Drop Shipping is a means of managing the flow of goods where the retailer does not keep goods in stock. Customer orders and shipment details are transferred to either the manufacturer or a wholesaler, who ships the goods directly to the customer. Retailers that drop ship show customers their products by using “display items” in stores or by using a catalog or website of their products.
To keep the whole sale source from becoming widely known, retailers that drop ship merchandise from wholesalers take measures to hide this fact. They may ship merchandise without a return address or having the merchandise ship 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.
Drop shipping can occur when a small retailer who commonly receives a single large order for a product and sells small quantities to customers. The retailer arranges for the goods to be shipped directly from the supplier’s manufacturing facility to the customer rather than route the shipment through the retailer store.
Many sellers on online auction sites also drop ship. Usually, a seller will ship the item directly from the retailer or wholesaler to the highest bidder.
5 Steps of drop shipping
- Contact drop shipping wholesalers. Most of them will ask for a business EIN number and a copy of your sales tax and/or resale certificate.
- Choose the products from the wholesaler’s catalog
- List the products on the website
- Collect the payment from buyers
- Order the products from the wholesaler at wholesale cost. Use the customer’s shipping address.
Why Should retailers drop ship
Drop shipping allows sellers to offer more products for sale than what might be achievable if they had to supply everything. Having a broad range of products also helps marketing since each product will be a landing page or a page for search engines to index. This will introduce more potential customers. Drop shipping:
- Eliminates the wait time in shipping from manufacturer to seller
- Gives sellers a way to test new products without spending money in bringing them to their inventory.
- Reduces investment in products making eCommerce start-ups easier
- Saves merchant time in stacking, storing, packing, and shipping products
Cons of Drop Shipping
- There will be loads of competitions and bad margins
- Syncing inventory is difficult and leads to out-of-stock items
- It’s hard to sell products that you never see
- Involving a third party will result in more fulfillment errors and mistakes
- Long wait for a shipment because the product is sold out, which may reflect badly on the seller
- There is a risk of getting orders mixed up
- Product returns become complicated
- Profit margins for drop shipped items are often thin
With potential challenges associated with drop shipping, it may work best when sellers have some products in their inventory. For drop shipping to contribute to the success of a business, one has to invest over time in a quality website, marketing, and excellent customer service. Drop shipping does provide an easy way to get started and gives one the ability to use other people’s capital without having to invest thousands of one’s own. When managed in the right manner, it can form the foundation of a successful online store.