The 4 Methods of Dropshipping (E140)

Show Notes:

  1. Retail Arbitrage
  2. International Dropshipping
  3. Domestic Dropshipping
  4. Hybrid Dropshipping




Charles (00:00):

In this episode of the Business of eCommerce I talk about the 4 methods of dropshipping. This the Business of eCommerce episode, 140.

Charles (00:16):

Welcome to the Business of eCommerce. The show that helps eCommerce retailers start launch and grow the eCommerce business. And I want to talk about today, the four different methods of drop shipping. What I realized is talking with different users and different online forums is drop shipping is a very, um, confusing term where a lot of folks seem to have one method in mind. When they’re speaking about that method, they usually kind of push that as the, that is the method that is drop shipping. And I think it’s kind of helpful to map out these different discreet types of drop shipping. I’ve kind of mapped out as four different types. The fourth is less common. So I think that’s an interesting one to talk about. Well, it’s kind of go through each one, go through a pros and cons. Why? I think, you know, each one definitely has its benefits and let’s kind of talk about each.

Charles (01:05):

So number one, and a lot of blogs, we’ll talk about this as drop shipping, but retail arbitrage is kind of a niche inside of drop shipping. Today’s episode is sponsored by drip, drip. It’s a world’s first e-commerce CRM and a tool that I personally use for email marketing and automation. Now, if you’re running an eCommerce store, you need to have drip to try. And here’s why drip offers one-click integrations for both Shopify and Magento. There’s robust segmentation, personalization, and revenue dashboards. To give you an overview of how your automation emails are performing. One of my favorite features of drip is the visual workflow builder. It gives you a super easy way to build out your automation world visually and see the entire process. It lets you get started quickly, but also build very complex automation rules. It’s powerful, but also easy to learn. Unlike a lot of email tools that offer the same type of automation to get a demo of drip today, you can go head over to that’s O E.

Charles (02:03):

Now onto the show drop shipping is when you don’t take physical whole of the product or for very long sort of thing, it kind of just moving the product, right? So retail as a form of that, what that is is when a product is sold in one place, more than it’s being sold in another retail location, a retailer, or the retail arbitrage, or 10, essentially sell on Amazon for a hundred and buy that same product on eBay for $60 when they get that order and Amazon finally buys it for a hundred, they say, grace, they get that shipping address. They go directly to eBay buy the exact same product, put in that, use a shipping address and have it shipped directly there for a hundred, right? So they make that 40 in between minus shipping costs, minus taxes, things like that. So it’s very easy to get into.

Charles (02:57):

And that’s one of the biggest benefits, right? Well, most folks are starting off. You might not even have a LLC set up any sort of actual business entity. You could literally do it all within your, um, Amazon account. You can just use a personal account and just start listing products. Super, super, super simple to get into the issue is, well, first one issue is I believe mature the reality here of the terms rather, but I believe it’s against the Amazon’s terms of service. So it’s something that if you start doing it, any sort of scale and people find out, you can get reported, where that happens is a lot of times somebody gets a product and they think they’re buying it from XYZ store, but really they get it from Sarah’s dot com or from Walmart. They ship a product and people start to get a little upset with that.

Charles (03:42):

Sometimes they ship it back to the wrong location. You can have all sorts of issues with bash. Second is it’s like a hamster wheel, right? You can find these products, but it’s basically this arbitrage situation that is an inefficiency in the market. And eventually it will correct itself. So maybe there’s an place today to make money, but it might be gone tomorrow. And you’re constantly dealing with this where every day you’re gonna find a product and it’s going to be a great, and you can sell as many of them as you can. But then tomorrow you have to find a different set of product. So it’s constantly gonna be this hamster wheel finding more products because of that. It makes it very difficult to scale, right? Every time you find a winner, it’s fleeting, right? So even if you find a great product, you can sell, you make money.

Charles (04:25):

You don’t even know in $40, it could be gone. So that is an issue or always could be, Hey, one day gone the next and last, he’s probably talked to your accountant about this and depends where you live, but you might be buying products and paying tax, depending on how you’re buying them. It could be a physical retail. And if you’re paying tax on them, then whatever that 5%, six, eight, whatever your taxes that you’re paying locally, that’s eating into your margin. And that can be pretty big because some of the margins are pretty close. So if you’re paying 5% tax, that might be most of your margin right there, minus returns, that sort of thing. So it might eat you alive right there alone is paying that tax. And it all depends on issue, hand tax and then also tax when you sell it, not actually an accountant, you should probably talk to someone about that if you’re really doing this.

