Economic Issues

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I’m curious as to how the economy is affecting small dropship retailers. My two stores are fairly young, so they are growing, although not tremendously. I’m sure in a stronger economy, I’d be doing better, but I’ll take what I can get right now.

So does a weak economy help or hurt us small retailers? I guess there are two sides. On one hand, Americans in general have less money to spend on stuff. So depending on what you sell, your customers have less income to buy your goods. So certainly we’re not in great shape in that regard. The price of everything is going up, so manufacturers will have to start raising prices. This causes your costs of goods to rise, and in turn, you may have to raise prices. No body likes this, and your customer will be unhappy. Two strikes. Finally, shipping costs are on the rise which may cause shopping carts to be abandoned once they see how much shipping will cost. Three strikes, ouch.

On the other hand, all retailers are facing these same factors. At least we don’t have large facilities to man, or pay rent on. We don’t have big inventory issues or have to worry about cutting jobs as the brick and mortars do. Secondly, fuel is the main reason that shipping costs are going up. So customers do have to choose between spending money on shipping, or putting gas in the van to drive to the mall. For me personally, I’d still rather order from my computer than run around town. Finally, the economic stimulus checks are coming, so maybe things will jump up soon.

I want to hear from you. What are your thoughts? How is the economy helping or hurting your business?

Paypal As A Merchant Account

I’ve been asked about using Paypal and Google Checkout as a method of payment in a store. I’m happy to give my thoughts, but first a disclaimer. I’ve never used Google Checkout, so I don’t have any comments about it. I would assume that many of my thoughts about Paypal would also apply to Google Checkout, but I really don’t know.

As I’ve mentioned before, I own and run two separate online stores. Both of them have Paypal loaded as a payment option in addition to a regular merchant account. Here’s an interesting tidbit, my first store, which has been open for almost three years, gets a Paypal payment almost every day. My second store, which has been open for around six months, has never gotten a Paypal payment. I have no earthly idea why this is. Both stores are hosted by Yahoo, have the same checkout procedures, and sell similar (but different) product. It’s very interesting to me that customers would use Paypal on one, but not the other. Any ideas?

I think that having a Paypal option on your site is really important in this day and age. EBay and Amazon both offer it, so why not you? It’s free and simple to set up a business account. Plus it gives consumers a little more confidence as they don’t have to type in their credit card number into your site.

I don’t notice much difference between the fees of Paypal versus my merchant account. One drawback is that Paypal does not automatically deposit funds into your checking account like your merchant account does. If you want that money moved to your bank, you’ve got to manually do it. Not a big deal to me, but some might find that to be a pain.

Paypal gives consumers the option to verify their shipping address, and their bank account; plus they protect the merchant if you sell to consumers who have taken the time to verify both. Unfortunately, many consumers fail to complete these processes even though they are terribly easy. Many complete one and not the other. This gives you a decision to make. If they’ve failed to verify anything, I handle it just like an AVS mismatch on my merchant account. If they’ve done one, I usually look at the order and make a decision.

There can be lots of hassles and paperwork involved in setting up your merchant account, in which case Paypal can be a great alternative if your store is new and you just want to get your feet wet. However, I do feel that it is a mistake to use Paypal exclusively for the long haul. An overwhelming percentage of my customers DO NOT use Paypal for their purchases. So I feel I would miss out on a great deal of purchases by not offering a credit card option.

All in all, I think Paypal is a great service. It’s certainly mainstream, and can lend some credibility to your store. Just make sure it’s a payment option, not a requirement, if you want to be a serious retailer.

Why do suppliers need a SSN or EIN?

Time for some more Business 101. When you set up a new account with a supplier they should ask for your SSN (if you are a sole proprietor) or your business’ Employers Identification Number (EIN). An EIN is basically your business’ social security number. If they don’t ask for one of these, beware, it could be a red flag that something isn’t right.

Here’s what’s going on. In this country (USA) sales tax must be collected on every consumer sale. Yes, I said consumer sale. The end user, or the person buying the item for their personal use, must pay sales tax. However all the sales in between do not need to be taxed (i.e. selling the item from the manufacturer to distributor, distributor to retailer). Follow me so far?

