Do Drop Ship Businesses Still Make Money In 2017?

eCommerce Q&A

Show Notes:

Tell Us Your Biggest Ecommerce Pain

Check out Freeeup

Schedule a Call with Nathan

Nathan's Recommended Repricing Software

Check Out Freeeup on Facebook

Free Up Your Business: 50 Secrets to Bootstrap Million Dollar Companies

Upgrade Your Ecommerce Store With Sellry

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Transcripts:

Michael: Hello folks and welcome to E-commerce Q&A, this is the podcast where store owners, directors of E-commerce, and E-commerce managers can stay up to date on the latest tools and technologies in E-commerce. Our guest today is Nathan Hirsch and Nathan is the CEO and founder at FreeeUp, which is an amazing company. We've actually interviewed Nathan before and today we're gonna talk about very a interesting topic that jumps further back into his history. Nathan, thank you for joining us.

Nathan: Thanks so much for having me guys.

Michael: Absolutely. First of all is it Nate or Nathan?

Nathan: Nathan's fine.

Michael: Cool. I was looking at your LinkedIn and you're in Winter Park, is that right?

Nathan: Yup, right outside Orlando, Florida.

Michael: Cool. Yeah Winter Park you being from Colorado I was thinking more a different type of winter park, but that's great. So-

Nathan: Whatever Florida winter park can be.

Michael: It should be almost a joke right? It'd be summer park in the winter? Is that ... I've never been to Florida believe it or not, so yeah.

Nathan: Yeah, I just moved here five years ago so maybe that's what they were going for.

Michael: Where were you before?

Nathan: Massachusetts. And I went to school in Connecticut. So, I've seen snow.

Michael: Yeah, for sure. So today's topic I'm very excited about. Not because it's a new topic but it's because it's one that is so important for E-commerce of all flavors and the topic is Drop Shipping. We want to talk about Drop Shipping and we want to talk about optimization when Drop Shipping. That's the whole reason people do Drop Shipping typically, is to free themselves up and give themselves more time to work with the margins. Now you sir, are a very successful Drop Shipper. Can you tell us a little bit about why we'd want to talk to you about Drop Shipping?

Nathan: Sure. So I started off as a broke college kid in my dorm room. And I got mad that the bookstore was ripping me off. I was buying textbooks for hundreds of dollars and selling them back for pennies on the dollar. So I was like, "Alright, I can learn how to do this myself and cut them off," and before I knew it I had lines out my door of people trying to sell me their textbooks 'cause I was paying more than the bookstore. And I was holding onto the books, selling them at the end of next semester and then at the beginning of next semester. And pretty much finding all of these different ways to sell them from different bookstores to Ebay, to Amazon.

And then when I found Amazon I fell in love with it. I thought it was way better than Ebay. I became addicted and obsessed to it. And really wanted to figure out how to maximize it and how to make money. But I was also a relatively broke college student, so besides the money that I made on textbooks, I didn't really have anything to buy inventory and I didn't know anything about buying inventory. So to me, I kept trying to brainstorm how I could start an Amazon business without any kind of initial cast investment. And I came up with the idea of Drop Shipping years before I even knew what Drop Shipping was called. It was honestly like four or five years later that I was into the company that someone told me, "Hey, you're running a Drop Ship model." So my concept was I would sell stuff I don't have, buy it from someplace that had it, get it shipped to my customer, and then handle all customer service outside of it. And it was a real trial and error experiment. I remember I sold this small toy laptop on Amazon, I actually had it Drop Shipped from Walmart to the customer and I was like, "You know what, I'm gonna try it. Worst case scenario I'm out like 25 bucks and I learned a lesson if the customer complains, and I won't do this again. Or best case I'm on to something here." And the customer never complained. I sent her a few emails to follow up and make sure she was happy. She never responded and I was like, "Alright, I just made $10. Let's start listing lots of different products from different websites." So months later I was running a multi million dollar Amazon Drop Ship business out of my college dorm room and it really only expanded from there. 

Michael: Wait, you said months later? How many months later?

Nathan: Within six months to a year.

