Dropshipping is a method of supply chain management, in which the retailer does not keep goods in stock, but transfers customer orders and shipping details to the manufacturer, another retailer or wholesaler who sends them directly to the customer. As in retail businesses, the majority of retailers profit from the difference between the wholesale and retail price, but some retailers also get a commission, paid by the wholesaler.
To allow customers to browse the items they can buy, the retailer can either display them in a physical store window or provide customers with hard copy or digital catalogs, or even a combination of all these methods.
Retailers, who leave the shipping of goods to wholesalers, can take steps to prevent the customer from knowing the wholesaler’s address or name. This can be achieved by “blind shipping” with goods shipped without a return address, or shipping through private label (retailer personalized return address). The wholesaler can include a personalized packing slip, including details such as the retailer’s company name, logo, and contact information.
Dropshipping can also be used when a small retailer receives a large number of orders for a product. Rather than shipping the items themselves, the retailer can arrange for the goods to be shipped directly to the customer. Drop shipping is also very common with large items like steel bars used in the construction industry.
This system has two important advantages, namely a positive cash flow and the elimination of inventory tasks. The retailer is paid immediately upon purchase. The seller usually pays the wholesaler using a credit card or credit points. Therefore, there is a period when the seller has the customer’s money, but has not yet paid the wholesaler.
Drop shipping can also be an advantage in certain transactions because it prevents the final receiver from knowing the real sender, thus preserving the activity of the intermediary. The retailer is no longer responsible for any costs and possible delays that may occur in the handling of the goods.
This system also eliminates duplication of effort since a single actor stores, packs and ships the product. This approach can reduce shipping and inventory management costs; reductions which the consumer will then be able to benefit from.
The retailer’s image can be tarnished by a failure of the wholesaler. If the retailer asks the retailer to ship a product and that item is out of stock, the retailer will suffer. A good wholesaler should keep the retailers informed of the stock changes day by day. Drop shipping has played an important role in some internet business scams.
Fraudsters promote drop shipping as a very lucrative home business. Victims of this scam are sold a list of companies from which shipping orders can be placed. These are not really wholesalers, but retailers who leave all the marketing activity to the victims, leaving the victims with very meager margins.
By relieving retailers of the burden of shipping items sold, drop shipping allows them to improve their margins, while reducing their costs. This system also makes it possible to be more competitive by offering more attractive prices. However, care must be taken to check the reliability of the wholesalers with whom you are dealing before starting.