The IRS requires all of us to track these sales so they can make sure the correct tax is being collected and paid. So, when your supplier sells you an item, they report to the IRS that the item was sold to another business for the purpose of resale. This tells the IRS that a sale was made, but it wasn’t to a consumer. The burden to collect and pay the tax on the item now comes to you, the retailer. Suppliers (or manufactures, or distributors) use your SSN or EIN to prove that they sold the item to a legitimate business and the IRS needs to look to you for the tax. Got it?

What should I charge for shipping

When I first started my first store, this was perhaps the hardest thing to figure out. For most of us, free shipping is very hard to do. My feeling is that you should do your best to break even on shipping. With rising shipping costs, consumers are becoming more and more conscious of it. The store that tries to sell items really cheap only to charge big time for shipping will be out of business fast. Customers simply won’t be fooled and will shop elsewhere.

So how do you find a balance? First of all always be up front with what your fees are. Make sure your store has a FAQ page that explains all of your store’s policies, including how shipping is determined.

One of the most popular ways to charge shipping is with a tiered approach. Almost every catalog that you get in the mail has a shipping table. $0-$25 ships for $x; $25.01-$50 ships for $x; and on. This works really well if you don’t have any heavy or large items. I collected a bunch of catalogs in my industry, looked at all of their shipping tables, and created my own that was similar. This is a pretty good way to do things; you’ll overcharge some, and undercharge some. But hopefully will land somewhere in the middle when all is said and done.

You could use flat rates. If all of your items are pretty much the same size, and you’ve got a pretty good idea what they’ll ship for, make it easy. “All orders ship for $8.99”. Or maybe “The first item ships for $6.99, each additional item ships for only $.50 more”. This can work on big stuff also. Most of the big stuff I carry has flat shipping from the supplier. So I know it’ll cost me $50 to ship every time. I can adjust to make it work.

Finally, there are plenty of third party applications that can help. Yahoo! Merchant Solutions
hosts my stores, and I use Shipping Manager from Solid Cactus to configure my shipping. It costs me $75 a month, but I never have to worry about losing my shirt, or losing customers, due to shipping costs. It figures real time shipping costs based on weight, to and from zip code, box sizes, etc. An awesome tool. I’m sure there are other things out there for different store platforms. Search around and see what you can find.

Let’s share our knowledge. How do you configure shipping costs?

When To Fire A Supplier

So I’ve been thinking lately; when is the appropriate time to fire a supplier? I’ve fired some quickly, and some after a long thoughtful process. Before we dig in lets remember a few things:

1. Work to add vendor in the first place. Adding a new vendor, and all their products, is usually a big job in the first place. You’d hate to do all that work and reap no rewards at all. So firing a supplier isn’t something to be taken lightly or a decision to be made quickly.

2. Time for search engines/advertising to work. When you add new items, it does take time for the search engines to find them, and for any advertising methods you use to work. Don’t be too quick to pull the plug just because a supplier’s items aren’t selling; give things some time.

3. Most issues can be worked out with communication. Suppliers want to work with retailers; retailers want to work with suppliers. So if you’re having problems talk with them and express your concerns. Most issues can be worked out.

So, when to fire?

1. Constant customer complaints. This, of course, is one of the biggest ones. Customers complain about all sorts of things. But, when there is a sting of complaints that fall upon the supplier, you’ve got a problem. Now, while we all would like to blame all of our problems on the supplier, the truth is that most issues are not their fault. Look internally first. Some things that could be the suppliers fault are: product quality, extremely slow shipping, shipping the wrong item, and shipping damages due to poor packaging.
2. Problems outweigh the benefits. OK, so you’ve got vendor problems. Don’t jump and get rid of them too quickly. If you are selling a ton of their stuff, and making some good margins on it, maybe it’s worth it to you to just take your hits and keep going. Don’t sacrifice good sales for occasional mistakes. Be sure that the problems greatly outweigh your gain before considering a change.
3. Vendor shows no signs of changing. Always give the vendor a chance. Remember, we have spent valuable time and resources to get these products on the site. Express your issues with the vendor and see how they respond. In a perfect world, they’ll do what they can go work with you. If they tell you “tough luck” well then you’ve got some decisions to make.
4. You feel as though you’ve done everything possible to save the relationship. You’ve done everything you can think of and still no improvements. Time to decide if it’s really worth it or not.
5. Almost no sales. This is, of course, after plenty of time has passed. I’ve had suppliers whose stuff has been on the site for 6 months to a year without a single bite, that’s when to re-evaluate. Make sure it’s been long enough, as discussed above.
6. Made a mistake in the first place. All of the above reasons assume that you want to keep the items. Sometimes you don’t. Not all matches are made in heaven. Maybe your system and theirs simply don’t work together. Maybe you thought the items would blend with your site, but they just don’t. Maybe you just need to move on. In these cases, go for it.