Michael: Nice.

Nathan: Yeah, I mean I was really ... I started hiring people to just list products all day. I remember being in the back of my college class just listing baby products on Amazon and having people look at me like, "What is this guy doing?" And it was just a lot of trial and error. I started off trying to sell DVDs and different video game systems and realized that the margin wasn't good for that, and I found this niche in baby products, home goods, and toys. And from there it was about building a team, which is why I'm so passionate about hiring, because good teams make you look really good and make you get on top of the world business-wise. And really expanding to get away from retailers and onto more suppliers and building those good supplier relationships, which is a whole nother part of Drop Shipping.

Michael: Yeah. And I definitely ... We'll be linking back to the previous episode where we talked a lot more about that topic. And feel free to bring it in as much as you need to 'cause like you said, it's the people that make it possible to scale a company. It's not just the tech. And that's gonna be true even as we move into a world that's dominated by task work is being done by smart robots.

Nathan: Exactly. There's so many manual processes of a Drop Ship business, and I built a lot of software to do it. But the thing about when we built the software, it was never like, "Okay, we built the software, now let's terminate all the people that were doing that task." It's like, "There's so much to do, let's take those people and move them to the next role to make this next process more efficient. And then once they create a good process for that, we create software for it and then move on to the next one." And really what the technology does is it lets you take the lower level stuff off your plate and focus more on building new processes to build more technology down the line.

Michael: Exactly. So it's basically like operationalizing everything and then helping your people essentially become smarter and smarter, which is a boon to them I would say.

Nathan: Exactly. Connor, my business partner, and I have a strategy that we never do something for more than three or four months before passing it off of our plate. So when we were first coming up with our order placement system, there's a lot of stuff that goes into it. When you're doing orders you want to check for pricing, you want to find the manufacturer, you want to check the address and make sure you're not gonna have issues down the line. 'Cause anything you can do to be proactive will only help you. So, you create this order system with these checklists, and you teach order people to do it, and then you master it and then you add technology to it to make it even easier for the order guys and faster for them to process orders.

Michael: Nathan, I find that there's an incredible disparity between the QA that goes into order fulfillment from company to company, particularly those that are using 3PLs and other forms of distribution. How did you find the perfect level of customer service care, I don't know what you want to call that, but that whole mix of making sure that the order goes out right, making sure that the customer's happy. That entire sequence of events there. What did you do to find that sweet spot where you weren't spending too much time and money and you were able to preserve margin, but you were still ensuring a very high degree of success?

Nathan: Yeah, so I've only used my own systems and processes. And really any software that I built besides one repricing software, Appeagle, that I really like, 'cause I didn't really want to use a ... Actually, I experimented with building repricing software and I kind of gave up and figured that theirs was gonna be better than my end result anyway. But outside of that all the other stuff we've built has been stuff that, processes that we build and turned into software. Because my understanding is that anything that I buy out there, whether it's the channel advisors of the world or whatever it is, they're never as good as what your custom system can be. Because it might be 80% of what I want, but it's impossible to get it to 100 because they're not willing to make adjustments to their software to compliment your business, for the most part.

So most of the stuff that I did was processes I created based on trial and error and doing it over and over again and being proactive and thinking of every possible thing that could go wrong, and then giving that to developers to create a software that fits for my business but might not necessarily fit for someone else's. 

Michael: Interesting. I've got a lot of questions there about the software side. But I want to start with the ... Maybe go back to the beginning. Thinking about your story, if you had to do it over again, what are the first steps that you would say, go into starting and managing a Drop Shipping company that could potentially scale? And let me ask you also, would you even do it again? Do you believe in the Drop Shipping model still, or would you go a different direction now?

Nathan: Yeah, so I know a lot of people that have been able to start Drop Shipping models. A lot of them are my clients at FreeeUp, and they do it very successfully. But it's a totally different environment than it was back in the day. When I was selling these products on Amazon, it was like me and four other people on all these listings. Now, it's you've got hundreds of sellers. You've got all these manufacturers that are better educated on Amazon, some of them won't even let you sell there. And you really have to ... If you're gonna drop ship, you almost have to build your own website and drive traffic there.

