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Drop shipping is a supply chain management method in which the retailer does not keep goods in stock but instead transfers its customer's 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.
A drop shipping retailer might keep display items on display in a physical brick and mortar store or provide a hard copy or online product catalog 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, minus any selling, merchant, or shipping fees.
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.
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. 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. Some reports indicate that nearly 33% of internet retailers may use drop shipping as their main method for order fulfillment. A lot of such suppliers distribute products through AliExpress, whereafter they are resold by foreign drop ship entrepreneurs.
eCommerce platforms provide drop shipping entrepreneurs with a plug-and-play style option for selling products online.
Drop shipping has also featured prominently in Internet-based home business scams.[failed verification] 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 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.
In 2016, Buzzfeed published an article exposing unscrupulous drop shippers in China. The article shows how customers were receiving products that were not as advertised or receiving no product at all.
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.
- ‘It’s bullshit’: Inside the weird, get-rich-quick world of dropshipping - Sirin Kale, Wired, 1 May 2020
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