#1 - Buying Power

Resale (buying and re-selling for a profit) is all about buying power.  And with drop shipping, you have none.  Zero.  You are often buying just one of an item, and thus, have no buying power.  Because true wholesale pricing is all about quantity.

A huge established retailer, like Wal-Mart for example, has extraordinary buying power.  They don't just buy one iPod at a time, they contract to buy thousands.  Let's look at the numbers using a gold necklace as an example...

Let's say a wholesaler's cost on a gold necklace is $10 and the wholesaler sells the necklace to a famous department store for $11.50 each (cost +$1.50) with a quantity of 10,000 pieces.  The wholesaler will profit around $15,000 on this sale.

If you want just one necklace for $11.50, the wholesaler will profit less than $2.00 and have to breakup a case of merchandise.  No serious company is going to make this sale.  Not even a drop shipper.

Would you bother selling items and doing a bunch of work for $1.50?  Well, neither will any other company -- and it's not fair to expect that of them.

That is why drop shipping is not true wholesale.  With drop shipping you can buy just one necklace.  But you can expect to pay at least 25% more for the product.  That would make the price $14.75 each in our necklace example.

But we're just getting started...  On top of the product sale price, there is almost always a handling fee associated with drop shipping.  This is usually $2 - $3 per item, brining your cost on the necklace to a base price of $16.75 or more.

This is why many people using drop shipping services end up complaining that they can find the product for less money retail.  After all, in the example just given the retailer could sell the necklace for $15 and still profit.

Remember, the old-school drop shipping companies (such as Mary Kay) mentioned above do not sell to Wal-Mart or other retailers.  They only sell through reps and, in general, all reps get the same base price.  So in those cases you can get the lowest price and can potentially compete.

So are you beginning to understand why you cannot find a quality, low-price drop shipper of name brand merchandise?

There is more working against you than just buying power unfortunately.  The sad truth is that even if you could find a drop shipper who would sell you one gold necklace at a time for $11.50 you still wouldn't be able to sustain a successful online business due to reason number two...

#2 - Market Value Destruction (MVD)

Market value determines the price at which you can successfully sell a product.  Market value is not a constant; it is an ever changing variable which can be influenced by supply-and-demand, competition, technology costs, and other factors.  The market value of a product is almost always changing.  For a simple example of this, look at the DVD player.

An original DVD player, when they first hit the market, sold for more than $600.  These days, a much better DVD player costs under $60 -- or less than 10% of the original retail price.

While it took the DVD player a few years to drop so dramatically in price, it can take as little as a few days for the market value of a product to plummet in the online marketplace.  Especially when dealing with online auction sites such as eBay.

To understand this process, let's look at the gold necklace again and assume you were able to get the product drop shipped for the $11.50 price.  That means your total cost on the product is $11.50, shipped to your customer's door.

Now, let's say that the gold necklace has a retail value of $30 and that you plan to sell the necklace on eBay for $25 leaving you with $13.50 profit on each necklace.  Not including your costs for eBay and PayPal fees of course.

So you list your gold necklace on eBay and it sells.  You're off to a good start.  However, one of your competing eBay sellers, Tom, sees this and decides that this might be a good product for him to sell as well.  So, Tom lists the gold necklace at $22.

Tom is willing to sell the necklace for less profit because his lower price will allow him to sell more of the necklaces.  But this cycle of Market Value Destruction doesn't stop there, it has in fact only just begun.

Another eBayer, Jenny, logs into her drop ship account to look for a good product.  She finds the necklace right away because the drop shipper's website is now promoting it as a top seller.  So Jenny decides to jump on the bandwagon.  She lists the same gold necklaces on eBay for $15.

So, a product that started with a market value of $25 on ebay is now quickly down to $15, bringing your profit down from $13.50 each to $3.50 each.  And it just keeps going...

In desperation some sellers even list the necklace for $5 (Buy-It-Now) and try to make a small profit with outrageous shipping & handling charges.  This doesn't work.  The market value is destroyed and the necklace is no longer profitable.  This process happens lightning fast.

I have seen products go from $89 to $6 in just two weeks.  It happens all the time, and not just to sellers using drop shipping.  However, with other methods of sourcing products you have much more wiggle room.  Remember, you were not going to get that necklace for $11.50 via drop shipping to begin with.