Traditional Wholesale Trading Vs Drop Shipping
April 27, 2008 Posted by
Drop shipping differs from traditional wholesale trading in that it is a form of ‘just in time’ shipping. Basically, drop shipping means that the online seller will order the product from the wholesaler as and when customer orders are received. The seller simply receives the order and passes on delivery information to the wholesaler for delivery. The customer pays the seller, the seller pays the wholesaler and the seller earns the profit from the difference between the sale price and the cost price. So, the product does not pass through the hands of the seller at any time, and goes directly from the wholesaler to the customer in the drop shipping model.
The traditional wholesale trading method implies that the seller orders a stock of the product from the wholesaler and maintains this stock to service customer demand. The physical possession of the product is the differentiating element. This clearly has a cost associated with it. Firstly, there are storage costs, which can be daunting if the product occupies a large amount of space. Secondly, there will be shipping costs from the wholesaler to the seller. Additionally, there is the cost of carrying unsold stock for a long period of time that eats into profits from sold goods.
So suddenly, drop shipping seems like a great idea. But drop shipping has its drawbacks too. In most cases, especially if you are a small business, you will pay the full MSRP, which will squeeze your profit margins. Additionally, you may have little or no information on the status of your order from the wholesaler, affecting customer service levels. Since you are essentially passing on the cost of carrying inventory on to the wholesaler, you will be charged for it. But, on the upside, you will only need to pay when you receive customer orders.
Reliability is an issue when drop shipping – as a seller, you will be able to control and track your product’s delivery much better if you hold inventory. In case of drop shipping orders, the seller relies on the wholesaler’s delivery system, which may be surprisingly lax. Finding a reliable wholesaler is a critical task on its own.
If you are worried about the label on the box that is shipped to the customer, you may be pleasantly surprised to find that many wholesalers will include your packing slips and labels when they ship to your customers.
A couple of hybrids exist that are useful to know about: Buying from local wholesalers and hiring fulfillment houses. An alternative to carrying inventory and drop shipping is to buy from nearby wholesalers when you receive an order and ship it out immediately. Amazon started this way, but it works best for small start up businesses. The other option is to make a deal with a fulfillment house. This is an intermediary service that offers to maintain small amounts of inventory, assemble, order fresh stock, pick, pull, pack and ship out your product in accordance with your instructions and using your packing materials. A fulfillment house may provide a shopping cart online and customer call center, depending on the scale of operations. They will charge a fee based on various factors – amount of storage capacity etc, and may charge a small percentage of commission on sales. This model may work best if you are a seller of high margin items.
Part 2- Charging Higher Prices For Services and Products - Perpsectives On The Bottom Line
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In the first part of this series we looked at the effect prices have on profits. A change to the upside can have a wonderful effect on profits while reckless discounting and careless price reductions will surely have a disastrous one. If you don’t fully understand the implications, or haven’t read Part 1, go back and do so now.
(http://www.paullemberg.com/higher-part1.html)
By now you may be asking yourself, “What should my prices be?”
Before you go start changing prices, you need to clarify a core part of your overall positioning. You need a pricing perspective.
Do you want to be a low priced provider, or would you rather sell the premium product? There are good reasons for being a low priced seller. Just as Michael Dell - that’s where he started, although he certainly isn’t there now. Or look at Costco, or Amazon. If you look to these models for inspiration, make sure you have three things: a firm grasp on your margins, deep pockets, and the ability to do lots of volume. Without all of these three, you will surely go broke.
Where are you personally more comfortable? If you sell at the high end of your price spectrum, you are likely to attract higher end clients, and it would help to be comfortable in that rarefied atmosphere. On the other hand, you may feel better on the low end. It’s a choice and you have to make it.
What will attract the type of clients or customers you want? Your price is a signal to your potential clients telling them who you are in the marketplace. And if your goal is to raise the quality of your clientele, the easiest way to do so is increase your prices.
Do you want a low service, volume business, or would you prefer fewer, select clients and give them “high-touch”? High-volume, low-touch businesses can be very profitable, and can generally scale more easily, but require more planning. Low volume, high-touch (select always means high-touch) businesses, may be easier to build and require less overhead. If you are thinking of a lifestyle business, go the latter route.
Do you want a quick in-and-out transactional business, or would you rather develop long-term, nurturing client relationships? If you want to build something easy to scale and perhaps sell down the road, high-volume, low touch may fill the bill. If you are developing a life style business to carry you into old age, or a “professional” business with a strong public image, think long-term and nurturing. Higher prices usually go hand-in-hand.
Develop a pricing perspective that fits your goals. Your decision will go a long way to determine who you
do business with and how you do it, and will also effect how you can dispose of your business. There are no clear guides to the right choice. It’s more a matter of preference and positioning.
But perspective is not the only element to pricing. By itself it will tell you how to price (high, low, middle of the road), but not the exact price itself. Before I share with you how to do that, let’s examine a few common approaches to pricing.
As nuts as this may sound, lots of people price to pay the bills. No kidding. I’ve seen this advice in more than one article for professional service companies. “How much money do you want to earn? Divide that by how many hours you have to sell…” And so on. (By the way, cost-plus pricing is just as crazy.)
Price to time. This is what most services people do. They set their prices by the hour, or by the day. The biggest problem is this makes it way too easy for prospects to compare your price. It also puts them in control of your time if they do buy.
Price to competition. This is the most common form of pricing, and is the core of all prices based on market research. And it makes sense if your offer is comparable to that of your competitors.
One last common pricing structure is front-end or loss-leader pricing. Loss-leader pricing is not designed to generate operating profits. Its purpose is either to take market share from competitors or create customers to whom you will later sell other things.
If your goal is to drive your competitors out of business, and you have deep pockets to sustain an unprofitable price war, this can work brilliantly. Many big box retailers, including Staples and Home Depot have followed this strategy. Long years of low prices eventually crushed their competitors, and both raised prices when their markets thinned out.
If you have a profitable and expensive product or service, an effective approach is to sell something that is cheap. For instance, if you have a high-end seminar, a low end ebook or free consultation can bring in all the customers you want.
There are other considerations to pricing besides the bottom line. But if you want to understand how to increase your profits, stay tuned for Part 3.
(c) Copyright Paul Lemberg. All rights reserved
Paul Lemberg is the president of Quantum Growth Coaching, the world’s only fully systemized business coaching program guaranteed to help entrepreneurs rapidly create More Profits and More Life™. http://www.fastergrowthnow.com