Conclusion

The reason that I stress so much to keep the relationship going at all costs is because drop ship items are virtual. That is, once you’ve got the items up on the site it doesn’t cost you anything to keep them there. It’s not like you’re buying inventory, stocking them, and having to dust them when they are in your warehouse forever. In many cases, it’s simply easier to leave the items on the site and see what happens. The book, The Long Tail, by Chris Anderson explains this further. Bottom line is to use caution with all decisions regarding your business. Don’t take anything lightly and hopefully good decisions will follow.

Have I been charged twice?

So what was the most popular email I got from my customers during the holiday rush?  Well, it was an email that went a little something like this:

Hey, you guys charged my credit card twice for the same order!  I want the second charge reversed immediately or I’ll…

Have you gotten that one yet?  Of course, most are much more polite, but some go on to threaten calling their credit card company and the BBB.  I tell you, I must have gotten this email fifty times or more in December alone.  Here is the interesting part; I didn’t double charge one single customer.  Not one.  So why all the emails?  Let’s take a look.

How credit cards work

We first need to understand how credit cards work.  When a customer enters their information on your site, the system sends for an authorization.  Basically, it’s alerting the credit card company that there is a charge coming, making sure that there is room on the card for the transaction, and checking the billing address information.  You’ll be alerted if the billing address doesn’t match, or if the authorization is declined for any other reason.  The credit card company, in turn, leaves a temporary “charge” on the account, to hold the money while waiting for the actual charge.  Keep in mind that no money has changed hands at this point.  All that’s happened so far is the retailer’s system has said “Hey credit card, we’ve got a charge coming for $50, everything look good on your end?”  And the credit card; “Yeah, looks good here, we’ll hold it for you, let us know.”

At this point, you as the retailer will complete the sale, and at the end of the day, your credit card batch will process.  The credit card company will then see that an actual charge has gone through, and will move the temporary charge to an actual charge.  This is when the money actually moves.  All banks are different, but each will keep the temporary charge open for a set amount of business days.  If a real transaction never comes through (due to the order being canceled or something) they will delete the temporary charge off the system.  No harm done.  Follow me so far?

Why does my customer think they’re being charged twice?

Most customers do not understand the difference between a temporary transaction, and a real transaction.  Most of the time when a customer says they’ve been charged twice, it’s actually true that the card has been authorized twice.  Now I’m not a banking expert, so I won’t pretend to know all the reasons that this happens, because I’m sure there are tons.  One of the big reasons is that the original authorization came back with a billing address problem (AVS mismatch).  So you corrected the billing address, and tried again.  Resulting in two authorizations.  Again, there are a million scenarios where more than one authorization could post.  The point is that they are temporary.

When the credit card company sees that you’ve sent in one “real” transaction for that card, they should delete the extra authorization off the account.

How to respond

This didn’t used to be a problem.  Before everyone had online access to their credit card statement, people used to look only at their paper statement.  Well, the paper statement only shows real transactions.  It doesn’t show pending authorizations, like they do online.  So when you get this customer email, a little education is usually all that’s needed.

I send an email like this:

Mr/Mrs. Customer,

 

Thanks for your note about the double charge on your credit card.  We only show one charge in our system for your order.  Your bank just authorized the charge twice (they both probably say something like “pending”).  Nothing to worry about, it happens all the time.  Once they see that we only charged your card once (which won’t happen until tonight), they’ll delete the other authorization off the system.  Hope that helps.

Conclusion

Customers don’t always know the ins and outs of the business world.  Truthfully, before you were a merchant, you didn’t know much about it either.  People get really touchy when it comes to money.  But a quick message that explains what has happened usually takes care of it.

