What is Economy of scale?

In a production or manufacturing environment, Economy of scale is a simple concept that tells us that the larger the production run, the lower the per unit cost will be.

Think of it this way:

If I purchase component parts for 1000 units I pay my parts supplier x dollars per unit. If I purchase component parts for 10,000 units I might pay x- 10% dollars per unit.

The higher volume should mean lower handling costs per unit for your supplier, and also lower handling costs per unit for your receiving department and warehouse staff.

It costs me the same amount to issue a purchase order and pay my suppliers invoice if I order 1000 pieces or 10,000 pieces, so again, lower per unit cost.

Actual manufacturing production line set up costs are a major cost of production. It takes time to modify each production work station, set up tools and testing equipment, and assign workers to specific tasks. It may take several hours to set up a production line for a specific product. If I want to produce 1000 pieces I may keep my production line busy for 1 day to produce 1,000 pieces. Then I have to retool for the next new item on the production line. If I start a production run for 10,000 pieces I may not have to retool the production line for 10 days. That amounts to a significant cost savings.

When you add up all of the cost savings from a larger production run vs a smaller run, the savings might be significant. The manufacturer may elect to pass some of those cost savings along to their customer resulting in a lower product price.

How Soon Can You Expect To Make A Profit With A New Drop Shipping Business?

You could start to make a profit from drop shipping in your first month, or you could work forever and always lose money. It’s all up to you, the choices you make, and how hard you want to work.

  • You need to choose unique products that are not facing huge competition in the e-commerce world.
  • You need to choose products with a high enough selling price to maximize your chances to make a profit.
  • You need to negotiate the best prices possible from your suppliers.
  • You need to find suppliers that will give you rapid order processing and shipping service so customer satisfaction is outstanding.
  • You need to answer customer questions and handle customer service issues rapidly.
  • You need to target your marketing to the correct demographics to most efficiently use your marketing dollars.
  • You need to vigorously control your business expenses to try and maximize potential profits.

If you are successful in handling the issues above and choose the right products, you may have a chance of being profitable.

What strategies exist to identify profitable dropshipping products?

Research, then more research, then a lot more research.

To find a profitable product you need to know the potential competition, what they are currently selling, and what they are selling the product for.

You need to know what areas have problems with no current solutions.

You need to know what products people are looking for and what they are willing to pay.

You need to be an expert so you can identify products that are currently being sold that may be marketed incorrectly. These are the kinds of products you can create an effective advertising campaign to reach the right customers in the right markets.

Take a walk thru your local mass merchant. What do you see? If you just see a big mess of assorted products, you need to look more closely. In a big brick and mortar store, every product in the store is placed there for a reason. Each store is organized by departments, and each department has an employee or staff at the corporate level that is in charge of each department. These are called buyers, category managers, product managers, merchandisers, or some other descriptive term. These are the “experts” that have done their research and determined what should be in the product mix or what should be offered for sale.

You need to develop your research so you become the expert with regards to your chosen product. Research and product knowledge are your strategies.

If drop shipping is so easy and profitable, Why aren’t more people doing it?

Drop shipping is only profitable if you have a unique product or brand name that makes you different from all of the competition.

  • If you are trying to sell by drop shipping the exact same item from the same supplier that many other sellers are buying from you will have trouble being competitively priced. You will be faced with razor thin profit margins. Remember, drop ship suppliers do charge you for their service and they really don’t care which one of their customers makes the final sale. They make the same profit no matter who sends them the order.
  • Also, you need to develop some unique and creative ways to convince the customer to buy from you instead of all of the other sellers offering the same product. If you try and compete on price alone, you have already lost the sales game. Someone else will always be willing to cut their price to compete, and if you are drop shipping and someone else is importing direct and fulfilling orders from their own warehouse, I guarantee, they are paying a lower price than you.

So here are the facts about drop shipping, good and bad:

Pros– Drop shipping makes it easy for you to enter the market. No big investment in inventory, no need for a warehouse of storage space, no need to pack and ship customer orders.

Cons– The same easy entry into the market means that it is easy for ANYONE to start a drop ship business. That means lots of competition on items.

Pros– You don’t have to pack and ship orders.

Cons- You have no control over how fast a drop ship supplier will process and ship your order for you. If a bigger customer comes along with more orders he may go to the head of the line, then maybe your orders gets pushed back and are not shipped for a day or 2.

Cons– Customer service by the drop ship supplier is not controlled. Maybe Gladys in the drop shippers customer service office takes a few sick days. Her job is to send you tracking numbers when the order is shipped. You have advertised to your customers next day shipping. All of a sudden you start to get a lot of customer calls and emails asking for tracking numbers. Your workload just when thru the roof. OOPS.

