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How does a typical drop-shipping arrangement work?

 11:46 am on Jan 28, 2003 (gmt 0)

Can anyone give me any insight into how you like to set up your drop-shipping arrangements?

This would be for a site using worldpay to proccess cc's, probably with a worldpay supplied merchant account.

Specifically, I'm curious about how people usually handle the cash and accounting end of things - presumably you take the money into your merchant account, then send on the cash less your commission to your drop-shipper.
How frequently? Once a month? from what I can gather, worldpay pays up a month in arrears, so it would be tough to do it any other way.

Would you have a signed legal agreement with your drop-shipper? Any advice what it should contain?

Can dealing with multiple drop-shippers for a single site become an organisational nightmare? or can you automate much of the accounting and cash transfer? What about not being able to ship products together if they're coming from seperate suppliers but going to the same customer, could that be a problem?

I'm completely new to this type of arrangement as you can see, I want to make sure I get it as close to right as possible first time. Any advice greatfully received, thanks.



 2:36 pm on Jan 28, 2003 (gmt 0)

might be helpful if you explain more about what you're planning to do how you expect it to work etc.

get a positive cash balance in your bank account to cover the period while you're waiting for settlements from worldpay. you might also be able to get a business credit card which will mean you could pay the supplier on the spot if necessary and the full payment is withdrawn from your bank account once a month.


 3:28 pm on Jan 28, 2003 (gmt 0)

I'll try to explain better:

I've spoken to a few companies and they're interested in me selling their products online on a commission basis, so I plan to take the orders on the site and then email them to the suppliers for fulfillment. Hopefully they will be handling returns, email based product support (through me) etc too. They're mostly mail order retailers, but a couple of manufacturer/retailers in there too, all fairly small companies. UK companies and a UK market.

The idea is that they supply me with stock, availability and pricing, I build everything else.

Idealy, I'd like to take the cash directly into my own 'merchant' account (so I'm looking at worldpay - perhaps I'd be better with a proper merchant account from a bank rather than using worldpay's merchant account?) and then settle up with them afterwards. I thought perhaps this might be the usual way to arrange payment to the suppliers.

None of them have any arrangement already set up for this, so its down to me to suggest to them how it'll work and to suggest my own commissions.

Which is really why I'm asking for advice. I thought perhaps there was a general accepted protocol for such partnerships, perhaps obvious pitfalls to watch out for, but if there isn't and its basically down to what you can negotiate, then thats ok.

Thanks for the suggestions re handling payments.


 4:48 pm on Jan 28, 2003 (gmt 0)

thats a complicated way to do business and there may be legal issues with selling goods that are not yours to sell - you must either own the goods or have an agreement with your suppliers to sell the goods on their behalf. payment processing companies and banks generally will not allow you to sell goods that are not yours to sell (some people do it but don't tell their providers etc).

remember that in law, the contract of sale is between you and the customer - YOU must ensure the order is fulfilled, YOU must deal with returns and refunds etc (doesn't matter if goods are returned direct to suppliers, you're legally responsible for dealing with refunds etc). you do not want to risk your business getting screwed by a poor supplier failing to deliver or failing to notify you of a return.

the normal way of doing business is to buy the stock then sell it. that is probably the easiest way to account for it too. first thing is to write up a business plan and present it to the banks to try and get some financial backing and obtain stock and set the business up properly. not doing this suggests little confidence in your business plan and a low chance of success.

whether or not you get backing from the bank, you may not be able to afford all the stock you need. make arrangements with suppliers to obtain stock on account. alternatively, purchase direct from the supplier when you get an order. a couple of credit cards will give you plenty of buying power - you may incur some interest charges, but you'll cover them out of profits. and lets face it, you need some capital to get going ....

you're highly unlikely to get a bank merchant account without trading history and good turnover. you shouldn't have any problems getting a merchant account from worldpay.

and if you want the suppliers to handle delivery and returns etc, become an affiliate. let them handle the sales and just take a commission. save yourself the time, hassle and legal responsibilities of selling for them.


 7:07 pm on Jan 28, 2003 (gmt 0)

> have an agreement with your suppliers to sell the goods on their behalf

it would be this one

> you do not want to risk your business getting screwed by a poor supplier


> save yourself the time, hassle and legal responsibilities

I want to start this off while I'm still working, so time is a factor. Maybe the answer is to start the site going as simply as possible and worry about these things later. It needs to pay for itself past a point.

There's a lot to think about there - thanks


 7:21 pm on Jan 28, 2003 (gmt 0)

Crazy Fool - I don't want to get too far off on a tangent here, but I have a different understanding of drop shipping.