Any New Business Takes Time

I’ve decided that my absolute favorite thing is to respond to comments or questions on the site. Here’s one I got a few weeks back:

Any success stories to share? I’m not sure if it’s worth it to quit my job to start a webstore solely dependant on drop ship wholesaler. I’m a breadwinner for my family, and no income for a few months would be too disastrous – Bizman.

Whoa Bizman. Slow down. As a husband, father, and breadwinner, your comment scared me. Always use extreme caution when quitting your job to start a business. Unless you have a ton of capital or financing, it will usually always be awhile before making any money, especially enough to support a family.

I’m not sure why you’d want to do this anyway. One of the biggest advantages of a drop ship business is the fact that it is relatively easy to set up, and can certainly be run in your spare time on the weekends and in the evenings. I assume that you are fed up with your job, and that’s why you have considered this drastic move. Rather than jumping in with both feet, I encourage you to take it slow. Get started, and let your business grow before quitting your day job.

Remember, drop shipping is very competitive. The goods are easily obtained, so the margins are typically much less than traditional retail. While I’m sure it’s happened here and there, the chances of starting a drop ship business today, and making a sustainable income within a few months is slim.

Good luck, and let me know how it goes.

Send me questions and comments at justin@dropshipdigest.com

What is MAAP?

Many suppliers will mention MAAP when setting up an account.  They may even ask you to sign an agreement stating that you’ll abide by their MAAP policies.  Well, what the heck is MAAP and why is it important to me?

What is MAAP?

MAAP stands for (I believe) Minimum Allowed Advertised Price.  Basically they are saying that you can not openly advertise the price of an item lower than the MAAP requirement.  Suppliers and manufacturers use this in an attempt to protect their products from discounting which aims to protect their brand’s reputation.  They don’t want retailers selling their products for dirt cheap because that will eventually cheapen the brand and make it harder for anyone to make any margin on the products.

Why As A Drop Shipper Should I Care?

Because if a supplier has a MAAP requirement, and you are found violating it, you run the risk of loosing the privilege of selling the item, or in extreme cases, risk a lawsuit.

Is it legal?

In a word, yes.  Keep in mind that a supplier can not tell you what you must sell an item for.  That is called price fixing, and it is 100% illegal.  But there is a big difference between price fixing and MAAP.  Price fixing dictates sales price (again, illegal), MAAP dictates advertised price.  You can still sell the item for whatever you want; you just can’t openly advertise it for less than MAAP.

The way around it

Ever go to an online store and it says “call for pricing”?  Or something like: “the price is so low we can’t show you.  Add it to your cart for the price (you can always remove it later)”?  Well those stores are going around the MAAP requirements on those products.  They are not advertising the price, but will tell you if you ask, either by calling in or adding it to your cart (considered intent to buy).  The call in method is relatively simple to implement if you have a call center or some kind if customer service.  The add to cart method is a little more difficult and would take some extra coding or software to work on most store platforms.

Conclusion

My feeling is that MAAP is very confusing to the consumer.  Most don’t even know what it is.  So sites that use one of the above methods probably lose some trust.  It’s hard enough to get customers to buy, but when you add an extra step, many will just go somewhere else.  In practice, I generally just put the actual price I’m offering.  If it happens to be too low, I just move the price up to MAAP and move on.  Consumers like to know their price up front, and any time it seems to be hidden, you’ll lose more than not.

How Much Information Should I Give My Supplier About My Customer?

Many drop ship retailers worry about their suppliers “stealing” their customers.  They worry that with all the information needed in order to ship the product, the supplier will start advertising to the customer directly for additional sales in the future; thereby cutting you out.

In my experience, this rarely happens.  In fact, I don’t think it’s ever happened to me.  It all boils down to being careful when choosing your suppliers.  Make sure they are a good and ethical company.  Have a clear understanding of what, exactly, will be in the box with your shipments.  I had a vendor that did everything right, except put a sticker on the product box with their logo and website.  I simply had them stop using that sticker and everything is now fine.

So What Does The Supplier Actually Need?