Cons– Returns. If a customer wants to return a defective product or just doesn’t like what he received how do you handle the return process. Do you accept the return back to your address? Or, do you have it returned back to the supplier and hope the supplier handles it properly. Remember, if you are selling on Amazon or eBay your account can be suspended because of poor service or lots of customer complaints. That would be a big price for you to pay for the convenience of drop shipping since it is extremely difficult to get your account reinstated.

Cons– Passive income. Many people advertise drop shipping as an easy way to make passive income. Let me assure you, drop shipping is not a passive business, no matter how much automation you can introduce in your order handling process. There are still many, many tasks that must be checked and verified. You must make sure your supplier does not run out of inventory. You must make sure your supplier hasn’t raised his price. You must make sure your supplier has actually shipped your orders on time and correctly, and then notify your customer of the ship date and tracking number. You must offer customer service to answer any questions or handle any problems.

As you can see from the list, there are a lot more cons than there are pros, and this is just a simple list. So why don’t more people drop ship? because it is not as easy as many people advertise it to be.

How do I start to import product from China into the USA and Canada?

Over the years I have exported many products to Canada from both China and from the United States. Fortunately, I was over 18 so I never had to face any of the issues you will face. I am not sure about the age of majority in Canada but to legally sign contracts you need to have reached that age. You may need to be at that age to set up an Amazon sellers account, register a business, open a business bank account, deal with Freight companies, and customs agents.

In the US the age is 18 is sign contracts, register businesses and all the other legal stuff you will need to do. The Good news is Income tax laws. In the USA the tax man will take money from anybody, and I would guess Canada will be similar. You will probably need to contact an accountant or Tax attorney for Canada specific regulations.

You want to create your own brand and yes this is legal to add your own label here or have the factory apply for you if the quantity is large enough. With China factories, everything is negotiable based on the quantity of order.

When you import you will have to make sure the product is labeled made in China. Most factories are very aware of this requirement so it is almost a no-brainer. If your laptop bags are constructed of manmade materials there should be no special labeling requirement. If you want to make them out of animal skins, you will need some additional documentation to show they are not made from endangered species skins. Other products like electronics, chemicals, food products, nutritional supplements, children’s toys and clothing, and more, all have must stricter requirements for labeling and certifications.

Product selection.

Do your research and planning carefully. You have mentioned laptop bags. If possible, pick products you have an interest in or are knowledgeable about. This simple step will make it a lot easier to develop unique sales content for your Amazon listings. Your goal will always be to figure out why a customer would buy from you rather than from one of your competitors.

Take a look at the listings of competitors selling on Amazon, you will see product after product being sold using exactly the same sales copy and photos as everyone else. You need to develop a unique look and sales approach to attract customers to your listing. I did a quick search on Amazon CA for laptop bags and there are only 503,901 listings to choose from. Many, many choices and many look very similar to each other.

Use unique high-quality photos and in use photos, Clothes on real people instead of mannequins, Auto parts installed on vehicles, product shots showing the product in use, anything to let your customer see the intended use and the benefits of the product.

Write unique sales copy detailing the product’s features and benefits. How will this product help the customer? What will it do for them? Will it make some part of their life easier or better? Will it solve a problem? Find something to say that your competition does not mention. Always list accessories required to hook up the product, tools required to install the product, anything necessary to enhance the performance of what the customer has purchased. The extra sales you make can make the difference between making a profit on a sale, and making a really good profit on the sale. You can charge a higher price since the customer will hit the buy button based on convenience. They don’t have to order from someone else, the items may help qualify for free shipping, etc.

Vendor selection.

You want to buy from China. There are a lot of options available.

  1. Aliexpress is good if you only want to buy a few pieces at a time. You won’t get the lowest price and shipping may be higher but, if the supplier does rip you off you have only invested a little bit of money.
  2. Alibaba- Many sellers are listed, some are factories, some are only trading companies, simply taking orders for the factories, and shipping to you. Again, for you as a small, newer seller, verification of the seller will be difficult. You pay upfront when you place the order and take your chances about when the product will be shipped, and the quality level you will receive. My recommendation is to hire an inspection service to do a quality check before the merchandise is shipped. If you receive a container load of bad quality merchandise it will be very difficult to negotiate a refund or return privilege to get the problem corrected.
  3. Search engines- You may be able to identify factories from their websites. Similar problems to buying from Alibaba.
  4. Trade shows- This would be my number # 1 choice to find suppliers. There are trade shows available for all types of product categories and located all over the world. Use your favorite search engine to find a listing of trade shows. Most major shows have many foreign factories exhibiting at the shows. These factories are usually very reliable since they do spend a lot to attend and exhibit at these shows. As a bonus, you may find a local supplier available where you can buy smaller quantities as needed to test the market.

