"Drop-Shipping - The Perfect Zero-Risk Enterprise?" - 419 Legal

zhuguoqing · #1 (**permalink**) 10-08-2007, 11:13 AM

"Drop-Shipping - The Perfect Zero-Risk Enterprise?"
I am not normally a negative person, but I feel it's important to give some warnings about drop-shipping as a business plan. It can be great and I don't want you to go away from this section totally discouraged, but on the other hand everyone needs to face up to reality in the cold light of day.
Too often when I am reading "guaranteed success" type websites I read sales copy from people who are trying to sell you drop-shipping directories or related services, and they don't like to show you the other side of the coin!
I'm afraid I am more mean and not afraid to shatter illusions!

Here are the basic downsides of drop-shipping you need to consider:
• YOU ARE NOT IN CONTROL
Since you are not the manufacturer or original supplier of the goods, you are at their mercy or the mercy of fate. What if their business starts being unreliable, untrustworthy, or even goes bust? What if their export regulations, or your import regulations change? Without a supply of goods your business will quickly be finished.
• MOST COMMON DIFFICULTY: NO STOCK!
Even if your supplier is a good one, inevitably they will often go out of stock on certain goods, or change their product range. If you aren't completely up-to-date with what your supplier has available, you could find yourself with dissatisfied customers facing long delays because they have paid you for a product which is now on back-order or not even available any more.
• "OH NO - I DIDN'T WANT A FULL TIME BUSINESS"
As a drop-shipper you may be tempted to move quickly into several product areas in a bid to get the easy profits you dreamed of. Perhaps you hit on something very successful. You could rapidly find your sales expanding beyond what you originally thought you would have to deal with in the "simple" drop-ship business model. Can you keep everything under control?

Very quickly, if you are successful at drop-ship selling, you could find yourself overwhelmed with all the problems of running a business that you thought you were going to be able to avoid:
o taxes,
o customer service,
o pre-sales and after-sales product technical support,
o product returns support,
o legal issues,
o growing overheads if you need support staff or office space,
o accounting and record-keeping,
o marketing budgets,
o time management problems and personal stress, etc etc.
• COMPETITORS
Drop-ship suppliers tend not to offer exclusive agreements to anyone in particular. That means that with the right base and know-how, any other drop-ship selling business can relatively swiftly copy your successful model and compete with you or take down your business completely.
• ONLINE FACTORS
Since most drop-ship sellers will be running most of their marketing through internet channels, they will be exposed to all the risks associated with online business. These include people copying your web content without authorisation, ever-increasing advertising costs, ever-increasing competition especially from large companies, and unpredictable customer traffic if relying on search engines. If you are doing business online, you won't succeed if you're a total web beginner.
• FINANCIAL RISK
A normal import business may have to import a large stock of goods and bear the cost of storage and insurance for this stock. And then the goods may not even sell, or the value of the goods may go down over time, making the whole stock-keeping situation very risky for the business. In drop-shipping you have basically avoided that problem. However you are still handling the payments. If your customers send you money and for whatever reason that money gets lost, e.g. because of your supplier or because a shipment gets lost, you will bear the responsibility and financial risk. Similarly if you wish to offer customer money-back guarantees, or even have customers that cheat you, you will have more financial risks, and one or two large refunds or frauds could swiftly erase your profits or even put you out of business!
• LOW CUSTOMER LOYALTY
By definition as a drop-ship seller your prices are higher than your supplier's, and in many cases your customers, if they know where to go, could quite easily cut you out and buy as cheap as you do, directly from the source. Especially if your buyers are planning to order the same product again, and in higher quantities, there is a strong likelihood that with a bit of research they will be able to locate your supplier and cut you out of the loop! Even if you aren't worried about your customers bypassing you, you still need to consider the traditional business issue of building loyalty with your customers, so instead of finding you once and buying one product never to come again, they will remember you, your brand, and continue to buy from you in the future. As a drop-shipper the brands and products aren't yours, you may not be an expert in the product area, and you have no physical / personal presence for your customers. So you will have to work extra hard to build your company's identity and repeat-customer business.

Drop-shipping from China
Not a lot of Chinese suppliers will really know what you are talking about if you ask about "drop-shipping". Mainly this is because small order quantities for international orders are quite a new thing in many product areas, so even the word 'dropshipping' may be unknown.
Cool-sale.com is an online wholesale electronics shop, and because we have no minimum order quantity, we have a lot of orders every day for single items being drop-shipped to customers all over the world. However, the factories we source the products from would never be able to deliver single items, even if they could cope with the logistics complications involved with so many small packages. It's the same with most factories - they won't do small orders. So if you are looking for China drop-ship suppliers, you may need to look at the middle ground of distributors and trading companies instead of trying to head straight for the factories.
In principle, Chinese suppliers probably won't have any problems sending goods to your customers. If they can already send samples or packages to your address, then why not to someone else's? The key really is finding suppliers with a low enough minimum order quantity. Even if you find a supplier with a MOQ of 10 pieces you may be able to drop-ship 5 of those to your customers and the others to yourself as a sort of combination of dropshipping and holding inventory. Or some suppliers may let you pay in advance for say 100 pieces and then ship them in small batches to different locations later.
The perfect situation is to find a Chinese supplier who can reliably and efficiently dropship single item packages anywhere in the world. If you approach Chinese suppliers and simply ask "do you drop-ship?" you may not get very clear answers because they may not understand the question.
Here are my suggestions for the questions you can ask your possible Chinese suppliers:
1. Do you have a minimum order quantity? Can I order one piece at a time?
2. Can you ship to [country]?
3. Is it OK to ship directly to my customers?
4. If you ship to my customers can you also provide me with invoices?
5. If you shipped directly to my customers could you guarantee that your packages and invoice would not identify your company?
(This is one of the hardest things!)
6. Would you be able to label the packages and invoice with my own company name / logo? If so would you charge an extra fee for this?
7. If I order 20 pieces but ship to 20 different addresses, how can I do this? Do I have to make 20 separate orders? And if so do I still get the 20 piece quantity discount?

You will also need to discuss shipping options:
• what method of shipping
• how to quote / pay
• how fast
• how to get tracking details
• how to deal with customs and taxes
• how to deal with delivery problems
• how to deal with returns

Obviously some of these things you will work out as you go along, but it's a good idea to think about some of the issues that are likely to arise so you can prepare yourself.

Tips for Successful Drop-Shipping from China
o It may seem obvious, but please check with your supplier whether then can dropship, before attempting to place a dropship order!
Don't dive into dropshipping and sell something to a customer, and THEN start asking your supplier if / how they can dropship. Do your homework!
o Don't make promises about delivery time to your customers until you have tried the supplier and you know they can deliver in the way you want.
o Under no circumstances drop-ship items that you have never seen. Your first order should be to yourself to inspect the goods and assess the supplier's service. This will also let you get an idea of the import tax situation for this particular product.
o Follow my good communication tips for Chinese suppliers. Make requests not demands.

I think I've said enough about the general issues of drop-shipping. I want to return now to the question of selecting the best products to sell, which is vital to drop-shippers and in fact in any importing business.

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