Drop shipping is a product delivery method in which a seller accepts payment for an order, but the customer receives the product directly from the manufacturer. The seller's profit in the transaction is the difference between the wholesale and retail price of the items sold. This process offers advantages to both retailer and manufacturer, but it's not appropriate for every seller or product.
This delivery method is commonly used by smaller retail shops, Internet-only stores, and those who primarily use catalogs for sales. These stores' customers don't always expect to walk out of a physical store with their purchases, and so accept a slight delay between ordering and receiving the product. Stores that do have a brick and mortar component often display representative items on their shelves so that consumers can see and feel them before buying, but the actual products are sitting in a factory's warehouse. Sellers on Internet auction sites also commonly drop ship, running auctions for items they don't physically have and then drop shipping them from the manufacturer to the highest bidder.
Advantages for Sellers
Some of the biggest advantages this process offers retailers relate to inventory. In a traditional store setting, retailers order items in bulk from the manufacturer and then must store these products in a secure area until they can be displayed, which involves maintaining a proper storage area, hiring employees to handle the stock, and investing in security measures to prevent theft. With drop shipping, the retailer doesn't keep a large inventory on site, which allows the store to devote more space to displays and hire fewer employees to handle shipping, receiving, inventory, and security. All of this translates into a reduction in costs, which can lead to greater profits for stores and savings for consumers. Additionally, drop shipping allows retailers to offer a wider selection of items, since they can source products from many different manufacturers without having to worry about importation costs and storage.
Many sellers also prefer this type of shipping because it takes a lot of the logistical problems off of their hands. The manufacturer provides the packaging and shipping labels for the items and holds a merchant shipping account, so the seller doesn't have to. This is especially helpful for small businesses and those that are just starting up, since they don't have to have a lot of cash on hand to pay for packaging and shipping before they can start shipping items. Many wholesalers offer blind drop shipping, in which they put the seller's name and labels on the packaging instead of their own, making it look like the product is unique to that seller. Businesses like these also tend to prefer drop shipping because it creates a positive cash-flow cycle and prevents waste, since they receive money from the customers before having to actually pay the manufacturers for goods and they don't have to pay for goods that may never actually sell.
Advantages for Wholesalers
The main benefit of drop shipping for manufacturers is increased market penetration. In this method, each retailer becomes an additional salesman of the wholesaler's products, helping to expose them to a wider audience. It also gives them a much wider market for their products, since they can be sold and shipped to consumers anywhere in the world. Factories can sometimes benefit in terms of shipping as well, since they have more flexibility in choosing shipping options. For example, they could choose to use a low-cost local delivery service to ship individual items to nearby consumers, or use a different company to get a bulk-shipping discount when sending lots of items at once.
Despite the logistical and cost advantages with this method, this process isn't right for every seller or wholesaler. Some manufacturers don't do drop shipping at all because of the additional expense of hiring personnel for the process and the work involved in shipping orders. It can also create bottlenecks in the shipping and receiving system, especially if a lot of sellers place orders at once, leading to delays. This can make customers frustrated with the retailer as well, since the delay appears to be coming from it instead of from the wholesaler. In situations in which the manufacturer do drop ship, customer may have to assume the cost of shipping as well as the retail price, which could be prohibitive in the case of large items like furniture or high-end electronics.