Drop Shipping

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You may already know how valuable a drop shipping program can be in selling your product
to stores. Or, maybe you've heard the term 'drop shipping' but aren't quite sure how it applies
to you. The intention of this guide is to show you, not only the value a drop shipping value
can add to your business and bottom line, but the steps needed to implement a successful
With the state of the current economy, retailers all across the country are turning to vendors
who drop ship vs. writing wholesale orders. Why not ensure that your business is in line with
this retail shift and take advantage of being in front of the retailers who are looking for vendors
with a solid drop shipping program?
This guide is written in simple question and answer format, with expanded explanations and
examples of important need-to-know information along the way.
Remember, if you have any questions about anything that you read in this guide, or need
some advice on starting your own drop shipping program, I can always be reached at
[email protected] to assist you.
**Please Note** Throughout this guide you will see the term DS used for 'drop shipping'.
Copyright 2008, Creative Writing Studios & Boutique Up!. The content in this guide, including all written content
and graphics belong solely to the author and may not be reproduced in any form, including digital, written or
otherwise, without the written, expressed consent of the author. The author may be reached at: Lisa Otto,
1-888-495-1091, or email: [email protected]

What Is Drop Shipping?
Drop Shipping is a term applied to the process of a retailer selling a product which he doesn't
actually keep on physical inventory. Instead the retailer takes orders for a product which the
vendor then ships directly to the customer.

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The retailer:
Gains permission to use the vendor's product pictures and information to promote the
product on their retail site, though they never purchase physical product. Instead, DS
allows them to offer 'virtual inventory'. There is no minimum purchase or automatic
restocking required.
Negotiates to earn a percentage of each product sale.
Takes orders for the product and relays order to the vendor for product packaging and
shipment to the customer.
The product vendor:
Allows the retailer to use your product information to promote the item for sale on their
retail website/store.
Allows the retailer to take a percentage of profits.
Ships the product directly to the customer.
While the process seems simple there are many variables to consider and work out before
making your product available via a DS program.

How Do I Price My Items for Drop Shipping?
Because, ultimately, money and selling more product are the main reasons you're entering
into DS, you need to make it profitable for both you and the retailer while still maintaining a
reasonable MSRP for consumers.
DS programs typically follow a 50% above wholesale format. You should have a wholesale
price set for your product before you even consider doing DS.
Here is how to determine your wholesale price: (hypothetical example of product pricing)
Simple formula for wholesale pricing: cost to manufacture x 2 =wholesale x 2 = retail. So, if something
costs you $2.50 to make then the wholesale price is $5.00 and the retail price is $10.00.
You should always factor in total production costs when figuring your wholesale pricing. Total
production costs can include insurance, inflation coverage, pay for your time or employees
time in handling product, etc... Take a close look at how much it really costs you to produce
your product, and take it from there.
Your item costs $3.00 to manufacture
You've added a $1.00 inflation coverage on your item
You've added $2.00 per product to pay yourself
You've added $1.00 for liability/insurance coverage per product
Total cost to you per product: $7.00
Double it: Your wholesale cost is $14.00
Double it: Your retail (MSRP) cost is $28.00
Wholesale pricing is largely determined by your industry and product, and what the market
will tolerate. As with the above example, a retailer has to be able to sell the product for at
least $28.00 or pricing will have to be reconsidered. Always be sure to research products
similar to yours to see how you can compare/compete in pricing. And always be sure that you
are getting paid something for your time.
So, how does this work into DS pricing?
You've decided that your wholesale cost is $14.00 and that retail on your product will tolerate
$28.00. When you offer your product to retailers via DS, you are going to offer them the
product at $14.00. This essentially becomes the amount you will make from each item the
retailer sells. You should have solid footing on your wholesale cost and product development
costs, because in the end, you need to be paid fairly for your own product.

Now if you were simply selling your product to a retailer at wholesale, this would be about the
end of your product pricing. But, DS also includes other financial issues that must be
addressed. This includes:

Drop Shipping Fees

Shipping Fees
What are the Extra Fees I Should Consider for My DS Program?
As a vendor supplying product via DS, you are responsible for shipping the ordered product
directly to the customer. This means that you will incur packaging costs, including your time
to package and ship each product. To cover your costs of shipping materials (not the cost of
postage-we'll cover that in a bit), you need to add a 'Drop Shipping Fee' to the amount
retailers pay to offer your product for sale.
Typically, DS fees are anywhere from $1.00-$5.00 per product and can vary greatly based on
what you are selling.
Think about what that DS fee can cover:
~You are warehousing your own product-not the retailer. You can implement a warehouse fee.
~Your packaging material costs, like boxes, tissue paper, packing peanuts, etc
~Labels, business cards, promotional materials included in each package, etc
~Your physical time to package and send-off each order
~Any decorative trims that you use to dress each package
~Printer ink and depreciation/use of your equipment
So now that you have determined the DS fee you need to charge to cover packaging costs,
you will need to add that into your DS plan.
Retailer wholesale cost: $14.00 per product
DS fee: $ 3.00 per product

