Most companies scoff at the idea of selling at a loss in order to increase market share. After all, doesn’t the practice of lowering and raising prices alienate the market? Well, yes and no. If you sell at a loss to increase market share and then raise your pricing at a later date, then it’s more than likely you’ve put that market growth at risk. At best, that growth is temporary and at worst, it could lead to a substantial loss of market share. However, what if you sell at a loss indefinitely? What happens if you never change your price and continue to sell without making any profit whatsoever? Now, you’re probably wondering why any company would knowingly sell at a loss and continue to do so. Surprisingly, it happens all the time. The key is to understand why and to establish the ideal conditions for selling at a loss.

When thinking of this aforementioned strategy, think Microsoft’s Xbox 360 and Sony’s PS2 and PS3 game consoles. Think of the marketing strategies employed by both of these entities. These competitors entered into a never-ending process of pricing their consoles to sell at a loss. They continually outbid one another by lowering pricing and losing money. However, losses incurred on console sales were made up with large profit margins on games. Any enterprise looking to be a player in the gaming industry, had to first secure the financing required to support a practice that most companies, in most markets, would find abhorrent.

Anybody would be right in being apprehensive of such a tactic. However, this strategy is acceptable when the net benefit means an increase in the company’s overall profit margins. In this case, the most important condition for adopting this strategy is to first identify your company’s loss leader product line, and establish the overall profit of selling complimentary product lines. Sony and Microsoft knew that for every console sold, their customer base would follow suit with purchasing a certain number of games. Both companies knew the total number of consoles sold and total number of games sold. As such, they could easily decipher the average number of games sold for each and every console. Herein lies the key to the approach. Use your company’s historical records on sales to outline whether any losses incurred on one product, can be made up with the profit on other complimentary product lines.

• Identify loss leader product line
• Identify complimentary product lines
• Use historical data to define the volumes on each
• Determine the net benefit using loss leader product lines

Granted, most companies measure the success or failure of their individual product lines by each product’s ability to derive a profit. This is why duplicating efforts allows companies to determine which products are successful and which are failures. However, the approach taken by both of these gaming stalwarts points to a practice that can indeed work, provided the conditions for success are clearly defined.

The Internet didn’t kill off magazines and newspapers, but it did change the way they make money. Drive down any street in the country and you will still see mail boxes stuffed full of newspapers and magazines. They may be antiquarian, but many people still enjoy sitting back and reading the actual paper copies.

Ask anyone on the street if they like reading on their home PCs and some will certainly say yes. Many will say no, or not that much: the screens hurt their eyes, it’s hard to hold a notebook in their laps for a long time, or they just prefer reading the real thing. It’s a normal occurrence for people to sit at their work desks and skim the morning news while they drink their coffee and eat their breakfast before starting their day.  The same goes for lunchtime.

The profits of traditional news and magazine publishers have dropped year after year for most. Those who have taken the great cyber-leap and now provide both limited free content and comprehensive pay content are doing better. The distribution channels are now seemingly endless, where before they were only paper. Thus, the profits should also be endless; ingenuity and forward thinking are keys to success.

The iPad is now a central aspect of that ingenuity and forward thinking. In the past, end users had to do a search for a particular magazine or newspaper of their preference; they now have an easy-to-use and easy-to-access app. If someone enjoys reading Scientific American or The New York Times they now can do it anytime and anywhere. The same limited free content and comprehensive pay content model now works better than ever before.

End users can still browse to a news site, read the headlines, skim the articles and move on. But, most major news companies are now putting pay walls in place for more all-inclusive access to their news. Major news aggregates will not disappear. They use RSS feeds and other aggregation methods to bring together all the stories they can; that news is now limited. The pay walls block their aggregation choices, so users looking for free news only get the barest of choices. This process is only in its fledgling stages, but will continue to be more and more prevalent as more traditional print media companies move in that direction.

