Is Drop Shipping a Legitimate Business Model or a Scam?

8:04 AM

 

Question: What’s your opinion on drop shipping as a business model? In other words, I’ve found some vitamin supplement companies which offer drop shipping for their resellers. But I’m curious what your experience has been with drop shipping.

P.S. Estes Park CO

Answer Marc Charles:

 

Drop shipping is a $10 billion+ monster business. My opinion of it is pretty high.

Granted, there are a boatload of shysters and scam artists…including a ton of “low level” operators which offer drop shipping as a delivery method. But my experience with drop shipping has been mostly positive. First, I’ll explain drop shipping so everyone is on the same page.

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Drop shipping is a process in which a retailer (or reseller/affiliate) does not keep products in stock, but instead transfers customer orders and shipment details to a manufacturer or a wholesaler. Then one of these entities ships the products directly to a customer.

A retailer makes his or her profit on the difference between the wholesale and retail price. The great thing about drop shipping as a delivery method (and business model) is it doesn’t require a ton of capital to get started, and it can be run from almost anywhere in the world because you don’t have a physical inventory.

I’ll focus on drop-shipping vitamins and herbal supplements today. This is one of the largest and fastest growing drop shipping markets. According to the Dietary Supplement Information Bureau, vitamin sales exceeded $10 billion in 2009.

Direct mail (and sales on the Internet) accounted for about 20% of sales, and this number is growing like wildfire. Vitamin, supplements and herbal remedies are expected to exceed $17 billion by 2012.

Granted, the lion’s share of this market (and the profit) is scooped up by health food stores, organic grocery stores and super-stores like Wal-Mart and Costco. But there’s still plenty of room for entrepreneurs like you and I.

On top of that, drop-shipping enables you to bypass the headaches of running a bricks and mortar business. Ask any business owner with inventories if its expensive. Most of them will tell you YES!!

Managing inventories is time consuming and gets even more expensive if a product becomes obsolete. When a product is no longer “hot” it sits on the shelf, gathering dust.

A good friend of mine runs a children’s clothing store and gift shop in a popular tourist town in New England. My friend is a seasoned entrepreneur. When stores on his Main Street are closing doors due to the deep recession, he plugs along making money. My friend pays cash for his inventory and has no long term debt.

He told me he makes money by “properly managing his inventory”.  But he also said, “It’s a pain in the butt and requires constant attention”.

Drop-shipping makes more sense to me.  You can mail catalogs or promotions to repeat buyers and have the manufacturers drop-ship them to your customers for you.  You’ll save time and money with this strategy … and you won’t need to babysit warehouse space or inventories!

Here’s the deal with drop shipping vitamins and supplements…….

Americans spend big bucks on vitamins, supplements and herbal remedies. This market is also a hot rising trend.

For example:

>  About three in five consumers (59%) take supplements on a regular basis. Even if the buyer is using a supplement – and its working – he may be seeking even better results … and will be open to trying something new. Like your product.

>  Almost one in four Americans (23%) regularly uses herbs and specialty supplements.

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The vitamin and supplement market is an active direct-response category with lots of competitors, so good mailing lists are plentiful. The best results come from mailing to lists of mail-order buyers who have previously bought nutritional supplements by mail. Other lists that work are health-newsletter and financial-newsletter lists.

Do not rent “compiled” mailing lists (e.g., men age 50 or older) when you’re starting out. The only names that will work are proven mail-order buyers.

“Insider” Front-End Marketing Strategies

“Front-end” marketing means you’re mailing your first sales effort to prospective customers.

A good way to do this is to mail a simple direct-mail package that features one front-end product that they can order from you directly. The mailing should focus on a single product (like a prostate supplement) and information about the problem it solves (a swollen prostate).

Formats that work great for this type of approach include #10, 6 x 9, and jumbo letter packages. Most direct-marketing masters will tell you to stick to one product when you’re starting out in this business.

The best types of products to focus on in your initial front-end mailings include multivitamins, herbal supplements (such as ginseng, flaxseed, and black cohosh root), antioxidants, minerals (such as magnesium and calcium), and non-herbal supplements (such as glucosamine/chondroitin, coenzyme Q10, collagen, and fish oils containing essential fatty acids).

Later, you can branch out and sell multiple products with other formats: tabloids, magalogs (my favorite), digests, and catalogs. But do not try to sell multiple products in solo letter-package mailings.