When I take a step back, the biggest thing that I learned that cost me a lot of time and energy upfront that I would do differently, is being stricter on who you work with. So what I eventually did was I created these guidelines that if a manufacturer is gonna work with us, they have to follow these guidelines. They have to have tracking numbers. They need to ship stuff when they say they're gonna ship stuff. They need to respond to emails within 24 hours every single time. They need to have a return policy that actually works with our business model and works with Amazon, which is what we were selling on, but it would work with whatever platform you're selling on, or whatever return policy you want to offer your customers. Because there's nothing worse that welling your customer that they can't return something in this day and age. So, coming up with that criteria and really vetting out all those other manufacturers that don't follow it is really the only way to drop ship now a day because either you're selling on Amazon, and if you're not, if you don't have quality control, you're not gonna be selling there very long, 'cause they're gonna suspend you. Or, you're selling on your own website and if your manufacturers are sloppy and they don't care about your end customer, you're gonna get a terrible reputation and your business is gonna tank. So you really have to ... You're really only as good as your suppliers are. 

Michael: Talk to my more about that, because that seems like the nub of the issue. How do you find good suppliers for a Drop Shipping scenario?

Nathan: You network, you build relationships, and you sell. What I did was I hired a Lead Gen Team of people in the Philippines that were making a low dollar an hour. And we would just have them do research and come up with these large spreadsheets of manufacturers. And then we would have someone go through them and be like, "Oh, this person doesn't allow sales on Amazon, this person has a bad reputation online," whatever it is to vet those people out.

And then the last group of manufacturers, those are the people that we would cold email, cold call, follow up with, until we got a definite no or got a meeting. And once we got a meeting and realized it could be beneficial, then we had these standards that we needed them to follow in order to work with us. So you're taking these thousands of manufacturers and you just keep narrowing them down and down and down and it takes up a lot of time and effort, and that's where building a team comes in, to help you do that. Because if you're doing it all yourself it really is an impossible task. It wouldn't have been able to get done. 

Michael: When you mention manufacturers ... So were you exclusively buying from manufacturers directly?

Nathan: So when I started off I was buying from retailers. And I did that for years. And as Amazon got stricter we migrated to manufacturers, so now we only buy from manufacturers.

Michael: And now, so talk to me about business now. The business is still running Port Light I can see, is that what it's still called? Port Light?

Nathan: Yup, still running. It kind of runs without me. VA's do everything from the order fulfillment to the listings to the customer service. It's at a good level. What I found with Amazon is when you get too big that's when trouble starts to happen. Especially with Drop Shipping and quality control. So we're at a good place, it's profitable, it runs well. I get to focus my time on FreeeUp, which is something I'm very passionate about because with my Amazon Drop Ship business, yes I can make money and sell products and help my internal team. But with FreeeUp, I get to help 500 plus workers provide for their family and I get to build relationships with them. I get to help thousands of clients and meet different influencers and help people achieve their dreams and their passion and build their own Drop Shipping business. So for me that's more rewarding and I also see more potential. And I always preach diversity in my book and every podcast I go on. But just having those multiple revenue streams and not being 100% relying on Amazon is a good business decision.

Michael: One thing I've been seeing is that for companies that are trying to get out there, a lot of times there's ... Let's take the model of a start up. So a start up will come up with typically one really good idea, right? They're either gonna come up with an innovative product that they kickstart or they have a unique way that they're curating things, or it could just be a different take on an existing model. One thing I'm seeing a lot is E-commerce companies wanting to supplement their core product offering that maybe is more innovative or they're manufacturing somewhere themself, with product that they source and Drop Ship. So, I think as we're thinking about this model, the idea of using Drop Shipping as a supplemental way for a company that doesn't typically do that, might be a really good angle. Do you have any input on that?