Generally, and correct me if I'm wrong, the merchant handles all of the customer service, billing, shipping, etc. The product, as shipped, may be labled with the website owner's logo, etc. but all of the back end stuff is handled by the merchant.

The website owner does not take title to the goods, but is free to apply a markup over the merchant's wholesale pricing, as opposed to receiving a commission as would an affiliate. The site owner's shopping cart is simply a mirror of the merchant's in the ideal situation. Any profit earned by the site owner is paid by the merchant to the site owner.

Since I haven't done this sort of thing yet, I could be dead wrong about some aspects. That said, I'm very interested in whatever possibilities there are in this area.


 9:01 pm on Jan 28, 2003 (gmt 0)

Drop ship works like this. You take the order on your site. You own the customer information. You are responsible for charging them, etc...At the end of the day, you put together a set of receipts and packing slips and send it over to the drop shipper either by fax or online. The drop shipper then takes the order information you send them, packs a box, puts your receipt in the box and ships it out. The customer does not know the drop shipper exists and deals only through you.

Before you get to this stage, you need to have a contract in place with the drop shipper. You need to negotiate every little detail because many of them get ticky tacky with fees. We have had a drop shipper who have tried to charge us $3.50 just to send an order to them. Get all of that spelled out in your contract along with your payment terms.

There are two ways you can do drop shipping, one is to actually buy the inventory and then the drop shipper will charge you to store it and to mail it for you. The other is to work out a cost per item (plus fees) and then whatever you sell over that cost will be your profit.

My company deals with several drop shippers and it has its advantages and disadvantages. The primary advantage is that you can offer a lot of different products without having to take the risk of purchasing that inventory, warehousing it, and insuring all that.

The disadvantge is that it takes up a lot of people time to manage several drop shipper relationships, to get the orders over to each one everyday, to make sure the product and service is good, and to update a sales and tracking system.

Essentially you are reducing your capital risk but upping your man hours.

Start small with one company that has a good reputation and can offer a lot of products. Negotiate the best deal you can, make sure your deal has some sort of out clause in it. Once you are doing better volume you can come back and get a better deal. As you get the hang of it, then look to add more drop shippers.


 3:06 pm on Jan 29, 2003 (gmt 0)

thanks cfx, I think thats closer to the kind of arrangement I was thinking about. I suppose I'm looking for the best of both worlds which may not be possible.

Is anyone running sites in the UK based around an arrangement anything like cfx describes?


 7:58 pm on Jan 29, 2003 (gmt 0)

If you download a feed of current inventory, most of your work for web site content is done. I find it helps to get a tracking number sent to you for every order. And this in turn is forwarded to your customer.


 8:20 pm on Jan 29, 2003 (gmt 0)

cfx211 - Thanks very much for the clarification.


 8:57 pm on Jan 29, 2003 (gmt 0)

Your welcome. This situation I described above is drop ship in its purer form. There are several other ways to do it in which you are more or less acting as an affiliate, but at that point you probably shouldn't call it drop ship and just call it an affiliate program. Anyway the key to all of this is making sure you stay on top of whomever is providing the product.


 2:23 am on Jan 30, 2003 (gmt 0)

Another suggestion for finding companies who can work with you on drop shipping (and I'm doing this now)... The industry the products are in probably have an annual trade show. GO TO IT! Meet the companies. You can find all sorts of great products and it's a simple question to ask them. And while not a perfect barometer of the companies track record, the fact they are attending a show like that usually involves spending a decent amount of money. And if you know the industry you will probably recognize their products. If you can't go to the show, look for the show's web site, see who was exhibiting and ring them up.

And yes, drop shipping relationships can be incredibly tough to manage, but it comes with much greater rewards than an affiliate relationship if you do it right. We went the affiliate route, didn't like it and decided to set up our own shop, with drop shipping as a part of it.

And I would certainly recommend getting a proper merchant account if you can. You will have your money in 3-4 days (at least you generally do here in the States), then you don't have such large cash flow issues. Also recognize though with your own merchant account you have more risk there too with fraud and chargebacks.

The best thing I can suggest is to research as much as you can on the business you are in and really be sure you understand what you are doing and what the risks are before jumping in. And it might also give you an extra edge in negotiating for the best deal when setting up with that company.

Good Luck.


 10:59 am on Jan 30, 2003 (gmt 0)

The industry the products are in probably have an annual trade show. GO TO IT!

