Drop Shipping Business

The more your product weighs, the higher your delivery cost; the larger it is, the more packaging it will need. Both weight and size put up your price without putting up your profit.

Most carriers charge more for their services than the Post Office; and the Post Office has a rate scale that increases with weight, and a maximum weight for parcels of 25kg. For higher weights than this you are obliged to use non-Post Office carriers. One way or another, the heavier your product, the more it will cost to despatch.

Whether you separately identify delivery cost in your advertising or embody it in a so-called delivery-free product price, it forms an important element in the mail order calculation, and it must be considered at a very early stage in your product search.

Ideally, delivery cost should be only a small addition to the product price — preferably not more than about 15 per cent — if it is not to put customers off. The higher the price of the product, the less you need to worry about weight; the lower the price, the more important it is.

Note that it is price/weight ratio that matters, not cost/weight ratio. It can well happen, especially if you are the manufacturer, that the cost to you of the product is lower than the cost of shipping it. That doesn’t matter. The figures that have to be weighed against each other are the price the customer pays for the product itself compared with the amount he has to pay to get the product delivered.

How is your profit margin? Are you profit earner?

Most people new to retailing experience a mild shock when they first learn the prices at which goods change hands within the trade compared to the prices at which they are sold to the public. It seems that traders must be making fortunes. Typically, for example, a book selling in the shops for £9 may be available within the trade for £6, or a TV set selling for £250 may have a trade price of no more than £180. With such profit margins, the beginner is tempted to believe he could make his first million in a year at most. It isn’t so, of course. The profit margins illustrated above, though fairly typical, are only gross profit margins. The trader’s real profit — his net profit — is not the simple difference between his selling price and his buying price, but between his selling price on the one hand and his buying price, advertising costs, rent, rates, wages bill, stationery, postage, insurance, heating, lighting, telephone, accountancy, bank charges, interest charges, equipment purchase and maintenance and other overhead costs on the other.

The 3:1 ratio

The new mail trader operating in a small way, and possibly running his business from home, may be spared some of these costs, but advertising and shipping costs alone can be heavy, and the gross profit margin must be large enough to cover these costs and still leave a net profit. The conventional wisdom is that about a third of the mail order selling price is needed to meet the cost of advertising the product. This means that just to break even on your advertising, you probably need a 50 per cent mark-up — that is, a selling price half as much again as your buying price. For example, buying for £6 and selling for £9 will at best allow you to cover your advertising costs but nothing more. Buy for £6 and sell for £8, and you can confidently expect to lose money.

This is, of course, a crude generalisation, and any actual set of results may contradict it. But in the absence of specific evidence with a particular product, earmark a third of your selling price to pay for your advertising.

What sort of gross profit margin, then, are you looking for? Again, the generalisation is crude, but something like a two- thirds gross profit margin is desirable if you are to have a realistic chance of making a net profit. One-third of the selling price, as already suggested, will hopefully cover your advertising cost, and another third will cover everything else and give you a chance of being left with a profit.

For example, if you’re buying for £6, you must consider selling for not less than £18. That may look like an enormous profit, but it isn’t. Most of the ‘profit‘ will go in paying for the promotion, processing the enquiries, and fulfilling the orders.

It comes to this: your selling price will probably need to be not less than three times your buying price if you are aiming to make an immediate net profit from your advertising. This is the 3:1 ratio to keep in mind as you assess likely products. If you’re thinking of dealing in Whatsits, and they are typically being retailed at £12, you can see at once that you can’t afford to pay more than £4 yourself. And again: if you manufacture something yourself for £10, you will probably need to sell it for £30 or more to have a chance of making a profit, and if £30 looks ridiculously high as a retail price — well, back to the drawing board.