Nathan: Yeah, I agree with that. Anything you can do to diversify your business is good. Whether you stay in Amazon and you just find different ways to diversify your product line, or maybe you open and Ebay store and a Shopify store, or you open a second business once you get your Amazon business to a certain level. You can reinvest in something else. Or if you just own small percentages of different companies. It's just always good to figure out how to continue diversifying. 'Cause you never know when that main product line of yours might go down when a new competitor comes up, when Amazon might kick you off or when something happens in the economy. There's just so many things that can go on with the business. The tasks that you have as a business owner is to constantly reduce risk by diversifying.

Michael: Absolutely. So speaking of that, I'm only seeing ... I'm not probably doing this right, I'm just googling here instead of asking you what URLs I should go to. So I can see the Port Light store on Amazon. Is there an Ebay store still? Is there a direct URL to an E-commerce store?

Nathan: Nope. So my Amazon business is my Amazon business and then all my time is focused on FreeeUp.

Michael: Got it. But back in the day, did you have several channels or just the one?

Nathan: No, not really. We started off a little bit on Ebay and we launched our own site but we ended up consolidating it. So I thought the question you were asking before was, "What was the worst business decision I made," and was opening up an office. Because I added Overhead to Drop Shipping business that just needed no Overhead, so it was completely unnecessary. So when we opened up an office we're like, "Yeah, we're gonna expand and we're gonna be the next Amazon of the world." And that didn't happen. And so once we hit that peak where we were like, "Alright, this doesn't make sense to reinvest these resources," that's when we scaled it back down, got rid of the office, made it all remote, focused on our Amazon store which was booming. And it allowed me to have another passion of mine, another idea I had, to focus on FreeeUp.

Michael: Absolutely. Nathan, I've got a very specific question for you. What strategy did you use for determining what your mark up should be? I know you mentioned that you use all internal processes. So I'm very curious to hear what you came up with to do that equation.

Nathan: Yeah, so it's all trial and error. Almost everything I do in business is trial and error. What I try to avoid is learning necessarily from the experts, 'cause what I've found is yes, you should take bits and pieces of what the experts are saying and apply them to your business. But if you just copy them, everyone copies them, and no one makes any money. So what I try to do is trial and error. I try to push the limits. Hey, how high can we sell this product? And then once we figure out that, hey the Drop Ship business works between that 10 to 20% margin, and even getting 20 is pushing it, then we're like, "Okay, now let's come up with different formulas for the price range of zero to 50, the price range of 50 to 100." And really dissect it and go down. And then you take those formulas for each one and you trial and error them and you adjust them accordingly.

So really that's the only way I do it, is by finding market data of real live customers. And yeah, you might spend a few months kind of trying to figure it out, but then once you identify what your target is and what they're willing to pay and what your optimal margins are, then you have these formulas in place and they're not just some generic formula. They're formulas that are customized to your business that you can use long term. 

Michael: And these formulas are things that you build into your software or into some sort of operationalized process? Or how did you scale the business via these formulas?

Nathan: Yes, they're all ... We started off with macros and then eventually moved it to software.

Michael: So all of the software, you're still using it?

Nathan: Yes.

Michael: Cool. How does it compare to off the shelf Amazon repricing software and that kind of thing?

Nathan: The order fulfillment and the getting orders and the sorting them and the sending them, that we have our software for. I mentioned before that for the repricing we use Appeagle, we love them. So we built the pricing software, we added pricing formula to it, and it was okay. But we still found that Appeagle was better. They're really good at what they do. They focus on it. So we migrated to them, but outside of just using our software we have our own formulas that are connected to macros that are connected to Appeagle. So I don't know if that answers your question but-

Michael: Yeah, conceptually answers it. I'm very curious in seeing how that was actually played out, but that might be a little bit of a trade secret that you might want to keep, I don't know. So this is really fascinating. Can you tell me more about this whole transition that you went ... From you had the office, then you said, "No, that's not gonna work, we're gonna go everything remote." And I'm kind of guessing, tell me if I'm wrong, but is it right in me assuming that FreeeUp was something that came out of you realizing that you're really good at operationalizing things and then having people work on them remotely?