You can test several health-supplement mailing lists to find the one that works best for your particular product. And, get this – you can purchase a directory of the best vitamin mail-order campaigns from North American Publishing Company. Sweet!

The “actual” mailing pieces are available as well.

You can also run space ads in newspapers, either selling a front-end product directly or to generate leads. And you can place inserts in alternative-medicine newsletters – such as the WebMD newsletter – that are dedicated to providing quality health information.

Eventually, you can offer a downloadable catalog on your website, and send your customers e-mail updates featuring new products, discounts, and specials.

For example, Paul Hsu began selling ginseng via mail-order in 1974. In 1998, Mr. Hsu opened the Global Mail Order Network, which ships products to more than 87 countries around the world. The company’s direct-marketing sales exceeded $100 million in 2009.

Back-End Marketing Methods

“Back-end” marketing means you’re selling additional products to your customers after they’ve made an initial purchase.  This is where the big money is! Think about it.

If you have people who trust you and enjoy doing business with you – don’t you think they would love to hear about your exciting new products and all the benefits they’ll receive by using them?

Just after the initial sale is a great time to send your customers a print catalog with your full product line. You should also include a catalog with outgoing shipments of your front-end products.

Freeda Vitamins markets “companion products” – nutrients which work better when taken together.

For example, they market prenatal vitamins along with Fem Cal (elemental calcium). And they market vitamin E along with selenium, which improves vitamin E absorption.

One of the most exciting aspects of a drop-shipping business is that it makes it possible for you to offer an automatic shipping program. The customer receives a one-month supply of supplements each month, and his or her credit card is billed automatically. They get a small discount in price, and can cancel at any time.

If you think that’s great … then listen to this. Every time your wholesaler drop-ships one of these automatic orders, you receive your commission (profit) – automatically!

Important Tip: Your Product’s USP

To charge the premium prices necessary to build a profitable mail-order supplement business, you must offer products that are perceived by your customers as being somehow different and unique.

That is your unique selling proposition, or USP. There are five ways to distinguish your product from the competition:

>  Unique ingredient. Your product contains an ingredient usually not found in other supplements in this category.

> Unique blend. Your product contains the same ingredients as competing products, but in a different ratio that not only gives the customer the optimum daily dosage but also makes the individual ingredients work better in combination.

>Unique delivery method (liquid, powder, capsule, tablet). Advantages of your method can include greater absorption of the nutrient, convenience, ease of swallowing. Taste (e.g., orange-flavored) can also be a differentiator here, as can packaging (e.g., making it possible to take one pill a day instead of six).

For example, Freeda Vitamins promises that its tablets disintegrate even more quickly than official standards require. They also use a “nutritional delivery” system that eliminates the use of animal substances such as gelatin and glycerine.

> Quality. Your processing or manufacturing method is superior, so the product delivers more of the nutrient in a more absorbable form.

For example, Freeda Vitamins checks its tablet runs every quarter-hour with an apparatus that simulates the action of the human stomach. Hi-tech hardness testers are also used to make sure the tablets aren’t too hard or too soft, which can affect digestion.

> Brand name. The name of your product line, your company, or the maker or inventor of your formula (e.g., Dr. Atkins) is well-known. Doctors and other healthcare professionals endorse your products, and the general public always wants to learn more about them.

If you can distinguish your product by brand name, providing potential customers with educational information can help entice them to become new buyers. For example, Freeda offers a “Helpful Hints” section on its website that explains the best time to take vitamins, how to store them, when they really expire, the advantages of powder vs. tablet, and the problem with capsules. They also offer nutritional information for people coping with a variety of health problems.

Drop-shipping vitamins to repeat buyers can be easy and very profitable.

Two additional huge markets include life extension and sexual enhancement. These repeat buyers spend money without hesitation in order to “recapture” their vitality, youth, and vigor.

A Little-Known Drop-Shipping Secret

Drop-shipping is a terrific way to sell vitamins via direct mail or on the Web, because you don’t have to stock an inventory. Anyone in business can tell you how expensive it is to maintain a warehouse. What’s more, products typically follow trends or cycles.

Therefore, if you have a warehouse full of Vigrexä (a natural Viagra) and a new product hits the market that’s faster, cheaper, and more effective, you’ve got a big problem sitting on your shelves. Granted, you’ll lose some of the profit margin by drop-shipping your products – but you can make up for it in volume or by specializing.