Shipping and Customs clearance.

If you are only placing small orders that are being shipped by mail or EMS service, simply ask your supplier to quote you a delivered price to your destination. It is called CIF price and means the cost of merchandise, insurance, and freight.

If you are shipping larger orders by container, it will be best to use a freight forwarder and customs clearance agent. Some companies will handle both these functions, sometimes you will need to use separate companies. The freight arrangements, documents, required, and customs forms will be a little difficult for a beginner.

That is about it for a simple explanation. 500-page Textbooks have been written to cover most of the details and even them not everything can be covered easily.

If you have any further questions, please feel free to ask again.

What should you do when you get a drop ship order?

When you use the drop shipping model for e-commerce here are some things you should always do.

  1. When you process payment send your customer a receipt of the transaction by email. If you are using a sales platforms like Amazon or eBay/ PayPal they will do this for you.

2. Process a purchase order to send to your supplier with customer shipping info so supplier can ship item. Do not include your selling price on this purchase order.

3. Make sure your drop ship supplier uses your company name as the shipper on the mailing label. This is really important. You are the seller. You want your customer to remember your company and come back to you for future business.

4. Once your supplier has shipped, send your customer the tracking number and a nice message like “we appreciate your business” or “thank you for your order”. Ask your customer if they would like to receive your news letter by email. Keep in touch with your customers regularly. Make sure you include your website link and maybe a discount promotion to encourage your customer to take a look at your website for possible new orders, new items, etc. This type of marketing is the cheapest advertising you can ever get.

5. If you can, try and make arrangements with your supplier to include some promotional literature or brochures featuring your company, website, products, and promotions. Good drop ship suppliers will do this for you. Most will not want to be bothered with this extra work.

Use every opportunity you can to keep in touch with your customers. Build an email mailing list. Send them regular mailings featuring special promotions, new items, customer testimonials, pictures of satisfied customers using their new item, etc.

How do customers choose whether to purchase an item from you instead of from Alibaba when the price is cheaper?

Why should someone buy from your website instead of direct from a trading company on Alibaba? Let me count the ways.

  1. Convenience- Companies on Alibaba sell mostly in larger quantities. On your website, possible you sell one piece at a time.
  2. Shoppers experience- Ability to combine an order and buy multiple items at the same time. Your website may also be easier to shop from.
  3. Location- Your company may be located in the same time zone or at least similar time zones so customer service may actually be conducted in real time or at least more convenient times for you as a customer.
  4. Trust and professional image= The quality and professionalism of your website will make a big difference in the level of trust a customer places with you. They can see by your address and contact details where you are located and how to contact you in the case of a problem. If your website is done correctly your potential customer should see that you are an “expert” in the products you are selling. FAQ, installation or usage tips and tricks, customer testimonials, etc.
  5. Shipping methods- You may be able to offer more speed based delivery service options than a Chinese supplier.
  6. Delivery Times- Shipping from China can take 4 to 6 weeks or more depending on the product, inventory levels, and shipping method used. You may be able to offer next day delivery or other quicker methods.
  7. Payment methods available- Customers may be more comfortable using credit cards with your company, rather than sending secure data to an unknown company in a foreign country.
  8. Customer service- Have a question or a problem? With a local company website you can pick up the phone or even send a text and expect fairly rapid solutions to your problem. Or, get up in the middle of the night to call an Alibaba supplier who may or may not be able to communicate easily in English. They all will tell you, “Yes I speak English”, but the level of understanding may be difficult.
  9. Return policy- Did you ever try to return something to a Chinese supplier? Getting return authorization may be difficult, cost to ship back high, and don’t even think about trying to get a refund for any customs duties you may have paid.

Remember, when you talk about buying from Alibaba you are not really buying from Alibaba at all. You are buying from a third party vendor using Alibaba to list and market their items.

Keep in mind that price is not always the only consideration shoppers use to justify a purchase. If the price is the only consideration you are worried about, and it doesn’t matter about the speed of delivery, possible returns, trust or scam potential, and little details like those, then go ahead and buy based on the lowest price available.

Buyer beware!

What are the downsides of drop shipping?