Nathan: Yeah, absolutely. So I liked hiring, when I found Upwork, a friend of mine on my softball team told me about it, I thought it was the greatest thing in the world. I was like, "I'm gonna build an Upwork army," and it was called an oDesk army. And so I spent so much time just interviewing these people and finding these all-star workers and a lot of those people still work with me six years later. And they're fantastic. And what I realized is all of a sudden I was hiring more and more. All that time that I was spending building processes and expending the business, all of a sudden switched over to HR time.

And I remember that I was sitting in my office one day after going through three different interviews, and I just hired someone after we had spent weeks interviewing them and they quit after like one day and I was just reading more resumes and I was pissed. And I just threw something against the wall and I was like, "There's gotta be a better way. I cant go to Upwork anymore and post a job and just filter through all these people." So that's when the idea really materialized that I could create a marketplace that was better, that I could use my ability to create good systems to make it more efficient and also to protect the clients. Because I know what clients want, I know what clients hate, I know every single good and bad thing that's happened when it's come to hiring. So when I created FreeeUp, the concept was instead of being a marketplace where as a client you post a job and all these people throw applications at you and you have to decide, is we'll vet people into that marketplace. So we get hundreds of applicants every week, we have a great interview process based on eight years of hiring. We have 15 pages of communication guidelines our workers have to memorize and get tested on. So there is that standardization, that you always have that same experience. And then we back it up on the back end so if the clients have an issue, instead of having to fire someone and get a new worker, they can tell us and they get a new worker right away and we cover those hours. And if they quit we cover all retraining costs and all replacement costs. And it's incredibly hands on to make sure as a business owner you spend as little time on HR as you possibly can and as much time expanding and focusing on the things at your business that you want to do. And that's really what I wanted when I was back hiring all these people. 

Michael: Yeah, absolutely. It's so interesting to me ... We started out talking about basically creating repeatable systems and then turning those into software products. And I think a lot of people think of that idea as so beautiful because it's so sterile in a sense. You're taking something that could be relational and need a bunch of emails and contact and handshakes and all that, and it's becoming this completely code based thing. But then if you look at where your business has actually gone and what you're focused on now, you've actually gone more towards the helping people be effective. Which I think is cool, 'cause software's one thing but it's ultimately people that we care about right? And it's people that we want to work with and we're relational beings. So how do you, maybe in coming back to the Drop Shipping topic, which is obviously tied in again because we're all mainly concerned about optimizing our businesses, preserving margin, and having a good life as a result. What are maybe some final thoughts that you'd have around Drop Shipping? If you could give people three do's and three don'ts for thinking about using Drop Shipping? Probably as a supplemental thing to their company or maybe there's gonna be still some windows to do a full Drop Shipping model?

Nathan: Sure. So the biggest do is the client isn't always right, but it's in your best interest to make the client or the customer happy, especially your initial customers. 'Cause you're essentially using them as a test. You're Drop Shipping products from this manufacturer. At the beginning you're really crossing your fingers every time you sign up a new manufacturer, when those first orders go out, you're hoping that those work out. So you have to be on high alert. You need to make sure that if the customer complains, you find out why, you figure out how to fix it, and you figure out how to make that customer happy so you can make money down the line.

Two would be creating those manufacturer systems that I told you about. Making sure that they're getting tracking numbers and shipping on time and answering emails and stuff like that. And really holding them accountable and not being afraid to cut off manufacturers that aren't meeting your incredibly high standards that you have to have. And then the third os figuring out where you can actually find a niche. You can't do what I did and just go out and sell everything. It doesn't work anymore. You have to figure out what niches there isn't a lot of competition, what people are buying, what time of year it is, different outside factors that contribute to it. And really find something that you can grab a hold on and really make money on long term. In terms of the don'ts, everything has to be process driven. You can't go in and just hire someone on day one, throw them into it, and just be like, "Hey, you're processing orders and doing customer service," and you're doing it your way. There has to be a your way to do it. There's your way to get a tracking number and give it to a customer. There's your way to get the client, the customer's information and pass it to the manufacturer. And it should be the same thing all the time. Even down to the hour of the day that's worked. Hey it's 9AM every morning, that's when orders go out to the manufacturer. Hey, it's 11, that's when we check tracking numbers. So it has to be incredibly systematic. Does that make sense? 