Agreed. I went to the biggest show for this industry in the UK, all but one of the companies I spoke to are interested so I'm spoiled for choice! They all want to 'cash in' on the web, have sites, but have been caught by 'build it and they will come' syndrome imho.

Going to a show also gives you a good idea whose selling the most popular lines by looking at how busy their stands are. I also got a lot of useful information on what lines require the most input in terms of customer support (avoid), and what are the easier sells.

I guess the main reason I want to look at something like drop-shipping rather than an affiliate approach is that I want to build a recognisable brand which would build over time rather than a quick-hit affiliate site.

I can see I've got quite a learning curve heading my way. Thanks for all the responses.


 11:57 am on Jan 30, 2003 (gmt 0)

I'm currently reselling for one company, but thinking about adding 3 or 4 more suppliers to expand the product selection.

The biggest problem I see right now is shipping charges.
If your margin is high enough to cover some of the shipping charges then you are fine. But that's not my case, I sell low-ticket stuff.

Here are two scenarios:
1) The customer orders 3 items which happened to be from the same supplier. The total is $30 and the supplier charges you $6.50 for shipping. So you pass it on as $30+$6.50.
Sounds ok.
2) The customer picks 3 similar items from 3 different suppliers. So you get $30 + 3x$6.50 (each supplier will still charge you for shipping). So that's $19.5 for the shipping; does not look as good any more.

You can get store software that would apply different shipping charges on per-item/per-destination/per-whatever basis. But in that case, your checkout process would scare away a programmer with 10 years of experience, not even talking about the Joe Average Web Surfer :)
Besides, your s/h clause would look way too ugly:
...If the item model starts with A_ and you are shipping to "this place" and you don't have any items in the same order that start with B_ and....

No way I would ever buy from such store :)

Of course, it all goes away if you are on a high margin. Just charge your $6.50 and hope for the best.

I'm still thinking about it, so if anybody has any ideas or experience - please share.


 12:24 pm on Jan 30, 2003 (gmt 0)

I've been wondering about that problem too. Seperate site for each supplier perhaps? More overhead in terms of maintenance, but if the product lines are different enough perhaps two better focused sites would do better than one with a complicated shipping arrangement.


 1:09 pm on Jan 30, 2003 (gmt 0)

Seperate site for each supplier perhaps? More overhead in terms of maintenance, but if the product lines are different enough perhaps two better focused sites would do better than one with a complicated shipping arrangement.

Then it wouldn't really be building a brand. It would be more like an affiliate venture. All effort would be diluted among several sites.


 2:11 pm on Jan 30, 2003 (gmt 0)

Looking at drop shipping from a conventional mail order perspective: often mail order firms, whether web or paper based, use drop shipping for hard-to-ship items (bulky, heavy, etc.) while fulfilling most orders themselves. A few may drop ship 100% of their product, but that's not all that common - many suppliers aren't geared up for shipping individual orders, and rely on mail order firms to order in bulk.

Usually, the order transaction is completed by the site or catalog owner. That is, that company gets the customer, processes their payment, and notifies the item supplier of the shipment details. (In some cases, the site/catalog owner may authorize the charge but wait until shipment is ready to bill the card - not a bad idea if the product has a long lead time.)

How the site/catalog owner pays the supplier depends on what kind of credit relationship the firms can arrange. If the site/catalog owner is established and has good credit, the other firm will probably be content to invoice them with 30 day payment terms or similar. If the site/catalog owner is new or has weak credit, tighter terms will apply - prepayment or, perhaps, a very low credit limit.

In looking at drop ship arrangements, you should explore how experienced the other firm is at handling the process - do they have systems and people to make it work? I've worked with some drop shippers that were completely reliable, and others that would lose orders, document shipments poorly, have difficulty answering customer service questions promptly, and in general screw up my firm's reputation for high quality service. (Avoid the latter kind!)

Side note: Drop shipping shouldn't be confused with third-party fulfillment, where you (usually) own the product, but it's warehoused and shipped by a fulfillment company.


 4:55 pm on Jan 30, 2003 (gmt 0)

You are absolutely right if they order from three different suppliers. It adds up and fast. Here's my thoughts. First, if they are charging you $6.50 to ship plus the actual shipping, especially on a $10 item, that's very high unless it is a really big or awkward product. Companies I have talked to so far are in the $2.50-3.50 range per order for their products over a varying range in prices. That drop ship charge is something in my opinion you have to build into price. But keep in mind, the reason you are probably looking at drop shipping relationships over affiliates is that you now get to "buy" at wholesale and make 40-50% margins instead of a 5-7% commission. So you have some room in your margins to work with those numbers. If you are trying to be the lowest-priced source, it's tougher but wouldn't even a 30% margin with control over the process beat out a 7% commission with no control.

