Drop shipping

Drop shipping is a supply chain management method in which the retailer does not keep goods in stock but instead transfers the customer orders and shipment details to either the manufacturer, another retailer, or a wholesaler, who then ships the goods directly to the customer. As in retail business, the majority of retailers make their profit on the difference between the wholesale and retail price, but some retailers earn an agreed percentage of the sales in commission, paid by the wholesaler to the retailer.

Procedure

A drop shipping retailer might keep "display items" on display in a physical "brick and mortar" store, or provide a product catalog as either hard copy or online, to enable customers to review items before purchase.

Retailers that drop ship merchandise from wholesalers can take measures to hide this fact or keep the wholesale source from becoming widely known. This can be achieved 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). The wholesaler might include a customized packing slip, including details such as the retailer's company name, logo, and contact information.

Drop shipping can occur when a small retailer (that typically sells in small quantities to the general public) receives a single large order for a product. The retailer may arrange for the goods to be shipped directly to the customer from the manufacturer or distributor. Drop shipping is common with expensive products.

Sellers on online auction sites also use drop shipping as way of distributing products without handling the stocking and shipping of the inventory. A seller will list an item as new and then ship the item directly from the wholesaler to the customer. The seller profits from the difference between the sales of the product and the wholesale price, less any selling and merchant fees, or shipping fees.^[1][2]

An emerging trend in the drop ship business is private label drop shipping, in which a manufacturer produces a custom item for a retailer and drop ships it. The range of private label drop shipped items available includes, simple keepsakes, apparel with custom logos, pictures, and customized formulations for vitamins and nutritional supplements.

Back ordering may occur when a seller places a shipment request with a wholesaler, but the product is sold out. Back orders may be accompanied by a long wait for a shipment while the wholesaler waits for new products, which may reflect badly on the retailer.

Developments

Major drop shipping suppliers and fulfillment services are primarily based in the USA. Since 2006, many drop ship companies have emerged in China, many of which offer wholesale and drop shipping services to both companies and individuals.^[3] This is largely due to the increasing ease of e-procurement and the growing part that the internet is playing in e-commerce. Drop ship suppliers based in China have increasingly been able to compete with same-country distributors because of improved logistics for small packets and the easing of trade barriers.^[4] Some reports indicate that nearly 33% of internet retailers may use drop shipping as their main method for order fulfillment.^[5]

Benefits

Benefits of drop shipping include a positive cash-flow cycle and the elimination of upfront inventory. A positive cash flow cycle occurs because the seller is paid when the purchase is made. The seller then pays the wholesaler using the cash from the purchase or by using credit. Drop shipment can be used to obscure the location of the seller from the final customer.

Drop shipping offers an inexpensive way to acquire inventory which is not otherwise possible. This can be less risky than spending large amounts on acquiring inventory. There is no need to manage and maintain and inventory and shipping department. This is managed by the suppliers.A business that relies on drop shipping focuses there resources on promotion of the the products in order to drive sales.

Drop shipping offers those interested in diverse product lines the ability to switch merchandise up without severe fiscal repercussions, which is not possible when owning a brick-and-mortar or non-drop shipping e-commerce store.

Scams

Drop shipping has also featured prominently in Internet-based home business scams.^[6] Scam artists will promote drop shipping as a lucrative "work from home opportunity". The victim of the scam will be sold a list of businesses from which drop shipment orders can be placed. These businesses may not be wholesalers, but other businesses or individuals acting as middlemen between retailers and wholesalers, with no product of their own to sell. These middlemen often charge prices that leave little profit margin for the victim and require a regular fee for the retailer's usage of their services. In 2018, a Gimlet media podcast Reply All investigated the drop-shipping phenomenon. The journalists explored the way that drop-shippers micro-target^[7] their client, but also found that micro-shipping itself is a rather dubious industry in that despite the promises of some of the most well-known drop-shipping acolytes, few drop-shippers actually make any profits.^[8]

One effect of drop shipping is that customers who receive a drop-shipped package will realize that they overpaid for the item on eBay, return the item to the manufacturer, then reorder the identical item directly from the manufacturer. The cost of processing the return and the loss of the unsellable returned product can result in significant losses to the manufacturer.^[9]

Knock off name brand products being sold by drop shipping wholesalers is another problem. While some of these products may look genuine, they can be spotted by the extremely high profit margins available on them. If colors, styles or other physical characteristics do not match those of the manufacturer, the product is probably a counterfeit. Selling non-genuine products could destroy ones eCommerce reputation and possibly ruin a drop shipping business, it could also cause legal problems.

Related concepts

The converse of drop shipping is will call, where a customer picks up directly from a wholesaler rather than via a retail shop.

As with drop shipping, affiliate marketing allows a blogger, website owner, or another form of internet content owners commonly known in that industry as publishers or partners, to list or promote a product or advertisement campaign on behalf of a third party brand typically called merchants. In affiliate marketing, the product or advertisements are not owned or designed by the affiliate publisher and often the affiliates and their content must adhere to contractual standards detailing how the brand and promotion may be represented. Affiliates often may not imply in their marketing that they own or represent the brand. In contrast with drop shipping, the potential customer, often called a lead, is typically redirected to the third party merchant's own website, sales portal, or shopping cart. Thus in traditional affiliate marketing transactions, the lead is redirected to the merchant's own sales campaign and so are only processed directly through the third party's network. Therefore, an affiliate commission is generated for leads and sales occurring directly on the third party merchant's website and would not be combined with any processes or commissions arising from a drop shipping relationship.

See also

• Fulfillment house
• Logistics
• Mail forwarding
• Mail order
• Order fulfillment
• Shipping
• Supply chain

References