The UGLY Truth About Dropshipping That No Guru Will Tell You

MyWifeQuitHerJob Ecommerce Channel
14 Jun 202213:59
EducationalLearning
32 Likes 10 Comments

TLDRThe video script delves into the intricacies of drop shipping, debunking the myth of it being a 'get rich quick' scheme. It explains that while drop shipping is legal and requires no inventory or shipping on the part of the online store owner, it is not as easy as it seems. The script outlines the need for a seller's permit and business license, discusses profit margins typically being between 10-30%, and highlights the importance of using legitimate suppliers to avoid fraud. It also emphasizes the potential of drop shipping for product research and as a stepping stone to private labeling. The video further explores automation through EDI, the process of setting up drop shipping on various platforms, including Amazon and eBay, and the payment methods accepted by drop shipping suppliers. Additionally, it provides tips on finding suppliers and products, the best times to use drop shipping, the costs involved, and the scalability of the business model. It concludes by comparing drop shipping with private labeling and the benefits of controlling the entire supply chain for higher profits.

Takeaways
  • 🛒 Drop shipping is an e-commerce model where the online store doesn't hold inventory and purchases products from a supplier upon customer order, who then ships directly to the customer.
  • 📄 Drop shipping is legal and legitimate as long as you work with official, licensed distributors to avoid fraud.
  • 📊 A seller's permit and possibly a business license are required to legally sell online in the U.S., and drop shipping is no exception.
  • 💰 Drop shipping typically has lower profit margins (10-30%) compared to private label or traditional wholesale (50-66%).
  • 🛍 High-ticket items are more profitable in drop shipping due to lower margins.
  • 🚀 Despite low margins, drop shipping can be a good starting point for online selling with minimal initial investment and can be used for product research.
  • 🤖 Drop shipping can be automated, especially with EDI (Electronic Data Interchange), which syncs inventory and orders between your website and the supplier.
  • 💡 Drop shipping is best used as a stepping stone to private label or wholesale by testing various products to find winners.
  • 🛍️ Amazon and eBay drop shipping are riskier due to strict adherence to platform rules, such as sourcing from legitimate wholesalers and not drop shipping from other marketplaces.
  • 💳 Payment to drop shipping suppliers can be made via credit card, ACH, direct transfer, or payment terms, with some offering a delay in payment.
  • 🔍 Finding drop shipping suppliers involves using search tools, attending trade shows, or using a drop shipping company that acts as a middleman.
  • 📈 Use sales data from platforms like Amazon, with tools such as Jungle Scout, to find profitable products for drop shipping.
Q & A

  • What is the general perception of drop shipping as a business model?

    -Drop shipping is often perceived as a get-rich-quick scheme because it seems easy to start with no need for storing inventory, shipping, or fulfilling orders, and it can be operated from anywhere in the world.

  • Is it true that running a drop shipping store is easy?

    -While the initial setup might be easier than traditional retail, running a successful drop shipping store is not easy. It has many pros and cons and requires effort to manage effectively.

  • What is the legal status of drop shipping?

    -Drop shipping is 100% legal as long as you use legitimate dropship suppliers. However, selling counterfeit products or not adhering to brand licensing agreements can lead to legal issues.

  • Do you need a seller's permit and a business license for drop shipping?

    -In the US, a seller's permit is required to legally sell online, and if your state requires it, you must also obtain a business license. Drop shipping is a method of order fulfillment, and your business must be registered accordingly.

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

    -Drop shipping typically has lower profit margins, ranging between 10% and 30%, compared to private label and traditional wholesale, which can have margins of 50% to 66%.

  • What are the best types of products for drop shipping?

    -Higher ticket items that yield more revenue per sale are the best for drop shipping due to the lower profit margins associated with this business model.

  • How can drop shipping be automated?

    -Drop shipping can be automated through Electronic Data Interchange (EDI), which allows your website and your supplier's inventory to stay in sync automatically, and orders placed on your website are automatically transmitted to your drop shipper for fulfillment.

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

    -You list your products on Amazon or eBay as a merchant fulfilled seller. When an order is placed, you send the order to your drop ship supplier, who then ships the products to the end customer. It's crucial to follow the platform's terms of service, including sourcing products from legitimate wholesalers.

  • How do payments to drop shipping suppliers work?