Drop-shipping Vitamins

You’ll need to acquire a mailing list of repeat vitamin buyers. I’ve enclosed some links below to brokerages that specialize in these types of mailing lists. Then simply mail your direct-mail catalog or sales piece to the names on the list.

Your customers will place an order by calling a unique 800# or by mailing the order form. (There are dozens of ways to track their purchases, too.)

Once the order has been received, your vitamin wholesaler will prepare the order for drop shipment.  When the shipment has been completed and the transaction (via credit card or check) has cleared, you will be sent the remaining proceeds.

Typically, your check will include the difference between the wholesale price and the retail price, minus any shipping and handling charges and transaction fees.

Some drop-ship wholesalers require a small deposit in order to cover charge-backs and returns.

One more thing: Always provide a 100% Money Back Guarantee. If a customer takes you up on the guarantee, don’t be foolish. Issue a refund check the same day or as soon as possible.

Now you have everything you need to grab your slice of this $10 billion pie!

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I hope that helps!

Your Humble Host,

Marc Charles

(Ed Note:  Marc Charles is referred to as “The King of Business Opportunities” ….and for good reason. He should be known as “The King of Legitimate Business Opportunities”…because he’s launched, bought, sold reviewed and advised on hundreds of businesses and money making opportunities. He understands legitimate opportunities. Marc has agreed supply League of Power members with crucial updates regarding legitimate business and money making opportunities.)

***** Action Strategy *****

Dropshipping is a viable business model. Tonight sit down and determine which market you would like to pursue…there are a boatload of options. I used vitamin supplements. But you can find other “hot” rising markets too such as personal security, recreational products (like poker), scrapbooking supplies, or organic food.

Collect information on each company’s dropshipping program….and take action.

 

 

******Valuable Resources *******

List brokers offering repeat vitamin buyer mailing lists:

Walter Karl

Direct Media

Edith Roman

Carney Direct Marketing

Worldata

Vitamin Wholesalers

Jarrow Formulas

1824 S. Robertson Blvd.
Los Angeles, CA 90035
Tel: 800-726-0886 / 310-204-6936
Fax: 800-890-8955 / 310-204-2520 NHS Labs Inc.

335 Edgewood #110
Eagle, ID 83616
Tel: 208-939-5100
Fax: 208-938-2819

Wholesale Vitamins USA

2500 83rd St., Bldg. 8 South
North Bergen, NJ 07047
Tel: 201-453-0900
Fax: 201-869-8922

Randal Nutritional Products Inc.

P.O. Box 7328
Santa Rosa, CA 95407
Tel: 707-528-1800
Fax: 707-528-0924

Vitamin Power Inc

P.O. Box 081839
Saint Mary’s Place
Freeport, NY 11520-0818
Tel: 516-378-0900
Fax: 516-378-0919

Vita-Tech2
832 Dow Ave.
Tustin,CA 92780
Tel: 714-832-9700
Fax: 714-731-8482

Hsu’s Ginseng Enterprises

T6819 County Road West
Wausau, WI 54402
Tel: 800-826-1577
Fax: 888-888-9511

Nutriforce
3337 N.W. 74th Ave.
Miami, FL 33122
Phone: 800-455-3396
Fax: 305-629-9994

*****Vitamin Wholesalers Offering Dropshipping Services****

NutraScience Labs

Vitamin Power

Vitamix Labs

Nutrition Manufacturer

MuscleMaster

Puritan

Colorado Nutrition

Mother Nature

VitaCost

9 Responses

  1. Admittedly I have considered joining this trend. There are some really great products on the market. Unfortunately most of the vitamin/mineral compounds on the market do not meet my minimum criteria for effectiveness and many of them are a total waste of money.

    The reason I say these things is that I was a co-founder of a nutritional company which developed a product that leaves all current products on the market in the dust as to effectiveness in improving health. Unfortunately we didn’t get financial backing and I had to close the company. If my biochemist and I live long enough, I will get it up and provide the product to people who really want better health. That is the reason I have become involved in the business of private banking for commercial real estate.

    And frankly, I do not trust some of the largest nutritional companies because I know for a fact – due to my experience – that they are much more interested in making huge profits than in providing quality products that truly build health.

