies in chain the less margin you will make on the sale of your products.In most drop shipping cases, the business owner never handles the merchandise because every aspect of shipping is handled by the drop shipper. However, there is one gotcha; and that is how you and your drop ship partner will handle returns. Returns, depending on the type of product you are selling, can be anywhere from 12% to 27%. Computer products are at the low end of the percentage of returns, while clothing and accessories are at the high end. If your drop ship partner handles your returns they may charge you a restocking fee.There are other advantages to a drop shipping business model. For example, it saves you the cost of holding your own inventory.
If you’re like most people starting a small business, your working capital is limited, and may only be your credit cards. By drop shipping you have immediate positive cash flow because you are paid when the purchase is made. Therefore, there is a period of time in which you have the customer’s money, but have not yet paid the wholesaler if you have terms, or if you paid your drop shipper with your credit card. By drop shipping you\’ll be able to quickly take advantage of new products; since you don\’t have to worry about having the inventory on hand before adding the new product to your web site.
Is A Drop Shipping Internet Business For You?
Every buyer that inquires about an Internet Business Opportunity for Sale would like to own a home-based business, but perhaps isn’t quite ready to fill the garage, or spare bedroom, with inventory. Also, the buyer may believe there is less risk by using a drop shipping model compared to buying and holding inventory. My experience in reviewing dozens of drop shipping Internet businesses suggests that a hybrid provides the most successful approach to making money online by selling products. High sales volume products are carried in inventory; while higher ticket items and low volume items are drop shipped to the customer.
Also, certain products just don’t inventory well in your garage or spare bedroom. For example, a current listing that sells Mini Bikes. Imagine storing a few dozen mini bikes in your garage!If you\’ve been interested in starting, or buying, your own Internet business, but you’ve been trying to avoid the hassles of things like developing and producing products, tracking your inventory, setting up warehouse space, and maintaining a shipping/receiving infrastructure, then drop shipping may be your answer. It allows you to profitably sell quality brand name products on your website, while someone else looks after product development and order fulfillment. Leaving you to focus on drawing customers to your web site.
You Want to Buy or Start a Drop Ship Internet Business , Now What?
If you saved at least a little money, you are better off acquiring a Drop Shipping Internet Business Opportunity as opposed to starting one. Why? Aren’t you the buyer who wants to avoid the risk of carrying inventory? Well, starting a drop ship business brings the same risks. What if the product you pick to have dropped shipped doesn’t sell, or has too much competition to gain a foothold? You will spend money on creating your web site, drawing traffic to your site, yet not be able to convert the visitors to customers that buy your product. You also have an advantage at present with financing your drop ship Internet business purchase. Lenders have become increasing comfortable with drop shipping and passive income Internet businesses. I’m working with one Loan Broker right now that has clients with millions to lend to buyers of an Internet Business Opportunity. The money was earmarked for sub prime mortgage loans. These lenders are aggressive as demonstrated by their loan terms. Including the potential for interest only, 10% interest, and 90% LTV (loan to value).
The Basics You Will Want To Know
Although the drop shipping model can be a windfall to Internet entrepreneurs, before getting started you should know the advantages and disadvantages. Drop shipping can seem like you will own the perfect solution for making money online with an Internet Business Opportunity. While drop shipping is a highly desired business for small business buyers, and entrepreneurs, there have been many misconceptions associated with it.
This is Part One of a ten part series that will explore all the information you will want to know to make money online by buying or starting your own drop shipping Internet business.In Part Two of this ten part series we will explore the differences between drop shipping sources and affiliate sources. The end goal of each model is the products you sell are shipped by a third party.
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