Q: I would like to start my own eBay business, but I really dont want to invest in a ton of inventory until I can get a better handle on what might or might not sell. I read another column about dropshipping, but Im still a little fuzzy on how the whole process works. Do you think using dropshipping is a good way to start an eBay business and if so, how do I get started? -- Candace M.

A: Dropshipping is a topic that I first addressed in my column way back in April, 2003, which is decades ago in Internet years. But with the continuing growth of eBay and its positioning of itself as a viable way for anyone looking to launch an ebusiness, the topic of dropshipping is now hotter than ever. It is also now more misunderstood than ever.

Dropshipping has been around since Sears first started selling goods from its mail order catalogs over a hundred years ago. However, the idea of dropshipping still confuses many people who dont understand exactly how the process works.

By definition, dropshipping is a method of selling and distributing goods wherein the distributor or supplier of the product (the dropshipper) ships the product directly to the end user (your customer) on the retailers behalf (thats you).

The process of dropshipping involves three parties who take a product from manufacturing to market. They are a manufacturer, a distributor, and a reseller.

Lets use a blue widget as a sample product to demonstrate the process: Blue Widget Manufacturing (manufacturer): This is the company that manufactures blue widgets. Blue Widget Manufacturing does not sell directly to the public or supply the retailers who ultimately sell the blue widgets to the end user. They prefer to use distributors to handle the task of taking their blue widgets to market. Blue Widgets sells blue widgets by the truckload to distributors who pay $5 per blue widget.

A1 Distributing (distributor/dropshipper): A1 Distributing is the company that purchases blue widgets in bulk from the manufacturer and supplies them to resellers at a cost of $7 each. The distributor does not ship blue widgets to the reseller, but ships orders directly to the resellers customers as the widgets are sold.

Big Bobs eBay Widget Store: Big Bob sells blue widgets to the public from his eBay store. Bob orders the blue widgets from A1 Distributing as he sells them (usually one at a time) and has A1 ship the blue widget directly to his customer. Bob sells blue widgets to the public for $10 each, which means that for every blue widget sold he nets $3.

How The Process of Dropshipping Works

Here are the seven steps involved in starting a dropship ebusiness:

STEP 1: Choose A Product To Sell

The very first step in any sales process is deciding what product to sell. There are many factors that should be considered before deciding on a product to sell, but for now lets say that you decide to sell CD players on eBay.

STEP 2: Locate A Supplier Who Will Dropship For You

Using a research tool like Google, Thomas Register, or an industry-specific resource like The Ultimate eBay Dropship Power Pak, you search for and find a company who will dropship CD players for you. The company offers you a 35% mark up over cost, which means that they will supply the CD players to you for $100 each and you should be able to retail them for $135. You make sure that the dropshipper has a good stock of CD players on hand so you dont end up selling a product that must be back-ordered.

STEP 3: Set Up An Account With The Dropshipper

You contact the company that can supply the CD players and set up a reseller account with them. This can often be done online or by phone, but some companies will require that you complete and return a reseller application to open an account. Some companies may also require a tax ID and business license.

STEP 4: Advertise The Product For Sale On eBay

Now that you have your supplier lined up and know that the product is in stock, its time to make a sale. You advertise the product using an eBay auction. Since you know what you must pay the dropshipper for the product, you know what the minimum amount you will take for the product. In this case you start your auction at $100 since that is your cost. If you are confident that you can get more than $100 for the product you can start with a lower price, but remember that if the product goes for less than what it costs you to fill the order, you will lose money. Also remember that the dropshipper will charge shipping, so you should figure that into your sale.

STEP 5: The Product Sells

Great news: your CD player sells for $135 and your customer pays you with a PayPal instant payment. I highly recommend that if you are selling on eBay you use PayPal or some other online processor to accept instant payments. This allows the customer to pay you faster, which lets you place the order with the dropshipper faster, which gets the product to your customer faster.

STEP 6: Place The Order With The Dropshipper

After your customer pays you, you should contact the dropshipper immediately to order the product on your customers behalf. The dropshipper then ships the order to your customer under your company name and address.

STEP 7: Follow Up After The Sale

This is where many new ebusiness people drop the ball. Just because your customer has paid you and youve placed the order with the dropshipper does not mean that you are out of the loop. Quite the contrary, if there are problems with the order you are the one that will be held responsible in the eyes of your customer.

Be proactive in your customer relations. Follow up with your customer to let them know that the item has been shipped. Offer yourself as the personal contact for any issues that may arise. This is also a great way to sell that customer more products. Invite them to check out your eBay store or website if you have one.

Many people are afraid to use dropshipping as a method of sales due to the horror stories that fill the Internet about unscrupulous dropshippers who take the money and dont fill the orders, merchandise that is eternally back ordered, unscrupulous middle men posing as dropshippers, etc. Make no mistake, the dropshipping industry like most other industries does have its share of shady characters who would rob you blind given the chance, but there are also hundreds of honest dropshippers who can help you build a profitable eBay dropship business.