    -When you sign up with a drop shipping supplier, you provide a form of payment, such as a credit card. The supplier keeps your card on file and charges it when an order is placed. Other payment methods include ACH or direct transfer, and some suppliers offer payment terms.

  • How can one find drop shipping suppliers?

    -You can find suppliers through various methods: paying a fee to access directories like Worldwide Brands, attending drop shipping trade shows, using a drop shipping company that acts as a middleman, or using a print-on-demand company.

  • What is the best way to find wholesalers who dropship?

    -The easiest way to find dropship wholesalers is by using Google, attending wholesale trade shows, or using directories. Initially purchasing wholesale to demonstrate sales can lead to a drop shipping arrangement.

  • When should one consider using drop shipping?

    -Drop shipping is best used as a stepping stone to collect data for potential products to private label or buy wholesale. It's also suitable for those entering e-commerce without a large budget, allowing for testing various products before committing to inventory.

Outlines
00:00
🛒 The Truth About Dropshipping

This paragraph discusses the common misconceptions about dropshipping, which is often seen as a 'get rich quick' scheme due to its seemingly easy setup. It clarifies that while you don't need to store inventory or handle shipping, running a successful dropship store is not as easy as it sounds. The paragraph also explains what dropshipping is, its legality, and the necessity of a seller's permit and business license. It highlights the lower profit margins compared to other e-commerce models and suggests that dropshipping is worth considering for its low entry cost and potential for product research.

05:01
💰 Dropshipping Profitability and Automation

The second paragraph delves into the profitability of dropshipping, noting that while margins are lower, it can still be a great way to start selling online. It emphasizes that higher-ticket items are more profitable in dropshipping. The paragraph also covers the automation aspect of dropshipping, mentioning EDI for inventory synchronization and the importance of customer service. It outlines the process of how dropshipping works from a personal website and the risks associated with dropshipping on platforms like Amazon and eBay, including strict adherence to terms of service and the prohibition of sourcing from certain marketplaces.

10:03
📦 Payment, Suppliers, and Product Selection in Dropshipping

This paragraph explains the payment process with dropshipping suppliers, including the use of credit cards and direct transfers. It discusses various methods to find dropshipping suppliers, such as using Google, directories, trade shows, and print-on-demand companies. The paragraph also provides advice on finding wholesalers who dropship and emphasizes the importance of demonstrating sales volume to secure dropship agreements. It details the process of finding products to sell through leveraging Amazon's sales data and using tools like Jungle Scout. It further explains when dropshipping is a suitable strategy, suggesting it as a stepping stone to private labeling and a way to test products without upfront costs.

🚀 Best Practices for Dropshipping and Choosing the Right Company

The fourth paragraph focuses on the best dropshipping companies, which act as middlemen providing access to a wide range of products. It discusses the payment terms that can be negotiated with suppliers and the two payment transactions that occur when an order is placed. The paragraph also addresses who pays for shipping in dropshipping, the ability to use multiple suppliers, and the impact on the customer. It outlines the benefits and drawbacks of dropshipping, mentioning the low margins, dependency on suppliers, and lack of brand recognition. It concludes with examples of large stores that use dropshipping and the suggestion that private labeling is the best e-commerce business model for long-term success.