Charles (05:11):

But if any of you start running any sort of scale that’s definition to look out for. So the second type also very common is international drop shipping. So this is something like using Ali express. For example, you see a lot of people talking about this also as this is drop shipping and what this is, is buying from suppliers internationally, usually warehouses that are actually manufacturing the product. You go on Ali express, you’re saying, Hey, this product looks good. Maybe buying one, maybe you’re just using their images. You miss standing on like an Amazon eBay. As soon as you got to sell you go to AliExpress express, pop it in and say, ship it over there. They’ll ship, just drop ship. That one product, that user gets it. You’re essentially getting the money and you’re buying the product at the same time. So there’s very little risk app because you kind of know how much pain also makes it very easy again, too.

Charles (06:06):

The nice part also is the price selection. Now with Ali express and several other marketplaces, it’s pretty much unlimited. You could literally be selling socks one day, electronics and next. So you have this bass product selection. It makes it super easy to get into super easy, to try different products. Some of the cons, it is first obvious as longer shipping times, right? You’re shipping internationally. So wherever you are, let’s just say, it’s us coming overseas. It’s gonna be longer shipping times and domestic shipping rates. Some other issues is lack of quality control. You might, a lot of times, you’re not taking the first product you just sending directly. So you don’t even know, is it in great shape, is a packaging done, right? Or you know what it actually looks like. And even if you do, sometimes you have to swap out one supplier for another very quickly and buy from a different factory.

Charles (06:57):

And that’s not some issues as well also makes because the product section is alive. Sometimes it’s hard to stay inside of the niche. Do you see people try to sell footwear, whatever it is. And they keep having to try to look for other warehouses, be constantly looking for more warehouses. So staying inside a single niche tends to be a little challenging folks that do international drops, but it is very easy to get into. So you see a lot of people start here as well, third type of drop shipping. And I’ve done a podcast on this one as well. I can link tow, but domestic drop shipping. This is where same Dale you’re buying from a manufacturer or possibly a distributor. And you’re a local country. So there’s some pros and cons of this, obviously as well. You see less people actually talk about this as drop shipping, but this is probably when the older methods, right?

Charles (07:44):

If you’re in retail, who’ve been around, you have brick and mortar. You most likely buy from a distributor. Most likely you’re not going direct to manufacturer everything, a few things. And a lot of times, if you’re a local retailer, you know, 10 years ago, 20 years ago, you weren’t going internationally. You’re all buying it local. So it was probably actually the oldest form of drop shipping. Some of the pros, obviously faster shipping times, you might be working with a distributor that has, you might be in the U S working distributor in the U S with four or five warehouses. They can get it pretty much anywhere, continental in two days. So it makes it very fast for that. Also you tend to get better quality control it, kind of putting that on the distributor or the manufacturer. You can assume if you’ve got, maybe they have 5,000 skews.

Charles (08:30):

If the first a hundred a good, the other is going to be checking as well. And if you have a problem, you can go to them and go back to them and say, Hey, I’m a distributor of your product. And so, and so went wrong. We need to figure this out. So usually they’ll help you with that, which is great. Nice spot also is each distributor manufacturer tends to be in a niche or at least have a lot more products in the same niche. So if you are selling boat supplies, when you go to a manufacturer it’s on boats and buys, most likely don’t sell one. They sell a whole catalog full. So if you want to put all your boat, GPS is usually easiest dot, just adding all of them together. Instead of going directly to international manufacturers, we have to find one of, kinda assemble them one by one.

Charles (09:15):

You can usually go, go to Garmin. For example, maybe they have 50 of them. You could sell them all. So it makes it very easy to just expand the catalog horizontally. And then oftentimes distributors will have other complementary product lines. So it makes it easier to go into other product lines. So maybe a boat GPS is, and you want to add on some sort of life S and they have that too. So it makes it very easy to do that. Some of the cons are because they have multiple warehouses, because they’re doing that quality control. There are some higher costs, essentially, usually. So you’re buying from distributors cost and definitely a bit higher. Cause they have to factor in a little margin from themselves because they are providing a service to you. The other one is it is harder to get approved, right? This one, a lot of distributors, a lot of manufacturers, most likely the better ones.

Charles (10:04):

If you come in as a brand new retailer and say, Hey, I’m just setting up a store. They don’t want to talk to you, right? The best ones. Usually don’t usually they want to see some sort of track record. They might even want to see a brick and mortar. They might want a credit check. There’s always some hoops to jump through. Usually the more hoops, the better, right? Because if it takes you a while to jump through them, it’s going to take other retailers, you know, longer, and there’ll be less competition. But if you’re coming in day one as a brand new retailer, sometimes just setting that up setting, you have to have a LLC set up separate entity. You need a lot of foundational work to be upfront. So sometimes do retailers get a little bogged down on, even just finding one contact in Nebraska and just getting any dealer accounts.