The iPad is billed as the savior for media companies. Now, instead of having to erect massive pay walls while trying to lure end users into buying a monthly subscription, they can create an app and the luring is already done. For $3.99 a week users can get full access to The Wall Street Journal. Business travellers and consumers who prefer the content of The Wall Street Journal are more than willing to pay that fee for the ability to read it whenever and wherever they want without lugging around the paper: accessibility, convenience and complete access are key.

In the post-PC world of controlled content distribution through apps, if a user wants The Rolling Stone, Scientific American, USA Today, Good Housekeeping, The New York Times or any number of other magazines or newspapers, they will have two primary choices: limited use content with advertising or unlimited use content with reduced (or no) advertising. It’s a matter of preference and for $2.99 or $3.99 the ease of clicking an app and reading your favorite journal isn’t such a bad thing.

It’s a financial boon for the distributors as long as they change with the technology.

In the Apple universe Steve Jobs was king; his power is still universal though, even after his untimely passing. He ruled with an iron fist. To be part of that universe means living in a world where content distribution is controlled by such dukedoms as iTunes; you can find everything your heart desires – for free with advertising or for a price. Such is true of other universes and galaxies with names like Blackberry and Android to greater and lesser extents.

Apple users have no issues with this; they can get thousands (if not millions) of apps that do anything and everything they want. Designers, creators, distributors and the rest of the cyber-universe have jumped on the bandwagon and are creating channels for their content that lead to the proverbial pot of gold at the end of the rainbow. That specific rainbow now ends at a glowing silver apple with a small bite taken out of it. The leprechaun at the end of the rainbow was Mr. Jobs himself.

In the ancient days of the Internet, circa 2005 (the actual dates are a bit foggy), users still had access to all paths within the vast web of information now coined the Interwebs by those who like to sound clever. Apps were an idea of the future, lovingly discussed in meeting rooms across the Apple Campus. In the modern age of the Internet, content distribution has changed and will continue changing until many of the paths have large crystalline gates called pay walls guarding their inner most secrets.

To be sure, the new world of closed cyber-ecosystems provide numerous financial benefits for those who create the content: “use our app for free and enjoy our advertising” cry out thousands of voices from app-space; “or give us 99 cents, $2.99 or $3.99 and open up your life to our world without any advertising.” The change the iPad, and now a host of other tablets, has created in terms of content distribution is a boon for business:

• Closed Channels: Instead of using a browser to search for items, end users have apps and thus a closed system of information intake. Browsers are still popular, but now in the new cyber-universe created by Mr. Jobs, users who want educational programs for their kids can pay a small fee for a program that does exactly what they want. They no longer have to search, download and access, but instead just tap with a finger and like magic the program opens. It may be a closed system, but convenience often outweighs accessibility.
• Advertising: Popups, rollovers, Flash, SEO, pay-per-click, email and a range of other advertising options are now being replaced by a simple tool: free apps. You can use the app, but you get the advertising with it. Advertisers no longer have to figure out ways to outsmart consumers with clever (and often annoying) techniques. They now just offer their limited-use app for free and just like in the television world before DVRs and in cinemas today, the user is theirs.

The game has changed and with it so has the economics of the entire system. Browsers and search engines are not going to disappear; they are too much a part of cyber-consciousness. But, in the closed, proprietary universe of tablets and apps, the distribution channels are increasingly separating themselves into single roads rather than the vast, information highways of before.

Could your small business benefit from some fresh thinking? Resolve to do the following four things, and your company may grow exponentially in the new year.

Participate in a Daily Deal

Jump start a new product launch or drive traffic to your store during a traditionally slow time – participate in a daily deal. Here’s how it works: you choose an item or service you’re willing to discount by more than 50 percent. The deal site emails your limited-time offer to their database – you choose the demographic you want to reach. An agreed-to minimum amount of customers have to buy the deal voucher in order for everyone to get the deal. The deal site takes a percentage of the vouchers sold and the balance is forwarded to your business. In addition to moving inventory and generating sales, your small business may gain new – and then repeat – customers.