Second, I agree that you have to keep the shipping calc's for the customer simple. What we decided was to bite the bullet and build custom shipping routines into our store. We assign a shipping group to each product and then have charges calculated based upon each product and it's group. The drop ship charge we'll account for in our pricing of the product and keep shipping as close to the purest charge for just shipping as we can. If we need to we can add a base charge of say $1 or $2 to actual shipping costs. Now we have just a few categories of shipping which makes it a lot easier for us to show the customers, especially since you deal with the drop ship charge in the price/margins.

Also, here's an idea. If you are dealing with smaller items, things that will fit in a small bubble pack like jewelry and such, if you get enough volume, you can just buy the products from the wholesaler/manufacturer, have them shipped to you and do your own shipping to avoid those drop ship charges. That's of course if you don't mind the work of handling all the shipping work. You might even find that if you ship 100 packages in a day, the $3.50 charge is well worth it :) Or you've avoided enough of the drop ship charges to hire a part-time person to handle the shipping.

Just some thoughts.


 1:42 pm on Feb 1, 2003 (gmt 0)

First, if they are charging you $6.50 to ship plus the actual shipping, especially on a $10 item, that's very high unless it is a really big or awkward product. Companies I have talked to so far are in the $2.50-3.50 range per order for their products over a varying range in prices.

$6.50 for shipping, not for handling. That money goes to the shipping company. But if I have to order from 3 different suppliers to fulfill one order - that's 3x$6.50 for shipping.

But keep in mind, the reason you are probably looking at drop shipping relationships over affiliates is that you now get to "buy" at wholesale and make 40-50% margins instead of a 5-7% commission.

He-he. Does not really work that way. You simply cannot compete with other resellers of the same supplier if you start selling at the retail price. So theoretical margins of 40-50% become more like 15% in reality :)

We assign a shipping group to each product and then have charges calculated based upon each product and it's group.

That's what I was talking about. Too complex. A visitor might add an item to a cart and press checkout to see the total. After that, he adds more items and checks the total again. Then removes something and checks again. And then he starts to realize that something is wrong with the shipping charges, they keep going up and down without any logic. His thoughts: a scam hoping that he would not notice or the site is simply broken.
In any case - looks to me like a big turn-off :(

But, I think that's what I'm going to do.
We used to use ibm's net.commerce (later web sphere) for our stores in the past and it had really flexible shipping framework. I might just rip it off them :)


 10:47 pm on Feb 1, 2003 (gmt 0)

First, let me say this. I've only had my store online for about 6 weeks and I'm learning a ton and fast. So I by no means profess to be an expert, I'm just offering my opinions.

$6.50 for shipping, not for handling. That money goes to the shipping company. But if I have to order from 3 different suppliers to fulfill one order - that's 3x$6.50 for shipping.

Wow, that's a lot for shipping on a low-cost item. That's a tough one, I have no clue what I would do there. I hope I don't run across that. The only thing I can think of is if it's $6.50 per order, change your shipping terms to allow 4-8 weeks and try and accumulate orders if it's per order and then have it shipped to you for re-shipping to the customer so you only pay one $6.50 charge. But that would probably kill sales volume on a $10 item. That may be a situation where you need three stores (one for each) and cross-promote them in each store.

He-he. Does not really work that way. You simply cannot compete with other resellers of the same supplier if you start selling at the retail price. So theoretical margins of 40-50% become more like 15% in reality

Sure you can, at least I believe I can, or I woudn't have started our store. You just have to find your niche. First, you can have a somewhat unique product that's not available on 100's of sites. Seek and ye shall find. Second, small dollar items probably tend to be impulse buys, especially if promoted from a very targetted content site ("Gee, my girlfriend would love that product" or "Bob's birthday is coming up, he'd die for this"), and lots of folks will buy without looking around (as long as total cost including shipping is reasonable). Third, you can have better customer service which leads to all sorts of repeat business. Forth, you could designate some products as "loss leaders" that will drive a lot of traffic into the store and work the site to upsell to more profitable (for you) products, as well as getting the repeat visits to come back and buy those other products. Fifth, you outmarket them, smaller companies have lots of advantages over big ones, especially being able to react to market changes more quickly (how about adding hot products as soon as you find out about them). Also, if they find you and not your competitor, you win. For me, I'm not sure I'd bother with a 15% margin product unless it had a decent sales price (probably $50 minimum) and decent sell-through, as well being incredibly easy to ship. As I see it 15% of $50 is $6.50 commission. Find a unique $15 product with a 40-50% margin that you can sell lots more of and you win big time. I realize the web makes it so much easier to comparison shop, but there are lots of ways to market products taking that into consideration.

