Three Things to Think About Before you Drop Ship

Drop shipping is a way some Canadians are making their way in the small business world. It involves a warehouse-free way to buy goods in bulk, and have them sent to your customers. You see this commonly on Amazon. While you can buy goods from Amazon, you can also buy goods from re-sellers on Amazon. These re-sellers are using Amazon as their “drop ship” site.

At first, it sounds like a great plan, especially since China continues to emerge as a major player for North American re-sellers. In addition to cheap items that re-sellers can buy in bulk and mark up for resale, the Chinese market also offers its own drop ship sites.

Many people have had great success with drop shipping, and have converted this part time income stream to a full time gig. Before you drop in on this bandwagon, however, there are three important things you need to think about.

The Scam Potential

Like any “get rich quick” idea on the Internet, drop shipping is rife with scams. For every legitimate product supplier and seller, there are several scams that will sell you a bill of goods, or promise you training in drop shipping, but then just give you a list of companies to buy from. If you are interested in drop shipping, do your research very carefully for each step of the supply chain: the product seller, the importer, the drop ship site, and all the logistics along the way.

Think Like a Big Business

Income is income, and therefore, taxable. Don’t expect to simply start ordering products and reselling them. You must set up your gig as a business. That means, getting a business number, tracking inventory, doing paperwork, checking to see if tariffs or duties are applicable, reporting your income to Canada Revenue Agency (CRA), and collecting and remitting GST/HST if required, for a start. What if your product is recalled? Who bears the cost? Who contacts the buyers? What if the product kills someone (such as a toy you are reselling breaking apart into chocking-hazard sized pieces)? Who is responsible? You or the supplier? Do you need insurance? Ask yourself the hard questions so you have everything in place before you start your business.

The Question of Value

If your product supplier is selling to multiple people (and this is likely the case) and/or also sells directly to the public, you have to be very careful with your pricing. Resellers excel when customers give them a good rating online. However, nothing tanks your ratings faster than being accused of marking up your price too much, or “cheating” the system when the customer learns they can buy your products directly for much less money. Think about what you are reselling, how much of a market you really have on it, and what a fair price point will be.

There are many pros and cons to launching your personal drop shipping empire. It can be done, but to do it well you must set up the business properly and legally, and do your necessary reporting to CRA. For the accounting side of your small business, AF Accounting can help. We offer bookkeeping, tax planning, budgeting, virtual CFOs and so much more. Before you start this or any other business, get in touch with us.

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