Create a DIY Mobile App

Want to engage your customers more than ever in the coming year? Don’t wait for them to visit your Web site or follow you on Twitter. Instead, create your own mobile app that lets you share your content, coupons, videos, photos, downloads and quizzes immediately. DIY mobile app services abound, and allow you to create low-cost mobile marketing quickly.

Commit to Email Marketing

Do you have your customer e-mail addresses but aren’t sure what to do next? For a small monthly fee, you can upload those addresses to an e-mail marketing service, and then send your customers company news and coupons using design templates. E-mail marketing services will also clean up your database by eliminating duplicate addresses and let you know which addresses bounced. Even better, they’ll tell you which customers opened your e-mail and what they clicked on. Embrace e-mail marketing in the new year.

Think Out of the Box for One Marketing Initiative

All it takes is one memorable marketing effort to make your company front page news. Know of someone who’s embarking on an endurance feat, like biking across the country? Create branded rest stops that he and his fans can enjoy. Have a funny use for your product that you’ve never promoted? Film a few people using your product in that unusual way, and then load the video to social networks. Maybe it will go viral. Marketing creatively could prove to be a breakthrough for your small business – in both brand awareness and sales.

With the new year comes a new challenge: how will your small business achieve unprecedented levels of customer engagement and profit?

Today’s small business owners can easily level the playing with their larger competitors. Gone are the days when marketing was dominated by large enterprises, enterprises with vast resources, huge marketing departments and the market knowledge and clout to keep smaller companies at bay. In today’s business climate, small enterprises can easily determine their costs of leads without breaking the bank, all the while putting proactive plans in motion to increase market share. However, to do both requires small businesses define their marketing budget and track the costs of lead generation from month-to-month, or from quarter-to-quarter. With this in mind, we’ll provide insight into how small business owners can come up with that marketing budget, track expenditures and express them as a total percentage of sales. Next, we’ll show to determine the company’s costs of leads.

Coming up with your marketing budget

Before tracking the results of individual marketing initiatives, and your cost of lead generation, one must first come up with that all-important marketing budget. That requires an in-depth review of your market, your customers, their purchasing habits, when and where they congregate and how best to reach them. While this might seem like a lot to figure out, it really isn’t. First, determine whether your company operates in a B2B (business to business) environment or a B2C (business to consumer) environment. Second, outline your business model. For example, if yours operates in a B2B environment, would you then classify your enterprise as a manufacturer, distributor, VAR (value-added reseller) a sales agent, or an integrator? Outlining your business model will help focus your marketing message to the most interested parties. Third, define your current costs of customer lead generation. Finally, measure the performance of individual marketing initiatives. To help you with this, we’ll provide a fictitious marketing budget and show how that budget is expressed as a percentage of total sales. Afterwards we’ll provide a table that shows how to measure your costs of lead generation.

Sample Marketing Budget

In the following marketing budget, the company has decided to focus on its second quarter marketing expenditures and to express these expenditures as a percentage of its sales revenue. This is done for the month of April, May and June. Each marketing initiative is included in the budget. The marketing expenditures are provided through each month with a summary of the expenditures on each initiative for the entire second quarter. The column entitled “total expenditures for Q2” totals up the company’s expenditures for the quarter on each of its marketing initiatives. Next, the company has totaled its marketing expenditures on each initiative by month. This are included in the vertical rows entitled “marketing expenditures”. The company’s “sales revenue” is just below and finally, the company’s “marketing as a percentage of sales revenue” is summarized in the last row.

To calculate marketing as a percentage of sales, the company takes its marketing expenditures for April of $18,750.00 and divides it by $475,000.00. This gives a percentage of 4% for the month of April. The company then does the same for May and June and provides a total percentage for the entire second quarter.

Tracking the costs of lead generation

Don’t complicate the process of tracking where your company’s leads come from. Tracking leads from websites, company blogs, online PPC (pay-per-click) campaigns and trade shows will be straightforward. However, tracking leads from magazines and print will be more involved and will include asking your customers to confirm how they came to your enterprise. In the table below, the company has tracked its leads resulting from its marketing initiatives for the second quarter.