On the shipping, I agree. If your charges for shipping are that high on small dollar items and you don't build it either into the price or accept lower margins, the cart can go ballistic and instill all sorts of negative issues with the customer. But I think a lot does depend on the actual shipping cost in relation to the price. Getting above a 10-20% ratio (for USPS shipping) in my mind is a sign of a tough product to sell, if it's a semi-commodity (something you have exclusively is a different story). Is $6.50 the actual cost to ship that item, or are they looking for a huge profit center in their shipping department? I just think that if you have a reasonable shipping cost and you can build any added drop ship charges into the price or your net margin it won't jump around so much and you'll be okay. That's why I think above 20% is a problem area and the products you refer to are 65%.

Just my $0.02 (S&H included) :)


 12:53 pm on Feb 23, 2003 (gmt 0)

We have many clients who use drop shipping as their sole way to run their store.
The main idea is to make sure every product you sell has a ROI that will cover the shipping and product.
Larger ticket items over 20.00, if you are dropshipping, you simply can't offer 2.00 items and expect to make a profit. So you don't sell them.
This way you are making enough profit on each item to cover if they order 3 items all from differnt suppliers.
Also I have 2 clients who sell the same product, one sells the product for more, and sells more of them.
Sometimes when you lowball to get the sale, customers do not trust a) the quality of the product, b)your website at all.
If you put together a website that is professional and has contct information, make yourself available to the customer, watch your conversion rate grow.
You can try and sell cheaper, most customers think the quality will be terrible. And I am talking about a significant difference in sales. 50% over his competition.


[edited by: engine at 4:57 pm (utc) on June 23, 2003]
[edit reason] No sigs, thanks. See TOS [webmasterworld.com] [/edit]


 6:54 pm on Feb 24, 2003 (gmt 0)

I ran across a software product that will manage your drop shipping. They have put it together to work with Yahoo Store. I'm not sure if they can do it for other types of stores or not.

I am thinking of purchasing it for my store. However, it's $3,000 so I am waiting to hear from a couple others who can tell me what they thought of it. It's a bit expensive to plunk down without knowing how well it works.

If it can do what they claim, it would be priceless for dropshippers. It works like this:

A Customer visits your site. They place an order. The customers credit card is automatically processed (which most online stores already have). The credit card processing has nothing to do with this company, you are responsible for your own CC processing.

You assign a special code to each product that specifies which Dropship Vendor the product is associated with. The software then automatically forwards (via email) the order to the correct vendor. It will even seperate orders that contain multiple vendors in a single order. The vendor will only receive the part of the order that belongs to them. The vendor will have your credit card on file and they charge your card as they get orders (Or, you may arrange Net 30 or something similar). Each vendor has a special user name and password where they log onto a website that manages all the orders. They insert the shipping date and tracking number into the website. This information is then automatically uploaded to your store and the customer automatically gets an email with the shipping info.

So, basically all you have to do is set it all up, get your products online and establish automatic credit card processing. The orders will come in and automatically get processed and delivered to the customer. If you do have Yahoo Store, you can download all information to Quickbooks for easy accounting.

It all sounds like a Dropshippers Dream. However, I don't know how well it actually works. Of course you will have to visit WEBMASTERWORLD a lot to make sure your site gets lots of traffic.


 8:47 pm on Feb 24, 2003 (gmt 0)

what we do, and we process the credit cards, handle customer service and all the backend things, we pay you 20% commission on the total sale it works well for us, you get to use our graphics, shopping cart etc...

and you get a copy of each order,



 12:41 am on Feb 25, 2003 (gmt 0)

Everybody makes this dropship thing way too complicated. Dropship is the best thing since sliced bread. I have been in retail almost 40 yrs. and have have yet to see a problem doing business ths way. Don't think internet sales are any different than regular retail sales. They're not. Shipping charges are shipping charges and if you have items priced right everything works out fine. I prefer to use distributors that carry a full line or as close to it as possible of the products that I sell and let them do the leg work. Just work out the details with them beforehand and life is fine. As far as ordering direct from the manufacterer on a dropship basis go ahead. Usually, direct from them means a bigger order and arrangements can be worked out for no shipping charges which will more than compensate for some extra charges along the way. If you work companies hard and fair they will accomodate you; Trust me, they will!
My thoughts and experiences anyway.

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