Shipping Costs:
The matter of who pays for the customer's shipping cost can vary from retailer to retailer, but
the general rule of thumb is that the retailer is responsible for charging the customer shipping.
It is easiest if you figure a flat rate shipping cost for every product that you ship. For example,
if you know one product costs you $6.00 to ship, then you can charge the retailer $6.00 for
every order, and add that into your DS plan.
Retailer wholesale cost:
$14.00 per product
DS fee:
$ 3.00 per product
Shipping fee:
$ 6.00 per product
The retailer will pass the shipping fee directly along to the customer. However, you will need
to be flexible with retailers when multiple products are purchased and how you will adjust flat
rate shipping. Don't overcharge retailers on shipping costs. If you know your product costs
$6.00 to ship, it's not advisable to charge the retailer $8.00. This will only cut in the retailer's
bottom line and make your DS deal less inviting since you are already charging a DS fee to
cover shipping materials and related expenses.
Now that you have the financial aspects of your DS plan, you have something to present to
retailers when negotiating a DS contract. I say negotiating because retailers are different,
and though you have a solid plan, it won't be a one-size-fits-all plan for every store you
approach. Be flexible, yet know when you simply can't adjust to a retailer's request.
Now your DS figures look like this:
Retailer wholesale cost:
$14.00 per product
DS fee:
$ 3.00 per product
Shipping fee:
$ 6.00 per product
Total cost: $ 23.00 per product (YOUR FEES FOR EACH ITEM SOLD)
This end number is what you should expect to be paid for each item the retailer sells
(assuming the items you allow the retailer to carry are priced the same). You have received
wholesale cost for your item, a DS fee and shipping costs to ship the product to the customer.
As you can see, the retailer will not profit at 50% above wholesale due to drop shipping fees if
he prices your product at $28.00 MSRP for resale. This is acceptable, and expected, since
the retailer is not carrying your physical inventory or writing a minimum purchase order.
Starting with wholesale pricing gives you the option of being flexible if a retailer asks for
slightly different terms and the ability to see how much financial wiggle-room you have as
well. Some retailers are happy to only make a few dollars above wholesale for each product
sold, especially if he carries a lot of virtual inventory in his store. In the end, you need to
determine what is most profitable for you, and worth your time and effort.

How Do I Recoup My Fees For Each Item the Retailer Sells?
How you are paid can vary from retailer to retailer. Some may request to pay you monthly or
weekly. Some may pay you after each sale. If you feel strongly about a payment schedule
add it into your DS program contract, clearly stated, and make sure the retailer understands
what you are expecting in forms of payment.
A retailer may pay you via Paypal, a business check or credit card. As well, some larger
retailers carry a company credit card which they expect YOU to charge after each sale. For
instance, say a customer makes a purchase from the retailer and you ship the product. The
retailer may provide you with a credit card number-to keep on file in many cases-and simply
ask that you charge their card for your fees.
In order to do this, you will need to be able to process credit cards through a merchant or
Paypal account (which you should have set up if you are a product seller anyway). Keeping a
retailer's company credit card allows you to bill for each product-and get paid-before you ship
the item to the customer. This ensures that you receive immediate payment for your goods
and time without waiting for the retailer to pay you, or running the risk of a retailer who is a
slow or non-payer.
An alternative to this is to bill the retailer upon each order and insist that you be paid for each
item before you ship the product. This can be done with a simple transfer of funds via Paypal
and no credit card is required.
When creating your payment terms, be specific and clear about your expectations, including
how you will handle late payments from the retailer, overcharges, refunds and non-payment.
Who Handles Refunds, Exchanges or Unhappy Customers?
Issues related to refunds and exchanges are likely to vary from retailer to retailer. Generally if
a refund needs to be given due to damaged or unsatisfactory merchandise, you will be
responsible for the refund. If the refund is due to retailer error or other issue related to the
retailer, than you should not be liable for the refund.
A few reasons you are responsible for refunds:

Unsatisfactory merchandise

Incorrect merchandise delivered

Late or lost delivery (that shipping insurance does not cover)

Merchandise that does not live up to it's warranty (ie, falls apart after washing,
noticeable flaws with use, etc...)