Determining your cost of leads is simply a matter of using a simple calculation. In the above table, we’ve done away with tracking leads from promotions and sales training. While an argument can be made that leads can be tracked from these sources, it’s best to focus on identifiable leads first.

Take the number of leads generated and divide it by the expenditures on that specific marketing campaign. For example, there were 22 leads generated through PPC campaigns in the second quarter and the company spent a total of $11,700.00 on PPC campaigns during that period. In this case, the cost of customer leads includes taking $11,700.00 and dividing it by 22 leads. This gives us a cost of $531.82 for each customer lead. How does this compare to the company’s SMS campaigns? Well, the company secured 37 new leads from SMS campaigns and spent a total $2,250.00 during the second quarter. In this case, the company’s cost per leads is $2,250.00 divided by 37 leads, or $60.81 a lead. For this particular comparison, it’s obvious that the company’s SMS marketing campaign is outperforming its PPC campaigns. Going forward, the company would track these variances from month-to-month and from quarter-to-quarter.

Focus on defining your business model by identifying your market and your customer base. Move forward with plans that reach your customer base. Use your marketing budget to define your expenditures as a percentage of sales revenue. Track performance from one month to the next and from one quarter to the next. Finally, analyze your cost of leads by marketing initiative. Doing this will allow your company to identify the best possible initiatives and the ones most likely to increase your marketing ROI (return on investment).

How does your small business define the value of a sale? Do you focus solely on its gross profit by taking the sales total and deducting the product’s COGS (cost of goods sold)? After all, the best indicator of a salesperson’s performance is the amount of gross profit generated on sales, or is it? In order to answer this last question, it’s important to think about your company’s cost of money. For instance, do you consider the impact of financing when looking at the value of a given sale? Granted, these are all very involved questions. However, they form the basis of the argument that companies should move past measuring sales performance based solely on gross profit, and onto considering the impact of financing on their inventory and their receivables. We’ll review both of these factors and show why your small business must redefine the true value of a given sale. Next, we’ll review a simple example within two tables that summarize the impact of financing on inventory and receivables within a fictitious sale.

Understanding inventory and receivable financing

Like most small enterprises, yours must use outside financing in order to finance its inventory and, to finance your customer’s unpaid invoices, or receivables. These financing costs have a yearly interest rate attached to them that can easily be converted into a daily rate. It’s this daily rate that impacts your financing costs in inventory and your costs to finance your customer’s unpaid invoice. For example, let’s assume your small business has a yearly interest rate of 6.5% on loans and business credit lines. The daily interest rate your small business must cover includes taking this 6.5% and dividing it by 365 days in a year. This gives us a daily interest rate to finance inventory and receivables of 0.0178%. By itself, this daily rate doesn’t seem too imposing. However, when you take this interest rate and multiply it by the amount of time your company holds inventory before your sales team sells it, and the amount of time your company waits for your customer to pay their invoice, then it becomes a substantial amount of money. We’ll review the financing costs on inventory and a customer’s unpaid invoice in a fictitious sales transaction. Afterwards, we’ll summarize these costs in a table and use them to define the true value of a sale.

The impact of inventory financing

The table below summarizes the costs to finance inventory on the sale of a product that was held for 60 days before being sold. In our example, the daily interest rate of 0.0178% is multiplied by the product’s COGS of $7,500.00, which gives the company a daily cost of $1.34 to finance inventory. The company’s total cost to finance this inventory transaction is this $1.34 multiplied by the 60 days it took the company to sell the inventory, which in this case is $80.13.

The impact of receivables financing

The company’s costs to finance its receivables are outlined below. Again, the company’s financing costs are $1.34 for every day the customer takes to pay the invoice. In our example, the customer takes 90 days to pay the invoice. Therefore, the company’s financing costs include these 90 days multiplied by the $1.34 daily cost. This gives the company a total of $120.21 in order to finance this particular receivable.