Well, name and address, obviously.  The questions usually come with phone numbers and email addresses.  I do supply phone numbers because that is passed on to the shipper (UPS or whatever).  If the shipper can’t find the shipping address, they should use that phone number to contact the customer and complete the delivery.  A good thing for us all.

I do not, however, give my supplier my customer’s email address.  I have yet to find any reason that they would need that piece of information.  Questions about the order should be coming back to you, the retailer.  If they want the email address to send tracking information, give them your own.  I want my company to notify my customer of shipment status, not the supplier.

Conclusion

Do your homework, pick good suppliers, and you really should never have to worry about your suppliers taking your customers.  Most likely they aren’t in that business anyway.  They realize there is much more in it for them to keep a retailer happy, than to take a single consumer.  Double check periodically, however.  You never know.

How To Be A Poor Drop Ship Supplier or Things a Drop Ship Supplier Should Never Do

I am very close to firing a supplier of mine.  I really hate to do it.  I’ve been with them since the beginning and while they’ve never been excellent, service-wise, I’ve been able to work through most issues.  However things have gotten worse lately and I’ve about had it.  So here is what they’ve done wrong.

1. Stopped Back Order Notifications.  This supplier does not have inventory on their website, so you really don’t know for sure if they’ve got the item in stock or not when you order.  For the most part, this hasn’t been a concern.  I’d usually get an email in a day or two that an item is back ordered and I in turn would notify the customer.  During the holidays, they decided that they were too busy to do this.  So orders were put on back order with no notification.  It is my belief that it is the supplier’s responsibility to notify the retailer promptly if an item isn’t going to ship.  Not the other way around.  This lead to countless “where’s my stuff” calls from customers.

2. Partial Orders.  Additionally, they decided that if they had part of an order available, and part not, they’d just go ahead and ship what they had.  Again with no notification to the retailer.  So once again, we got countless complaints from customers that an item was missing from their order only to find out later that the supplier had back ordered it.

3. Changed Images.  We also got countless complaints that the customers were getting the wrong product.  After investigating, we found that the customer was getting the right item; it just looked different from the site.  So, the supplier had completely changed the look of many items without notifying the retailers.  So as a drop shipper, we had old product pictures without even knowing it.  We had many customer complaints on this.

4. Can not supply item list.  As explained in my last post, I contacted them to try to get a full product list (as well as a list of items with changed images) to try to do some updating.  I was simply told that they didn’t have a product spreadsheet.  How am I supposed to sell their products, if they can’t tell me what they are?

5. Terrible Website.  These other issues made me start to really realize how bad their website is.  Not only do they not have any inventory data, but when you check out, their shipping screen (where you choose ground, or whatever) has a cost of $0 for every available shipping method.  This leads me to believe that they at one point made an attempt to give good information on their site, and just gave up.  Of course, they do add shipping on later.

6. Told the owners don’t talk to people.  When I voiced my concerns to my contact person (at least they have that), I asked if I could speak with an owner or some other high up manager so I could voice my concerns.  I was simply told that the owners don’t talk to people.  Don’t talk to people?  I’m a distributor of their products and they won’t talk to me?  Are you kidding?  My only course of action was to send her an email and she’d pass it on.

7. No response to email with concerns.  OK, so I sent the email.  I confirmed with her that she got it.  And after a few weeks, still no response from anyone on any issue.

So what to do?  Problem is that I sell their products well, and like their products.  Based on my vendor matrix, they have lots of cons but lots of sales.  I hate to lose the sales, but I hate to continue with so many customer service issues that the consumer views as my fault.  I’ve already lost several customers based on their practices, even got some negative feedback on shopping sites.  I really don’t want that to continue.

Conclusion

My analysis is that this is probably a supplier that is really good in the bulk arena that is trying to do drop shipping without a good plan to do so.  I feel as though I’ve made every effort I could to help them improve.  With no return effort on their part.  So, I will be removing their products this week and replacing with another vendor that I use.  This other vendor doesn’t have nearly as many products, but they are similar and at least I know they are reliable.  When I do remove the original supplier’s products, I will send a formal letter to let them know.  In the letter I’ll reiterate my concerns and invite them to contact me when they have made improvements.  I’d really like to carry their products again, but for the time being, I feel this is the right decision.

What do you think?