Drop shipping

Drop shipping is a supply chain management technique in which the retailer does not keep goods in stock, but instead transfers customer orders and shipment details to either the manufacturer or a wholesaler, who then ships the goods directly to the customer. As in all retail businesses, the retailers make their profit on the difference between the wholesale and retail price.

Procedure

Some drop shipping retailers may keep "show" items on display in stores, so that customers can inspect an item similar to those that they can purchase. Other retailers may provide only a catalogue or website.

Retailers that drop ship merchandise from wholesalers may take measures to hide this fact to avoid any stigma, or to keep the wholesale source from becoming widely known. This can be effected 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). A customized packing slip may also be included by the wholesaler, indicating the retailer's company name, logo, and/or contact information.

Small business

Drop shipping can occur when a small retailer who typically sells in small quantities to the general public receives a single large order for a product. Rather than route the shipment through the retail store, the retailer may arrange for the goods to be shipped directly to the customer. Drop shipping is also very common with big ticket items like steel buildings where the retailer will take a deposit and have the building shipped direct to the buyer's building site from the supplier's manufacturing facility.

Online auctions

Many sellers on online auction sites, such as eBay, also drop ship. Often, a seller will list an item as new and ship the item directly from the wholesaler to the highest bidder. The seller profits from the difference between the winning bid and the wholesale price, minus any selling and merchant fees from the auction site. A seller is permitted to list items that are currently not in his/her own possession, provided that he/she follows eBay's policy on pre-sale items.

Custom products

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 varies from simple keychains and t-shirts with custom logos or pictures to customized formulations for vitamins and nutritional supplements.

Developments

Major drop shipping suppliers are primarily based in the USA. This can be seen in the location of suppliers, so to speak like Commerce Hub, who support major chain stores like Sears. The strength of the industry in the USA is also evident from the advertising in major directories of suppliers, including Worldwide Brands, Salehoo, and Doba (company).

The key benefit of having services like this is that the goods can be delivered from suppliers in the same country or region as the end customers. According to some eBay sellers, this helps drop ship suppliers and drop ship vendors to increase the trust a customer feels towards an item listed on an online auction site.

Since 2006 many drop ship companies have emerged in China, including Chinavasion and Modbom, 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 larger part that internet plays in ecommerce. China-based drop ship suppliers have increasingly been able to compete with same-country distributors due to improving logistics for small packets and easing of trade barriers.

Benefits

Two significant benefits of drop shipping are the elimination of upfront inventory and a positive cash-flow cycle. A positive cash flow cycle occurs because the seller is paid when the purchase is made. The seller usually pays the wholesaler using a credit card or credit terms. Therefore, there is a period of time in which the seller has the customer's money, but has not yet paid the wholesaler.

Drop shipping also eliminates some duplication of effort, since only one warehouse will pick, pack and ship the product. This approach can reduce total inventory management and shipping costs. These cost reductions can subsequently reduce the price to the consumer.

Risks

As in any business, some risks are involved in drop shipping. For example, back ordering may occur when a seller places a shipment request with a wholesaler, but the product is sold out. Back ordering may be accompanied by a long wait for a shipment while the wholesaler waits for new products, which may reflect badly on the retailer. A good wholesaler will keep retailers updated, but it is the business owner's job to be aware of the quantities that the wholesaler has available.

Drop shipping has also featured prominently in some Internet-based home business scams. Scam artists will promote drop shipping as a lucrative "work from home opportunity." The victim who buys into this 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.

Another risk associated with drop shipping is market value destruction. This occurs when competing sellers continually lower the price of a product to increase sales volume. Over time this causes the market value of a product to decrease, eventually reducing the profit margin on a product to almost zero. While market value destruction can occur through wholesale channels as well, sellers using drop shipping to source their products are more vulnerable due to their higher base price on a product.

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.

Affiliate marketing can also be compared to drop shipping. As with drop shipping, affiliate marketing allows a website to list an item for sale that is not on hand but rather is shipped through a third party.

See also

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