The total cost to finance sales 

In our example, the company’s total cost to finance this sales transaction includes the $120.20 in receivable financing and the $80.13 from financing the company’s inventory. The total costs are therefore $200.33. Now, the question your company must answer is whether you take these financing costs into consideration when determining the value of a sale. This entire exercise provides insight into why faster turnover rate products, and customers with solid credit ratings, help to reduce a company’s financing costs and increase gross profit.

Now, does this mean that all your company needs to do is to only sell products with fast turnover times, and only sell to customers with triple “A” credit ratings? Of course not! However, it does mean your company must include its financing costs when looking to determine the value of a sale. Most importantly, your small business must incentivize your sales team to lower these financing costs. If needed, reward them by paying them a higher commission for helping to reduce these financing costs. It will force your sales team to go beyond just gross profit, and onto measuring the true value of sales for your small enterprise.

Business insurance is essentially a requirement for all businesses.  The benefits of business insurance  definitely outweigh the costs, and it is worth paying for whether it is a corporation or a small business.  Business insurance does cost money, and there will likely be some annual or monthly fees for the service, but the cost is still small compared to the amount that the business would have to pay if there were a costly lawsuit.  The main reason why business insurance is necessary is because it protects the business from liabilities like theft, vandalism, law suits, storms, fires, and more.  Going without business insurance will expose the company to a lot of liability and potentially cause the company to hemorrhage money if and when something happens.

What is business insurance?

Business insurance is like any other type of insurance, and the only difference is that it is designed to protect businesses.  Business insurance is different depending on the business, their needs, and the insurance provider, but it can include things like property insurance, auto insurance, workers compensation coverage, and general liability insurance.  Business insurance is designed to protect the business in the event that something damages the building, their products, equipment, employees, or even customers.

Why do you need business insurance?

All businesses need business insurance whether they are large corporations or small businesses.  It is generally not required in most states and many start-up and home businesses may not have any insurance in the beginning.  Since business insurance does cost money, some entrepreneurs will forgo getting insurance until they have become profitable, and that is understandable.  However, it is important that they obtain a good insurance policy shortly after they start because any type of disaster could cost them thousands or even millions of dollars in damages.  For example, if a new store opened without business insurance and  a customer slipped and fell on the floor, they could be sued for thousands or even millions of dollars for an injury.  If the store had business insurance, then they would be protected and they would only have to pay the insurance costs as opposed to all of the money for the damages since the insurance company would resolve the matter.

Since there are other types of business insurance, they still provide protection for a number of scenarios.  General liability insurance and property insurance helps provide coverage for fires, thefts, natural disasters, accidents, and etc.  Workers compensation insurance is designed to provide protection for the business if an employee makes a workers compensation claim or if they try to sue the company.  There is product liability insurance.  Product liability insurance is available for companies that make products and it protects them in case a product is defective or injures someone. Auto insurance can protect all of the company vehicles and provide coverage if a car is damaged by another party or if an employee gets into an accident or damages a vehicle.

Business insurance may actually be required for certain types of business depending on the state.  Most states require medical related businesses such as hospitals and doctors offices to carry malpractice insurance in case a patient gets injured.  Many financial business such as investment firms, banks, and credit unions are required to have a certain type of insurance policy as well.  Umbrella insurance is also available as a package deal of sorts because it combines all of the different types of coverage into one policy.  A business can work with an insurance company to create a policy that will fit all of their needs and include different types of coverage.

How to save money on business insurance

Business insurance costs can change due to a number of factors, so there are some ways to reduce costs.  The first thing that businesses should do is compare quotes across the board and meet with different insurance providers to get the best rates.  Try to negotiate with them and make sure that all of your needs are met in the policy that you create because you are not obligated to accept a standard policy.  Sometimes a business can reduce their insurance rates by increasing their credit rating and just improving their standing as a legitimate business by signing up with the chamber of commerce and the Better Business Bureau.  Generally, with most policies if the business gets a low deductible there will be a high premium and if they get a high deductible there will be a low premium.  Take some time to look around and never accept the first offer.