Mindmap
Keywords
💡Drop Shipping
Drop shipping is an e-commerce business model where the online store does not keep inventory of the products it sells. Instead, when an order is made, the store purchases the product from a supplier who then ships the product directly to the customer. This model is central to the video's theme as it discusses the pros and cons, legality, profitability, and operational aspects of running a drop shipping business.
💡E-commerce Platform
An e-commerce platform is a software solution used to create an online store. Platforms like Shopify, BigCommerce, or WooCommerce are mentioned in the script as they facilitate setting up drop shipping by integrating with suppliers and automating order fulfillment. These platforms are crucial for the operation of a drop shipping business as they allow for easy management of online sales.
💡EDI (Electronic Data Interchange)
EDI is an electronic system that allows for the automatic synchronization of inventory between a website and its supplier's inventory. In the context of the video, EDI is important as it enables automated inventory management and order processing, which simplifies the drop shipping operation by reducing the need for manual updates and order fulfillment.
💡Margins
Margins in the context of the video refer to the profit margin, which is the difference between the wholesale cost of goods and the retail price charged to the customer. The script mentions that typical margins for drop shipping are between 10 and 30 percent, which is lower compared to other e-commerce models, impacting the overall profitability of a drop shipping business.
💡Seller's Permit
A seller's permit is a legal document required to sell goods, including online. The video emphasizes the importance of obtaining a seller's permit to legally conduct business and charge sales tax, especially in the US. This is a critical aspect of operating a legitimate drop shipping business.
💡Payment Terms
Payment terms refer to the conditions under which a supplier agrees to provide goods or services before receiving payment. The video discusses how some suppliers offer payment terms allowing businesses to pay for products 30 or 60 days after an order is placed. This can improve cash flow for the drop shipping business.
💡Product Research
Product research is the process of identifying which products are likely to sell well. The video suggests using Amazon's sales data and tools like Jungle Scout to perform product research. This is essential for a drop shipping business to understand market demand and competition, helping to select profitable products to sell.
💡Private Label
Private labeling involves producing goods under a retailer's own brand. The video suggests that after using drop shipping to identify best-selling products, a business can then private label these products to increase profit margins and establish a brand. This strategy is presented as a step beyond basic drop shipping to build a more sustainable and profitable business.
💡Risk-Free
The term 'risk-free' in the video refers to the low upfront investment and lack of need to handle physical inventory, which reduces certain types of business risks associated with traditional retail. However, the video also clarifies that while drop shipping can be seen as risk-free in some respects, it still requires careful management and strategic planning to be successful.
💡Amazon Drop Shipping
Amazon drop shipping is a specific method where products are listed on Amazon and, once ordered, the seller forwards the order to a drop ship supplier who ships directly to the customer. The video outlines the risks and requirements associated with Amazon drop shipping, such as strict adherence to Amazon's terms of service and the prohibition of sourcing from certain marketplaces.
💡International Shipping
International shipping refers to the process of delivering goods to a destination outside the seller's home country. The video mentions that while some drop shipping suppliers offer international shipping, it can be complex and expensive due to customs duties and other fees. This aspect is important for businesses considering expanding their market reach.
Highlights

Drop shipping is an e-commerce model where the online store does not carry inventory and purchases products from a supplier only when an order is made.

Drop shipping is a legitimate business model as long as it is conducted with legitimate suppliers to avoid legal issues such as fraud.

In the US, a seller's permit and a business license are required to legally sell online, including for drop shipping businesses.

Drop shipping typically has lower profit margins (10-30%) compared to private label or traditional wholesale (50-66%).

Drop shipping can be a good starting point for online selling with minimal initial investment and no upfront inventory costs.

Electronic Data Interchange (EDI) can be used to automate inventory sync and order fulfillment between the online store and the supplier.

Drop shipping can be conducted from a personal website, Amazon, or eBay, but each platform has its own set of rules and risks.

Payment to drop shipping suppliers can be made via credit card, ACH, direct transfer, or through negotiated payment terms.

Finding drop shipping suppliers can be done through various methods such as Google, directories, trade shows, or print-on-demand companies.

Product research for drop shipping can leverage sales data from Amazon to find profitable products to sell online.

Drop shipping is best used as a stepping stone to private label or wholesale by testing various products and finding best sellers.

Drop shipping companies often act as middlemen, providing access to a large product catalog without the need to establish individual supplier relationships.

Shipping costs in drop shipping can be passed on to the customer or covered by the business, with some businesses offering free shipping over a certain order value.

Drop shipping suppliers may charge for international shipping, which can be complex and expensive due to customs duties and other fees.

Returns in drop shipping require the online store owner to manage customer service and work with the supplier for return authorization and refunds.

Multiple drop shipping suppliers can be used, but it requires careful order routing and setting correct customer expectations about separate shipments.

Drop shipping is advantageous due to its low risk, no need to handle inventory or fulfillment, and scalability.

However, drop shipping has downsides such as low profit margins, dependency on supplier reliability, and lack of brand recognition.

Large retailers also use drop shipping for certain products, demonstrating its viability as a business strategy when executed at scale.

Private label brands offer greater control and higher profit margins, making them the preferred long-term e-commerce business model.

Transcripts

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Drop ShippingEcommerceOnline SellingProfit MarginsSuppliersAutomationAmazon FBAEconomic NexusPrivate LabelProduct ResearchRisk Management