How does dropshipping work?
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Drop shipping is a term used to describe a manufacturer shipping a product direct to consumers on behalf of a 3rd party who is making the sale.
Often times, this is done by people in the US posting items for sale on social media shops, Shopify accounts, or Amazon. Those sellers then have a manufacturer, typically in China or other cheap labor country, produce the items and ship directly to the buyer.
The seller in this instance does not ever touch the product, all they do is process the transaction.
An example of this occurring domestically is the recent bed in a box phenomenon in the mattress industry. At their onset, a company like Casper was just a marketing and sales company. They advertised and took orders from consumers, but had a third party actually produce the mattress and ship it directly to the consumer.
Say I set up a shop of the brick and mortar type, and I sell online for local delivery or curbside.
But then someone on the other side of the country finds my shop’s website and places an order. I don’t maintain an inventory to both ship AND do local sales, and the distributor has a fairly large minimum order which means I can’t just order one item (I have to order a whole pallet). Instead, I push the order through as drop-ship, which means the distributor ships directly to you from their much larger inventory rather than me having to deal with the goofiness of trying to play games with my inventory.
The manufacturer or distributor benefits in that their business license rarely allows them to sell retail (wholesale and retail are separate business certifications in most of the US). A company CAN hold both, and some do, but most only do one or the other. So I make the sale and instead of sending you the item from my inventory and then trying to wrangle a single item from them between my normal orders, they just send the item directly from their warehouse once I’ve made the sale — the wholesaler wins, I win, and you win.
I have a regular dropship scenario set up with my veterinarian.
She has an account with a company that makes and sells pet meds and supplements. When I need to order, she makes the order call to them during my appointment, and they then ship the supplement directly to me, but I pay her for it as the company is charging *her* account. She’s the middleman in this situation mainly because the type of products with varying quantities/dosages could make direct ordering by the consumer (me) rather complicated or confusing.
In a typical retail business the business will have a warehouse with their stock which they buy from the manufacturer in bulk for a lower price and when they sell it at retail price they make a profit on the sale. The benefit of this is that they can generally move large volumes of product but the downside is that the shipping and storage adds extra cost to the retailer and there’s no guarantee they’ll sell all of their stock, and leftover stock is sold at a loss. Therefore in order for this to be profitable you have to consistently sell large volumes of merchandise.
With dropshipping the retailer does not have a warehouse with stocked items, rather they simply place the order to the manufacturer as they receive it from the customer and the item is shipped directly to the customer. As such they don’t need to have their own logistics or warehouse and this is a much better system for smaller businesses. The downside is that the retailer has a lot less control over the product and the shipping process and many things are not in their control. They may also not be able to have physical store locations or have only one and operate mainly online. Dropshipping can work very effectively if the retailer takes the time to ensure they make the right deal with the right supplier and make sure to have good quality control.
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