Understanding Drop Shipping

Drop shipping is a supply chain management strategy in which the retailer does not keep inventory in stock, but instead sends customer orders and shipment details directly to wholesalers, who then ship the products directly to the customer . The sellers make their profit on the difference between the wholesale and retail price.

Some drop shipping retailers may have "show" items for display in stores, so that customers can inspect a sample similar to those that they will purchase. Other sellers may only provide a catalogue or website.

Retailers that drop ship merchandise from wholesalers often take measures to cover this fact to avoid any stigma with their customers, or to keep the wholesale source from becoming known. This can be implemented by "blind shipping" (shipping merchandise without a return address), or "private label shipping" (having merchandise shipped from the wholesaler with a return address customized to the retailer). Sometimes a customized packing slip is sent by the wholesaler, including the retailer's company name, logo, and/or contact information.

Small business

Drop shipping can happen when a small retailer who usually sells in small quantities to the public receives a single large order for a particular product. Rather than sending the shipment from the retail store, the retailer may arrange for the products to be shipped directly to the customer.

Online Auctions

Many sellers on online auction sites, such as eBay, also drop ship. Often, a seller lists an item as new and ship the item from the wholesaler directly to the highest bidder. The seller makes a profit from the difference between the highest bid and the wholesale price, minus any listing and merchant fees from the auction site he's using. A seller has permission to list items that are not actually in his/her own possession, as long as that he/she follows eBay's policy on pre-sale items.

Custom products

A new emerging trend in the drop shipping business is private label drop shipping, in which a manufacturer actually produces a custom made item for a retailer and drop ships it. The range of private label drop shipped items varies from just simple keychains and t-shirts with custom logos or pictures to customized formulations for vitamins and nutritional supplements.

Benefits of Drop Shipping

The two main benefits of drop shipping are: no out of pocket inventory to purchase and a positive cash flow cycle. A positive cash flow cycle occurs because the seller is compensated when the purchase takes place. The seller often pays the wholesaler using a credit card or credit terms. Therefore, there is a span of time in which the seller has the customer's money, but has not yet paid the wholesaler.

Risks When you Drop Ship

As in any business, there's risk involved in drop shipping. For example, back ordering may happen if a seller places a shipment request with a wholesaler, but the product is not available. Back ordering may create a long wait for a shipment, while the wholesaler awaits new products, which may reflect badly on the retailer. A good wholesaler should keep retailers updated, but it is the retailer's job to stay updated on the wholesaler's inventory.

Scams

Drop shipping has also been the highlight in some Internet-based home business scams. Scam artists will market drop shipping as a very lucrative "work from home business opportunity". The victim who falls into this scam will be sold a list of businesses that supposedly do drop shipping. These businesses are not wholesalers, but other businesses or individuals acting as middlemen or brokers between retailers and wholesalers, with no product of their own to sell. These brokers often charge prices that leaves no room for profits, and require the victim to pay a regular fee for the retailer's usage of their services.

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