The UGLY Truth About Dropshipping That No Guru Will Tell You

Summary

This video delves into the realities of drop shipping, debunking its 'get rich quick' myth. It outlines the business model, where online stores sell without inventory, relying on suppliers to fulfill orders directly to customers. The script addresses legality, the need for permits and licenses, profitability with typical margins of 10-30%, and the importance of using legitimate suppliers. It also covers automation, payment methods, finding suppliers, and the strategy of using drop shipping as a stepping stone to private labeling. The video concludes with insights on why drop shipping may be both advantageous and disadvantageous for different business goals.

Takeaways

• 🛍️ Drop shipping is an e-commerce model where the online store does not hold inventory and orders are fulfilled by a supplier who ships directly to the customer.
• 📉 Contrary to its reputation, running a successful drop ship store is not easy and has many pros and cons, with typical profit margins being between 10% and 30%.
• 🏛️ Drop shipping is legal as long as it's conducted with legitimate suppliers and adheres to brand licensing agreements to avoid fraud.
• 📄 In the U.S., a seller's permit and potentially a business license are required to legally sell online, emphasizing that drop shipping is a real business.
• 💡 The best drop ship products are high-ticket items that yield more revenue per sale, compensating for the lower profit margins.
• 🤖 Drop shipping can be automated for order fulfillment through EDI (Electronic Data Interchange), but customer service remains a manual responsibility.
• 🛒 Setting up drop shipping on e-commerce platforms like Shopify or WooCommerce is straightforward and involves electronic transmission of orders to suppliers.
• 🚫 Amazon drop shipping is riskier due to strict adherence to Amazon's terms of service, including sourcing from legitimate wholesalers and avoiding late shipments.
• 💳 Payment to drop shipping suppliers typically involves credit card on file, ACH, or direct transfer, with some offering payment terms to defer costs.
• 🔍 Finding drop shipping suppliers can be done through various methods including online directories, drop shipping companies, trade shows, or print-on-demand services.
• 🔄 Returns in drop shipping are managed by the store owner, involving coordination with the supplier for return authorization and refunds.

Q & A

What is the common misconception about drop shipping?

The common misconception about drop shipping is that it is an easy and straightforward way to run a successful online store without handling inventory or shipping, which is technically true but often leads to the belief that success is guaranteed and requires little effort.

Is drop shipping a legal and legitimate business model?

Yes, drop shipping is 100% legal and legitimate as long as you use legitimate dropship suppliers and ensure that you are not involved in fraudulent activities such as selling counterfeit products.

What are the requirements for starting a drop shipping business in the US?

In the US, you need a seller's permit to legally sell online, and you must charge sales tax to customers where you have economic nexus. Additionally, if your locality requires a business license, you must obtain one as drop shipping is a method of order fulfillment and your business must be registered as such.

What are the typical profit margins for drop shipping compared to other e-commerce models?

Typical profit margins for drop shipping are between 10 and 30 percent, which is much less compared to private label and traditional wholesale models that can have margins of 50 to 66 percent.

Can drop shipping be automated, and what is the role of EDI in this process?

Yes, drop shipping can be automated, especially in terms of order fulfillment. EDI, or electronic data interchange, is a system that allows your website and your supplier's website to automatically stay in sync regarding inventory and order processing.

How does drop shipping work on platforms like Amazon and eBay?

On Amazon and eBay, you list your products as a merchant fulfilled seller. When an order is placed, you electronically send the order to your drop ship supplier who then ships the products to the end customer. However, you must follow the platforms' terms of service, including sourcing products from legitimate wholesalers and meeting strict shipping and fulfillment requirements.

What are the payment options when working with a drop shipping supplier?

Typically, you can pay by credit card, with the supplier keeping your card on file for automatic charges when orders are placed. You can also use ACH or direct transfer, where your bank information is kept for automatic transactions at the end of a specified period.

How can one find drop shipping suppliers?

There are several ways to find suppliers, including using Google, attending wholesale trade shows, using a drop shipping directory like Worldwide Brands, or employing a drop shipping company that acts as a middleman connecting you to suppliers.

What is the best way to find profitable products to sell online through drop shipping?

Leveraging sales data from Amazon is recommended, as it provides an accurate view of supply and demand for products sold online. Tools like Jungle Scout can help you analyze revenue generation for product listings on Amazon.

Why is drop shipping considered a good stepping stone for e-commerce businesses?

Drop shipping allows you to test a variety of products online without upfront costs, helping you collect data on what sells. This information can then be used to private label or buy wholesale for your best-selling products, thus maximizing profits.

What are the potential downsides of using drop shipping as a long-term business model?

The low profit margins, reliance on suppliers for customer service and product quality, the risk of account suspension on platforms like Amazon or eBay due to late shipments, and the lack of brand recognition are some of the downsides of using drop shipping as a long-term business model.