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What is Drop Shipping?

Michael Pollick
By
Updated May 16, 2024
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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.

Uses

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.

Disadvantages

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.

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Michael Pollick
By Michael Pollick
As a frequent contributor to SmartCapitalMind, Michael Pollick uses his passion for research and writing to cover a wide range of topics. His curiosity drives him to study subjects in-depth, resulting in informative and engaging articles. Prior to becoming a professional writer, Michael honed his skills as an English tutor, poet, voice-over artist, and DJ.
Discussion Comments
By mycoding — On Mar 17, 2015

Thanks indeed for the post, regarding "anon291345" comment. Do not worry. Usually the drop shipping company hides its address and only shows your address on the sent produc., so the end user will see yours and not the drop shipper.

By hewentout — On Apr 25, 2013

@anon18054: You can always ask help from the dropship provider. I find a lot of dropship companies are from China.

By anon291345 — On Sep 13, 2012

I have a question in mind and I hope somebody can answer it. Let's say I sold some stuff on ebay, and the stuff is to be shipped straight from the manufacturer, or a store like a liquidation store or dollar store,etc. So whoever is shipping will be promoting their product, so there will be all sorts of contact information in the package.

My fear is, after one sale, the next time the buyer will be buying direct from the company itself. Especially if it is a very costly stuff and the manufacturer and the buyer can save a lot without the middle man. So how true is this? And what's the solution if anybody knows of any? Can somebody comment on it. Your comment is appreciated.

By anon284725 — On Aug 11, 2012

@manthony: It depends on the drop shipping company. Some companies will send them as gifts and others won't. However, all reliable drop shippers should send the product to your customer anonymously.

@anon18054: Again, it depends on the drop shipping company. Great article!

By rubibo — On Dec 04, 2010

Your best bet is to thoroughly understand the policies of any drop shipper you plan to do business with in advance of placing your first order. Make sure that your drop shipper accepts returns and find out how they handle this.

By anon89808 — On Jun 12, 2010

@anon19685 - Many suppliers will have a file which can be imported into your website (depending on the website script you use).

@manthony - You would enter the address of the Receiver on your suppliers website as the delivery address.

@anon18054 - Normally you handle your customers returns by yourself. Most dropshippers/wholesaler will not handle the returns. I reality you are the retailer so you need to handle the returns. There are only a few dropshippers who will handle returns on your behalf, but you are probably better to handle them yourself so your customer does not find out about your supplier and try to buy direct from them instead of you.

By anon27899 — On Mar 07, 2009

I use an online drop shipping site and when there are returns they get the items sent back straight to them and then refund/replace whatever is needed. There are lots of drop shippers all over the world, I tend to try and use drop shippers from the same country as I live to avoid custom charges and delays.

By anon19685 — On Oct 17, 2008

after i get a company to dropship, how does the e-tailer get the products to list?

By manthony — On Oct 08, 2008

how do I allow my customers to send my products as a gift when I drop ship from a manufacturer

By anon18054 — On Sep 13, 2008

how do i handle returns?

Michael Pollick
Michael Pollick
As a frequent contributor to SmartCapitalMind, Michael Pollick uses his passion for research and writing to cover a wide...
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