Drop shipping is an easy way to get involved with e-commerce. No need to have a warehouse, no need to carry inventory, no need to package and ship orders. How much easier can it get?

Despite all of the pluses, drop shipping does have a big downside.

Here are some of the downsides:

  1. Price- you pay for the convenience of having someone else handle inventory and service, and often you pay a heavy premium for that convenience. Suppliers add a markup to the cost of packing materials, they will add a markup to shipping costs, and often they will markup their labor costs. After all, nothing is free.
  2. Information- Your drop ship supplier must keep you informed about inventory levels and any price changes. If you are selling on Amazon, eBay, or other similar sales platforms and you cancel too many orders because of a back order situation from your supplier, your service ranking will be affected and if your metrics drop too low your selling account may be suspended or even cancelled.
  3. Convenience- The number one reason to use drop shipping is also its biggest downside. Drop shipping makes it easy for just about anyone to enter the market. This easy entry results in massive competition since sellers don’t need any investment to start a business.This massive competition often results in sellers competing on price only. Profits suffer for everyone
  4. Control- When you drop ship you give up control of all of your order handling.  How do you ensure your orders will be shipped quickly?  How do you ensure good quality? How will your supplier handle problems or returns when they occur?  You have to find trustworthy suppliers.  That is a difficult thing to do.  Some suppliers will be excellent, some just good, and some totally terrible.  You have to hope you have made the correct choice.
  5. Your effort and involvement- Again, drop shipping is a good way to get started but it is not as easy as a lot of the companies trying to sell you tutorials or drop shipping services would like you to believe.It is not passive income.  It is not a low effort way to do business.  You have to pay attention and actually put a lot of effort into the business to succeed. You have to process orders.  You have to provide customer service and answer questions. You have to communicate with your customers about shipping, tracking numbers, possible service issues and more.  You also have to keep aware of your competition and monitor prices, monitor new items, and make sure nothing is happening to disrupt your market.

How can you prevent liability when selling online?

You really can’t prevent liability, you can only lessen your exposure. If someone or something is injured or damaged using your products. People, especially in the USA can sue anyone for anything. Often cases are dismissed or “Thrown Out” by the court as frivolous, but you may still have to pay legal fees to defend yourself. While not being able to prevent liability, there are ways to lessen your exposure.

  • The best that you can do to avoid or at least reduce liability is to select your suppliers carefully. Make sure they are manufacturing quality products and are using proper quality testing. Verify that they comply with all necessary safety regulations in your country. Examples of risky products would be anything electrical (think battery packs and battery chargers on Hoverboards for a recent example), anything that replaces an OEM part on a vehicle,, (think brake parts, tires, wheels, brake lights, headlights, etc.,) batteries on rechargeable products, (think about Samsung phones), food, medicines, and nutritional supplements, cosmetics, children’s clothing, and the list can go on and on. Make sure your supplier can provide copies of this compliance to regulations just in case you need them.
  • In addition to carefully checking quality, see if your suppliers carry product liability insurance and ask that you be covered on their policies for your protection. You will need to consult with an attorney or insurance agent that specialises in Product Liability since it is a very complicated area, especially if you import products.
  • Look into carrying your own product liability insurance, especially if you are selling something that may fall into a “ high risk” category.
  • Handle all customer complaints promptly and to the customer’s satisfaction. Sometimes just the simple act of acknowledging the problem and correcting it is sometimes enough to avoid legal action or additional problems. Some customers simply like to know you care about their issues and are willing to work with them to correct a problem.

As I mentioned earlier, Product Liability is a complicated issue and you must consult with a qualified attorney or insurance agent to get the best, most accurate advice. Proper advice may save you from a lot of financial problems for both your business and you personally in the future.

US marketers: Would you outsource marketing tasks to someone outside of the US?

Proper marketing and advertising is the lifeblood of any business. Done right, it helps you grow. Done wrong it will kill your business fast.

If you are talking about common marketing tasks that are not specific to your product or market, you may be able to use outsourced foreign marketing for repetitive tasks.

If you are talking about industry specific or business specific marketing tasks you hire the best “Experts” in your field you can afford. Marketing is charged with delivering your message to your targeted market. If you want it done right make sure you have someone that has an understanding of what specifically you and your company needs to do. Make sure you can communicate effectively with your chosen marketer and that they will be available when you need then, should a problem come up. If you don’t care if your message reaches your audience, hire the cheapest people you can find. If you want your business to grow and succeed you hire the best.

Remember, good marketing isn’t just about posting a few message on social media or searching keywords and SEO.  It is about delivering your message.

It’s your company, your money, and your business reputation on the line.