How Drop Shipping Can Save You a Small Fortune ?

Starting an online store, or any business venture, can be a scary prospect - especially if you need to come up with a large amount of money for that initial inventory purchase. Drop shipping removes the anxiety and the big inventory bill. So, what is drop shipping and how does it work? 

Product wholesalers usually only deal with retailers - shipping them products in bulk quantities. However, many wholesalers will now ship directly to the end customer and mostly through a company that provides order fulfillment - this is drop shipping. 

What this means for online retailers is that they do not need to keep any inventory in stock. When a customer places an order, the retailer forwards the order to the wholesaler. The wholesaler ships directly to the customer. This leads to a positive cash flow cycle - in which the retailer is paid before the bill from the wholesaler comes due. A good drop shipper will ship with a generic return address label or even the retailers label and inserts. Some drop shippers will even handle returns! 

Let's consider an example. Suppose you want to start a site that sells women's shoes. If you had to stock inventory just the initial purchase might run something like $50,000 (consider all of the sizes and styles you would need to stock). And that number does not even consider the warehouse space and labor involved in picking and packing. So, you would be $50,000 in the red before your first order. 

If the same company uses drop shipping, they would establish an account with the drop shipper. The drop shipper might even supply a data feed and stock photos - greatly reducing the amount of time required for site development. Here's the great part - the retailer would not purchase even a single shoe. Once an order comes in the details are sent on to the drop shipper, who fulfills the order. The retailer gets paid and does not have to pay the wholesaler until the end of the month (using a credit card or net credit terms). 

So, the company that chose to drop ship saved at least $50,000 (probably alot more) just in up front costs. The savings keep piling up each month as the company does not have to pay for space and labor. 
 

So again, what is drop shipping?

Drop shipping is 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 . The retailers make their profit on the difference between the wholesale and retail price.

Procedure

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 affected 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.

Small business

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 .

Online auctions

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.

Benefits

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.

Risks

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 is usually 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.