Charles (10:45):

So there is a little more work there and that makes it a little more challenging, but also is a little more defensible because not everyone can sell their products. So the fourth type that I’ve talked about also in the podcast before, which is my toe, this is probably the least known, but we do see a lot of retailers implement on this successfully. So I figured it’s good to include now is hybrid dropshipping. This is where you blend the best of stocking products with drop shipping. So easy example would be, you might work with five different distributors, but you also know your top 100 products, right? So you know what products you’re going to sell the best. You know, you can sell these. You definitely have to sell them. But those products, we see a lot of retailers go direct to the manufacturer or the distributor, buy them in bulk, bring them into a local warehouse, debt garage, a three BL someplace to ship the approximate locally.

Charles (11:37):

And they basically build their own warehouse, but it’s another, they have a hundred products. But what they do is LinkedIn together with the entire distributed catalog of those other five vendors. So the vendors each might have 10,000 skews. You can basically start much larger product selection with your products, right? So when an order comes in, that order might be a couple items, might be filtering your warehouse. A couple items might go to the distributed network. So it makes it very easy to scale to a large product selection. And the nice part is you have the pricing purchasing power of buying in bulk, bringing it to a warehouse. So you can go and say, I want to buy a hundred units. I need a discount. So it makes it possible to do that. So not really drop shipping those products, but you have the benefits of drop shipping, where you can expand your product catalog on a whim at any day, right?

Charles (12:28):

So you can just add more skews. You can drop ship. Those. It makes it totally easy to ask. We’ve also seen retailers implement very successfully is when an order comes in, they first look in their local warehouse, but if that’s not in stock, then they look down at the distributed network on the distributed network. They can see out of the five German distributors who has in stock. Great. Three of them do okay, out of those three, who has the lowest cost or get the quickest or whatever they need, but they can figure out what distributor is the best choice. And they come up down a whole order, make a decision and figure out, let’s send it to, let’s send this pieces of order to that distributor and this piece over there. So even though we ran out of stock, we can still fulfill it and we’ll figure out the best price actually.

Charles (13:13):

So it really gives you this powerful mechanism on figuring out when to get products from where to get the best cost and also where to stay in stock. Pretty much almost all the time. Because if you look at enough of these distributors together, the top five might be out of stock, but you might find some distributors that not many folks use in the middle of nowhere, but they still had a few in stock. And at that point, if it’s a popular product, you’re the only game in town and you’re going to get all the orders on a marketplace, right? So you’re gonna sell through y’all stock, sell through distributors, SOC, and you can just keep going in the more of these chain together, the better. So it gives you this secret superpower, nice spot is also same benefits of the other ones. You can control the quality control the shipping times because you have control even more so with the mini warehouse.

Charles (14:01):

But if you go to distributors, you still have that benefit. And also you can buy in bulk when it makes sense. So that’s a nice pot. You know, it’s not just all or nothing. It’s knowing where my top 10 5,100 skews. I know I can sell these. So let’s buy these in bulk, but I don’t have to buy a thousand seats in bulk. So you get to see what works. See what’s working through dropship and then double down on those 10, 10 tenants down on those. So you basically have all the benefits of both the real downside here is it does require more tech. It, it requires some assistance with this, right? Like you’re not gonna be able to just install a shopping cart and do this out of the box. There is some automation that’s gonna be required to set this up. You don’t need to pull on data feeds.

Charles (14:43):

You need to pull in pricing from all these different suppliers, because when it goes out of stock at the cheapest, you’re going to want to reprice that price a little higher, because that next supplier might be a little more expensive, right? So you’re gonna have to do a lot of realtime pricing, real time, stock updates. You’re moving stocks from different suppliers. So there is a lot more work here in the background. So you don’t want some sort of system to implement this. So this is also something that most retailers aren’t starting with right out of the gate, right? You need multiple distributor accounts to really get the power out of this. You need some buying power, right? So you need some money up front, actually purchase product, and you need some tech to actually run this entire backend process. So those are kind of the cons. It does require more set up to, to get this running. So run through them real quick. First retail arbitrage, second international drop shipping. Third is domestic drop shipping, and fourth is hybrid drop shipping. I think that kind of hits the main four points. I’m curious if I left anything out, please leave a note in the comments, send me an email, definitely have a hair or any of your thoughts. And until next time I will talk to you soon. [inaudible].

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