Home > Sell On Amazon > Financing Your Inventory (Part 2)

Financing Your Inventory (Part 2)

Last time we talked about buying and shipping your own inventory, this time we’re going to discuss drop shipping.

Some companies (and manufacturers) will ship products directly to your customers on receipt of order.  The sequence of events is:

  1. You list a drop-shippable product online
  2. A customer buys it from you
  3. You place an order with the drop shipper, giving them the customer’s shipping address
  4. You pay the drop shipper for the product and shipping service
  5. The drop shipper sends it directly to your customer

The big benefit of drop shipping is that you can list a very large number of products online without actually having to purchase the merchandise.  Inventory costs are almost certain to be your largest expense, so not having to buy merchandise before offering it for sale online is extremely attractive.

There are several downsides to this, though.

The biggest downside to me is price competition.  Price competition online is generally pretty stiff, and making a profit on drop-shipped products is difficult.  The drop shippers have to make a profit, so with the low discounted prices online there’s a good chance there won’t be any profit left for you.

The service quality of the drop shippers will be perceived by your customers as your service quality.  If the drop shipper is late in shipping, makes a mistake on the item, sends an item in less than pristine condition, etc., it will be a bad reflection on you.

You have to work with a vast number of products.  Since margins are going to be thin, and / or volumes on individual products are going to be low, you have to make up for it by working with a huge number of products (listing them, setting and updating their prices, etc.).  If you aren’t a software engineer who can automate much of this work it will be extremely time consuming.

You have to monitor when your drop shippers are out of inventory and update your listings online so they won’t be displayed, then re-enable them when the drop shippers have the inventory in stock again.  This has to be done at least once a day for all products.  When you’re working with a large number of drop shippers and a vast number of products this could be a problem.

You have to transfer orders from online to the drop shippers, and shipment status from the drop shippers back to your online store.  Imagine you’re receiving several thousand orders per day and dividing them up among several drop shippers.  For each order received you have to assign it to the right drop shipper, format the order information (items, shipping address, etc.) according to the needs of the particular drop shipper, and upload the orders to each drop shipper.  You then have to update the orders online with tracking information from the drop shippers, again each with its own format.  Just as working with a huge number of products will be a problem if you aren’t a software engineer, so will working with a large number of low profit margin orders every day.

I’m not trying to discourage you from working with drop shippers, I’m sure there’s a lot of opportunity there if you can sufficiently automate it.  And there are companies that provide services to help you with any mechanical step you want.  But each service provider you use costs money and reduces the number of products you can profitably sell.

Random Observations

If you go to the What To Sell On Amazon page you’ll see that I’ve uploaded the potential product lists for February.  The January lists were popular.  I’d like to hear your experiences with finding products to sell from this list, so if you have anything to share please post a comment or send me an email: golden.gate.trading.post AT gmail.com

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  1. February 14, 2012 at 8:28 am

    Very nicely written article on inventory, I have always wondered if you as a ecommerce store owner have a mental framework of inventory mix (drop shipping + inventory). If you have some pointers on what method should be used to devise inventory planning that would be interesting piece to learn

    • February 14, 2012 at 7:54 pm

      Hi Ravi,

      They’re two different ways to sell products. Each takes a certain amount of time and money, and returns a certain amount of money, and I measure how much time and money I put into each aspect of my business. I constantly look for the weakest link in the way I’m running my business – the thing that’s stopping me from expanding. Whatever the current weakest link happens to be is the one I work on.

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