    Yes, if money is the only thing that is important, drop shipping if a viable way to go. But for me, everything I would handle would go to my biochemist for evaluation. He is perhaps the most brilliant in this field and developed some of the products that made the biggest companies who they are. They just neglected to pay him his commissions and when he demanded payment, told him to sue because they had the money and lawyers and he would lose. In doing so, they lost the opportunity to carry a product much more powerful nutritionally than now have.

  2. Eunice

    I was sucked into this deal of drop shipping by Fortune Learning Systems. They charged me a lot of money and was supposed to teach me how to drop ship, etc. I was in the process of designing a web page using their templates. I had some problemm with that but they still got my money and charged me for the web site for which I had already paid.Then they cancelled my site but had been charging my credit card without my permission. I shut the card down so they shut me down. I already knew that I had been taken; my money gone.

  3. Reiner Grab

    This sounds great, with only one flaw to me. This is, that I would have to find my own customers, which is not an easy thing. Getting the first few repeat customers would be great. Then it would continue.

  4. Abe Friesen

    Drop shipment may be OK if you are an established business, but for beginning a business it can be ruinous, unless your product is in high demand. And how do you make your product in demand in this afluent socity? Where there are triples or more of eveything.

  5. Charles Okongo

    Very informative but the limitation of how to pay the initial entry amount hinders my taking up the opportunities. Fantastic job never the less and I encourage you out there to take it up.

  6. Euince.
    Thanks for the comments and post!
    Believe it or not, your experience is one of the reasons I’m so passionate about helping entrepreneurs.
    It’s amazing how many scams, gimmicks and underhanded businesses are out there! It’s unbelievable.
    What’s more, I’ve been “taken to the cleaners” too. I know what it’s like to lose money in the market, on business deals and ventures.
    But I try to separate truth from error when it comes to business opportunities, and communicate my findings in LOP.
    We can’t toss drop shipping out with the trash because of a few bad apples or pathetic so-called entrepreneurs. I know you lost money….and I KNOW how you feel
    The fact is….the companies in my article were researched. This doesn’t mean you won’t have problems with them….or that they are perfect companies and opportunities. But it does mean you have a firm foundation from which to work.
    My advice is to go direct with companies which manufacture or distribute products. It sounds like the company you were involved with were middle men or so kind of brokers.
    The truth is drop shipping as a method of distribution is a hot rising trend. It works.
    So hopefully you’re not burned too badly and you’ll continue your quest.
    Please keep me updated…we can post your experience on the forum.
    I hope that helps!

    Marc Charles

  7. George McClelland…

    Hi George — great post….and thanks!

    Amen and amen on nutritional companies and supplements. I could not agree more.
    However, as you know….in the real world the best or most effective products do not always perform well in the market….and frankly most of them never see the light of day.
    What’s more, there are natural compounds and whole foods which perform a hundred times better than any man made formulations. This has been proven for thousands of years. Chinese herbal remedies and cures (like ginseng) are one example.
    But sometimes in business we have to take the “middle ground”. This doesn’t mean we have to compromise our morals or ethics.
    It simply means we offer the best products or services we can, at the best price, to the best prospects.
    If we waited until we had the “ultimate” product, service, market and prospects, we may NEVER make a sale.
    I’m an entrepreneur. My focus is sales and a net profit. I’m absolutely concerned about my prospect or customer received the highest value for the most reasonable price.
    But as many entrepreneurs have learned….the market or prospects may NOT always want the “perfect” product for $99 a bottle. Sometimes the market or prospects simply want a “really good” product for $29.
    I hope that helps.
    As for your friend, the biochemist. He sounds brilliant! But he should always understand the downside of any deal or agreement he enters. The fact a company failed to pay commission is in some ways his responsibility.
    I know it sounds contradictory. But the biochemist should have “tested” his prospective client or employer with small insignificant projects and assignments. This would prove how the prospective client or employer pays his or her bills and invoices. If they do not pay commissions accurately or on time the first couple of times it is always an indiucation of how they will pay going forward.
    I always “test” prospective clients and partners. I’m rarely left “holding the bag”. But yes….I have been stiffed. That’s life.

    Marc Charles

  8. Dropshipping

    Of course, while it is legal to use a credit repair company, scams will always exist in all businesses.

  9. rachat de credit

    Man, really want to know how can you be that smart, lol…great read, thanks.


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