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a supply chain management technique in which the retailer does not keep goods in
stock, but instead transfers customer orders and shipment details to
wholesalers, who then ship the goods directly to the customer. |
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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. |
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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. |
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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. |
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A new 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. |
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The two main benefits of drop shipping are - no upfront inventory to purchase
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.
Often,[citation needed] web retailers starting their own business will confuse
drop shipping services with those offered by a fulfillment house.
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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.
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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.
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