The benefits of insurance does outweigh the costs because the costs of lawsuits, natural disasters, or a fire could be so devastating that the company may close down altogether if they cannot afford to pay the entire bill on their own.  In this day and age, business insurance is really a necessity, and it is just part of the cost of doing business.

1. Business Structure

Incorporation is for businesses with substantial business volume. A start-up can initially operate inexpensively under the owner’s name without any additional formalities. The new business may need a local business registration and license in some jurisdictions.

2. Banking

Banks offer complete business packages with many great services and high fees. A start-up just needs a simple checking account. If the owner is doing business in his own name, a personal account used for the business is usually enough.

3. Financing

All businesses need financing to bridge the gap between incurring expenses to do the work and the customer paying the bill. Banks often charge small businesses high rates and fees for such loans. A prospective owner planning to start up a business may get a better deal if he applies for a loan while still employed or otherwise earning a steady income.

4. Work Space

The focus of a start-up is to generate revenue and minimize costs. Second-hand office furniture is adequate for filing cabinets, desks and shelves, but a good chair increases productivity.

5. Computer

A computer is an essential business tool, but business applications don’t require a lot of power. Free business software can work with all the important file formats. A medium-sized, inexpensive laptop with free office software such as Open Office or Google Apps is adequate for any business start-up.

6. Printer

The initial output requirements for a business include printing, scanning and faxing. Scanning lets a business reduce paper use and clutter while banks and government agencies often still insist on faxing material. An inexpensive multifunction printer, scanner and fax machine will cover these initial needs, eventually to be replaced with single-function units when required. Check out a colour laser printer too. You can print flyers and some other marketing materials inexpensively and in smaller quantities compared to having them done by a printer.

7. Advertising

Effective advertising requires a large budget. Start-up owners can achieve much better results by focusing on direct mail and email distribution to lists generated from their own contacts and networks.

8. Marketing

Start-up owners can save money by using their own computer to generate initial marketing material. They can make the designs look professional by incorporating royalty-free images from low-cost services like 123rf or CanStockPhoto.

9. Bookkeeping

When starting a business, there is comparatively little activity to track. A system of spreadsheets for income, expenses and acquisitions keeps records in an easily-converted format for later input into a full-featured book-keeping or accounting program. There are more and more free or inexpensive online accounting systems out there such as wave accounting.com or zero.com. These systems also allow your accountant/bookkeeper to access your books remotely in order to fix errors or download the information into their tax software. Of course, the best thing to do is to outsource your bookkeeping as you have better things to do.

10. Taxes

In most jurisdictions, business losses from a business carried out in the owner’s name are deductible from other income. It may be advantageous to start the business in the summer or fall so start-up expenses are incurred before the end of the year. The owner can then deduct these against income earned in the first part of the year, especially if the owner was previously an employee and gave up his job when he started the new business. Such tax planning can result in a substantial refund during the first year of running the business, just when the business is likely to need some cash.

Business owners have a strong, vested interest in making it easy for their customers to avail of their services and products. Many businesses accept credit cards to allow people to purchase items they would not otherwise be able to buy. Extended credit is another way to help improve customer relations and to show customers that the business is willing to cut them some slack.

The problem is that many businesses are so desperate to get an advantage over their competition that they are willing to extend credit to their customers just to have their business. Never mind that this is the equivalent of an unsecured loan – all the owners are thinking about is how their customer is shopping with them. There is nothing like a “friendly” business to keep people coming back.

Unfortunately, whether or not the economy is doing well, some people just end up not paying. At the end of the day, the business or the company is what takes the hit. Before a company decides to give its customers the benefit of the doubt and extend their credit, there are a few things to consider.

As with anything, there should be a policy or a system in place that pre-determines which customers are eligible for extended credit. This is the same policy that will determine just how much credit is available to those customers and how that credit will be monitored. This will assure the customers that any credit extension allowances or denials are not personal and are instead strictly a matter of business.