Michael: Absolutely yeah. That's really helpful.

Nathan: Cool. And then I guess the other don't would just be focus on packaging. It's that one part of the business that everyone forgets about. They have these products, they have a customer base, or they found a marketplace. They've listed everything, they built everything, they know that if the customer opens their product that they'll like it. But they always forget, how is the product being packaged? How is it being shipped? Is the product actually going to arrive damaged? Because especially if you sell on Amazon, Amazon doesn't want to hear UPS messed up, or my manufacturer messed up. It's, "Hey, you messed up. You have to package it better."

So the last thing that we talked about with manufacturers all the time was how are you actually packaging these products? How are you making sure they're safe? Are you selling $1000 products in glass and barely investing anything in packaging? Hey, let's increase the prices and make sure that we don't have issues because I'm the one that has to deal with it at the end of the day. So that's something that I always make people focus on and people who lose sight of that end up dealing with a lot of complaints and ruining a lot of relationships. 

Michael: Yeah, not something you want to do when you're starting off, or at any point along the way. Well this has been great. Nathan, I wonder if you could go ahead and leave us with a couple of things? Number one, what's the best way that our listeners can connect with you if you don't mind, if somebody has a quick question about Drop Shipping or something related? Or of course about FreeeUp, is there a way that people could talk to you directly? And then two is are there any other resources or anything else you'd like to plug?

Nathan: Yeah, sure. So right on our website, FreeeUp.com with three E's, my calendar is right at the top, you can book a time to talk with me directly. I'd love to talk to you about your business and how I can help you or even give advice on just pointing you in the right direction, even if you're not ready to hire or use FreeeUp yet, I love talking to business owners and networking and figuring out ways to work together. You can also check us out on social media, FreeeUp on Facebook. You can check out the online hiring mastermind group. We post a lot of great stuff about using remote workers and building processes and systems that actually work. You can check out my book, Free Up Your Business, we talk a lot about that business that I grew up with in college and that I grew. And all the different good things and bad things that happened along the way that really shaped me as an entrepreneur.

And then lastly, right on FreeeUp.com you can sign up as a client, it's free, there's no monthly fee, mention this podcast, you get a dollar off your first worker forever. And you can honestly just keep it in your back pocket and if you want to hire in the future or you just want to meet some workers with no commitment to hire, you're welcome to request a worker at any time. 

Michael: And that's a dollar off per hour, a dollar off per-

Nathan: Yup, a dollar off your first worker's hourly rate forever.

Michael: Oh my gosh, I'm signing up right now. Awesome. Well Nathan, this is fabulous. We're gonna include all these links that were just mentioned in the show notes. And everyone, we have something else to leave you with as well. With Sellry, we really want to understand what store owners are feeling in terms of pain right now. Is it wondering how to deal with Amazon? Is it something about new technology? Is it lack of sales, lack of traffic, lack of conversion rate? Obviously it's gonna be different for a lot of people but we're assembling a massive survey that we're going to share the results with everyone with.

So what we want you to do is go to Sellry.com/survey, S-E-L-L-R-Y.com/survey, and there you'll be able to fill out a form and we'll be super respectful of your data we're not gonna spam you or sell your data obviously. And what we want to do is fill out that form and then we'll come back to you with the results once we get enough respondents. That's gonna help us guide the content of this show as we go forward. As well as we might have some ideas in the future to come up with amazing things like FreeeUp, or probably not FreeeUp 'cause they're already doing that, but you get the picture. We want to help people who are listening to this show and in general anybody doing E-commerce to be more effective at that. So, and I know that Nathan can relate to that. Nate, thank you so much for joining us, second time, that should tell you that we really enjoyed you the first time. And we have this time. 

Nathan: Awesome, I appreciate it guys.

Michael: Yep, alright, talk to you later and again everyone you can go to ecommerceqa.com for the show notes. If you want to email us directly you can go to, just send us an email to [e-mail]. Again that's [e-mail] and we'll leave you there. Keep selling.