Reasons you should not be liable for refunds:

Customers unpleasant experience a retailer

Retailer error or misrepresentation of a product

Shipping damage or errors that are covered under postal insurance
Customer service should almost always be handled by the retailer who is representing your
products. Because of this, the line of communication between you and the retailer must
always be open. The retailer will need to know when you have shipped an item, by what
carrier you sent it, any product substitutions or back-orders, delay in product shipping and
other key information.
Additionally, if a customer is requesting an exchange of a product, you will need to be
prepared for the additional packaging, time and shipping costs associated with an exchange.
Be upfront with the retailer about whether or not you will accept exchanges, and who will be
responsible for the costs involved.
Back-ordered, discontinued or replaced merchandise can pose problems for a retailer.
Because they rely on presenting consumers with exact information about a product, you must
keep each retailer you work with informed of any changes in your products status. If you no
longer expect to carry a current product in the future, will be replacing your product with a new
one or are experiencing lead-time issues with your products manufacturing, be upfront and
timely in letting retailers know so they can adjust inventory accordingly.
What About Brand Identification & Private Labeling?
The topic of brand identification can be tricky and you'll need to decide how important your
business brand is versus how badly you simply want to expand your product to the retail
Some retailers who sell drop ship products do not want another business' brand on the items
they offer for sale. This means that they may not want your business tags on the
merchandise you offer them, or your logo or packaging materials used for shipping the
product. To seem as an exclusive company, the retailer may ask instead that you use their
logo and packaging materials. While this doesn't happen often, it is best to be prepared in
case a retailer approaches you about brand identification.
If your business brand is very important to you and you are focusing more on growing your
brand than simply selling your product, you'll want to keep your brand identification on your
product and not enter into a DS agreement with a retailer who is asking you not to. If you are
driving your brand forward or have plans of adding additional products to your own branded
line it doesn't make sense to allow anyone else to sell your product as their own.

However, if you are more concerned with selling products and bringing in some profit to your
business, then allowing a brand transfer can be appealing to you. If you choose to allow a
retailer to place their brand and business logo materials on your product, you need a very
clear contract about this. In fact, you will likely want to have an attorney involved to craft a
rock-solid contract about how a retailer may use your product and display as their own, how
and when you can ask the retailer to stop doing so, and any specifics involved.
Never sign anything related to your product brand without a qualified attorney going over
everything with you. There would be nothing worse than inadvertently turning over your
product or brand to someone else!
Private Labeling
A simpler solution to the topic of brand identification is private labeling. Say a retailer wants to
carry lip gloss but doesn't have the resources to produce it themselves. They may approach
you about carrying the lip gloss you manufacturer but with their logo on the label instead of
yours. This allows the retailer to sell their own brand of lip gloss without having to actually
make it in-house. This is called private labeling.
You may choose to produce a product for another company or retailer and add their logo/tags
and branded material to the product as private labeling. And, if you do, you may charge a
private labeling fee. Additionally, the retailer will be responsible for supplying you with all of
their labeling and branded materials for packaging and shipping. Private Labeling offers up an
entirely separate business contract-one you should likely have an attorney involved in. But it
can offer a great way to sell more product and increase your profits if your company brand is
not at the forefront of your business plan.
No-compete Clause:
A benefit to you if branding is important for your business, is asking the retailer for a no-
compete clause. This would ensure that the retailer does not sell another item closely related
to yours, or the exact same as yours, but made by a different company.
For instance, if you sell minky baby blankets you may ask the retailer to no-compete minky
baby blankets from another company. This would allow that your brand, of that type of
blanket, is the only one offered on the retailer's site.
While some retailers may not agree to this, you should certainly ask them to consider it if you
feel strongly about it. However, don't only ask, show them why they should consider it.

Do you have record high sales for that particular item?

Did you receive beneficial press that would warrant people to look for your item, hence
driving buyers to the retailer's store?

Is your product well-known enough (or does it have the potential of becoming widely
known) so you can assure the retailer of good sales?

Ok, I'm Ready to Start My Drop Shipping Program! Can We Recap?
Below you will find a sample drop shipping contract which you can use to help form your own.
Because DS can add so many new profitable outlets for selling your product, you really
should give it careful consideration and work out drop shipping agreements with retailers that
offer long-term relationships. Once you're basic DS plan is worked out, you have a working
proposal with which to approach a variety of retailers and start selling!
Your Responsibilities As a Vendor:
To have an easy, long-term working relationship with retailers, you have a responsibility to
provide clear DS policies. Some of the key points you are responsible for are:


Product availability

Lead time (how long will each item take to produce upon order?)

Prompt shipping

Correct billing and responsibility for informing the retailer of price changes ahead of

Guaranteeing product integrity and quality at all times

Prompt and open communication with all retailers with whom you contract

Notifying retailers of any changes to take affect to the DS contract
The Retailer's Responsibility to You:

Abiding by the terms of the DS contract

Correct representation of your item in their store/website

Correct billing

Exemplary customer service as to reduce the potential for problems for you with
unhappy customers/poor customer service

Prompt and open communication with you about any store or policy changes that
directly impact you

Providing you with packaging materials if appropriate for brand identification
The main benefits of starting a DS program:
For the Vendor:
Wide range of retailer possibilities from which to sell product
Increases brand exposure through wider outlet of retail sales
Ability to keep cash coming in during slow retail sales