This policy should include a credit application wherein the customer lists trade references, credit authorization, and information on their banking history. It should also inform the customer of what to expect from their credit extension. It also helps to pull consumer credit reports on the customer to see if they are indeed trustworthy.

The worthy few should be treated as such. Smart companies will offer them every opportunity to pay off their credit. They should be allowed to pay using the method they are most comfortable with. If they are comfortable with payment by mail, then they should be able to pay that way. If they want to pay online, they should be able to do so.

In addition to the aforementioned credit policy, companies should generally only offer credit extensions to customers that come with a lot of business. Those who have history with the company should be considered for extensions more favourably, as a loyal customer is definitely more likely to pay his or her debt.

There are a few mistakes that companies make when they do end up offering extended credit. No matter how personal the relationship with the customer is, a company should never leave the terms of a credit extension to a handshake. It should be in writing and agreed upon by everyone involved.

Extended credit should not be offered to anyone at all if the company doesn’t have money flowing in from other sources. Doing so bets the future of the company on the debt, which is a position businesses should generally avoid. In general, it is good to make sure that any risks incurred by extending credit should be within the capabilities of the company.

It is also best to err on the side of caution and have a way of collecting money from customers with credit. This can make sure that the company stays protected should the worst occur.

Being paid outright is, of course, the best option. However, the bigger the purchase, the less likely it is for that to happen. Allowing select customers credit extensions can deepen customer loyalty and increase sales in a way that would not have occurred otherwise. While it is something that should be handled with great care, the benefits of allowing extended credit for select customers blow away any disadvantages that the company may incur.

With the popularity of auction websites and online marketplaces steadily increasing, many people are questioning what it takes to begin an online business. One appealing and often advertised possibility is the use of drop shipping companies instead of retaining an inventory. As with all things, there are positive and negative aspects to this solution.

Drop shipping involves the use of a third party company for order fulfillment and inventory control. Using drop shipping, the retailer does not have to keep an active inventory. Instead, the retailer sells selected items from the drop shipper’s inventory, at a markup that will become the retailer’s profit. Once the retailer gets an order, they notify the drop shipping company, which then packs and ships the item to the client. Drop shipping companies generally maintain a large online catalog of available products in many categories. It is up to the retailer to select a product that they are interested in, and that is not oversaturated.

Since maintaining an inventory is expensive and unwieldy, drop shipping can be incredibly useful to a beginning retailer, or a retailer who is interested in testing the market. In addition, packing costs are generally included in the drop shipper’s item cost. This not only means that shipping and packing fees are much lower due to the drop shipper’s bulk rates, but also that the retailer can devote all their time to selling and marketing their chosen products.

Unfortunately, like many online business opportunities, drop shipping has become infested with scams. Many websites claim to sell lists of drop shipping businesses. Often, these lists do not name actual drop shipping companies, but instead simply name middlemen who will connect the retailer to a drop shipping company, for additional fees. Other times, it is simply an old, unmaintained list of drop shipping companies that could be found in the phone book.

Drop shipping can be risky to a retailer due to the same aspects that make it beneficial. By placing the shipping and item fulfillment in another company’s hands, the retailer has little ultimate control over what happens. This can open the retailer up to customer service issues such as items being sold when they are on back order. Additionally, because drop shipping has become so popular, many retailers are now selling the same items on the same markets, and receiving them from the same source at identical cost. This can lead to a competition amongst retailers as to who can slice their profit margin thinnest.

Drop shipping can be an excellent tool when a retailer is just beginning their online marketplace business, or for niche items that are not yet saturated. The usefulness of drop shipping to test market interest on new items cannot be dismissed. By using drop shipping for research purposes, a retailer can discover an ideal product without the need for a large inventory investment that may or may not actually sell. Unfortunately the cost of drop shipped items over wholesale items, and the oversaturation of the items, mean that with few exceptions it is not a sustainable model for long term profit.