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.

Is e-commerce passive income?

E-commerce, especially with the acceptance and growth it has enjoyed over the last 20 years is still a great way to make money. But… and you know there is always a But with every question. E-commerce is about more than just throwing a few items to sell on a website or sales platform like Amazon or eBay. It is hard work and definitely not Passive Income.

Your success will depend on several things:

1. Finding a unique product to sell. The competition for selling common items is intense. On all of the major sales platforms, you will find lots of sellers of similar products and razor thin profit margins unless you have something unique to sell.
2. Developing unique and creative ways to advertise and market your product. You must figure out a way to make your products stand out from all the other similar products. You must give your customer a reason to buy from you instead of all the other competition. Write unique and creative sales copy. Take high-quality photos showing your products in their best way possible.
3. Customer service. You must be able to answer customer questions in a timely manner, ship goods quickly, and handle any follow-up issues the customer may have. Be knowledgeable about your products so you can offer assembly or installation tips. You must appear professional and trustworthy before you can expect to give your customer sensitive information like credit card numbers.
4. If you are going to sell from your own website you must market the hell out of your products so people know you exist. Customers can’t find you if they don’t know your name or if you even exist. You must be willing to use free marketing, social media marketing, paid advertising, email marketing, and whatever else it takes to drive traffic to your website.
5. You must continually strive to improve. Add new products, seek out new marketing opportunities, and stay ahead of the competition.

Now when going thru all of the above points, nowhere do I mention passive income. E-commerce is not a passive business even with all of the advances made in the field of automation and performance apps. E-commerce takes hard work all the time. Researching and sourcing new products and new suppliers, writing and creating attractive advertising, and most importantly developing hands-on customer service.

Is it possible to earn a high 6 figure income drop shipping?

If you are trying to earn a high 6 figure income, I assume you mean maybe $500,000.00 to $900,000.00 per year, you would have to have an extremely unique, high dollar value product or group of products to sell and have virtually zero competition to cut your selling prices or divert sales.

Do the simple math. To earn $500,000.00 per year from a retail e-commerce operation you would have to sell 5 times that amount, or maybe even 6–8 times that amount to get a net income that high since many drop ship items have notoriously low-profit margins. Drop ship suppliers do actually charge you for the convenience of handling the inventory and shipping for you and most are not cheap. So figure you are running an extremely low overhead drop ship operation and you sell $2.5 Million each year. If your product is selling for $100.00 each that would be 25,000 pieces sold per year or a little over 2000 per month or about 70 each day. Even with extensive automation of order processing that is a lot of work or someone to handle.

Here are some of the daily things that must be done on a regular basis:

• Process orders and send them to your drop ship supplier. Easy enough to automate but still requiring some human intervention at times.
• Make sure tracking numbers are sent from your supplier on a timely basis and relayed to your customers. Again, can be automated but you must make sure your orders are being shipped on time.
• Make sure you review the on-hand inventory position and monitor supplier for any selling price changes so you can react on your website or selling platform.
• Handle any customer service related correspondence, questions, and request for returns.
• Normal business routines like accounting, looking for new products, looking for new suppliers, marketing, and advertising.

Handling 70 orders a day does not sound like a lot of work, but it does add up when it comes to your time involved. All of these take time and hiring someone to handle these for you will cut into your potential net income. Some things can be automated but again, not everything can be done with an app. I will use Amazon as an example since it is easy to look up data on their seller’s performance. Only 13% of sellers on Amazon sell between 1 Million and 10 million dollars worth of merchandise per year. Only 2% sell more than 10 million. The average order value on Amazon is only $47.00. Not a lot of sellers in that high income bracket you are looking for out of the millions that sell on Amazon.

So yes it could be done but will probably require a whole lot of luck, an extremely unique product, and a good staff to handle the day to day operations. Another point to keep in mind. If you can find products where you can sell 25,000 pieces each year, you would be much better off buying in bulk and handling the shipping yourself.

What is the best business model to use? Retail, Wholesale, Drop Shipping, or Consignment?

If there were only one better choice between the business models listed, why would any other form of business exist?

Each of the choices have positives and negatives attached to their business models.

If I had to make a choice I would pick either wholesale or retail as the types of business I would pursue. Both require a major investment to develop the business and this is a positive thing. It makes the entry into this market model more difficult so competition is more limited. Once you have established your business and begun building a customer base, as long as your service,quality, and selection of product remains top of the line, your business should grow and prosper. Sure, certain product categories may come and go, but loyal customers tend to remain very loyal. Just keep building and adding to the product lines you offer. Use unique sales copy, and photos if you are an online seller and develop a very professional presentation and image.

Drop shipping is a good business model in some specific cases,and is very useful for product test marketing, selling a low competition Niche products, or offering items for sale that are big, bulky, hard to ship, or expensive. Because there is low investment involved to get started in the drop shipping business you will tend to face a lot of competition unless you have an exclusive agreement with a supplier of unique products. n this category you will see many companies offering a tutorial on how to drop ship, companies offering subscription services that will allow you to purchase products from them, or even companies selling lists of potential drop ship suppliers.

The consignment business can be very profitable if you have access to the right consignment merchandise. It consists of a lot of closeouts, refurbished merchandise, returns, and good individuals are offering for resale. Often, when the existing inventory is finished, there is no replacement available. So while it is an opportunity to offer low-cost, high-profit merchandise, it may be difficult to create a sustainable business since the product mix may be constantly changing.