Drop-shipping is an order fulfillment process that does not require a business to keep products in it’s own warehouse. Instead, the business sells the product, and forwards the order to a 3PL warehouse, which then ships the order to the customer. This is a common way to do business during the liquidation process when a business has excess merchandise in it’s warehouse and works with closeout brokers who get rid of it. If the company that owns the product doesn’t have it’s own sales team connected to closeout wholesalers, it often works with a closeout broker, or liquidation companies, that have the appropriate contacts to move the inventory. The closeout broker sells the merchandise to their overstock buyer, and the owner of the goods ships the merchandise directly to the customer. However, contrary to popular belief, drop-shipping is not a get-rich-quick scheme and it requires a ton of behind the scenes work. What may seem like easy money — you sell other people’s goods and take a cut for yourself — is a challenge. When you factor in all the drawbacks, obstacles, and day-to-day management, drop-shipping excess inventory and closeouts is far from easy.
Liquidation companies often buy excess merchandise from businesses that are closing, shutting down a 3PL warehouse or filing for bankruptcy. When this happens, these goods are often loaded with haste on trucks with little or no regard to how well they are packed, palletized or organized. Drop-shipping under these conditions may create problems since the seller of the excess merchandise never actually inspects the shipment. The shipper sends it direct to the closeout wholesalers, often in poor condition, and the middleman who organized the drop ship order is responsible for fixing the mess.
There will always be overly optimistic entrepreneurs who focus solely on the “low overhead” part of drop-shipping and ignore all the other aspects. Because very little capital is required to start a drop-shipping business, that low barrier to entry means a lot of competition, with the most popular markets suffering more than others. Closeout brokers often try drop-shipping because it is an alternative to the traditional commission structure. With a commission structure, liquidation companies can sell overstock inventory direct to their customers and the supplier gives them a 5% commission. Often, closeout wholesalers who act as brokers sell closeout toys, overstock housewares, and discontinued inventory of lawn and garden, pet products or other consumer goods direct to discount retail stores or closeout websites. With drop-shipping programs, the customer may get better deals because the middleman has low overhead and doesn’t have to make as much money. With traditional closeout buyers that warehouse inventory, they may need higher margins to pay their expenses than traditional closeout buyers. Basically, the bigger a company is the more they can reduce their markups to offer the lowest prices.
If you work with multiple suppliers—as most drop-shippers do—the products you offer to your closeout buyers must be sourced through a number of different drop-shippers. Obviously, you will want to work with different surplus liquidators so you can have a variety of different product categories. Some closeout wholesalers specialize in toys, other liquidators concentrate on housewares, etc. This complicates your shipping costs because now you have closeout inventory shipping from various warehouses. Let’s say a customer places an order for three discontinued items, all of which are available only from separate suppliers. You’ll incur three separate shipping charges for sending each order to the customer, but it’s probably not wise to pass this charge along to the customer so you may have to pay for part of the cost. In addition, surplus liquidators are exceptionally price sensitive and increased shipping costs will prevent them from liquidating overstock at low enough prices for their closeout websites and discount store customers.
The reason so many closeout liquidators either have their own warehouse, or store excess inventory in a 3PL warehouse, is because it affords them control of the inventory. When you are trying to figure out how to liquidate inventory, it is much easier if you own it, you are familiar with it, you pack it, and your own warehouse ships it. If you are a closeout broker and you want to drop ship from seller to buyer using closeout websites, Amazon FBA, etc, your surplus buyers will receive shipments that may have errors.
In the closeout business, wholesale liquidators buy excess inventory from importers and distributors for prices below regular cost. This allows them to deal with wholesale liquidation companies that buy surplus merchandise in large volume for resale on the discount market.
Merchandise USA is an overstock liquidator and we have been in business more than 35 years. We are one of the largest inventory liquidation companies in the United States, and we liquidate excess inventory from importers reducing stock and businesses moving 3PL warehouses and needing to sell inventory.