What is dropshipping and how does it work?

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What is dropshipping and how does it work?

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If you are sending something to Australia say from North America you can sometimes get the item shipped directly from a warehouse I. Australia and not have to pay for shipping from North America to Australia. Saves lots of money.

The main idea is that you are a business that advertises a product you don’t actually have in stock. If someone buys that product from your store online, you instead buy that product from another retailer or the manufacturer, and have them mail it to the customer on your behalf. This pretty much only works if you are charging more for the item on your website then it is possible to get from somewhere else.

Basically, if Joe orders a cup from your website for $25, you buy that cup for $15 from another source and have them mail it to Joe. You made $10.

A standard business model is to buy a large order of a product from a company, and because it’s a large order (MOQ/minum order quantity), you get a break on the price, plus you pay no sales tax. This is the “wholesale” price.

You buy a hundred bicycles from China at $200 each ($20,000), and after they arrive, you sell them locally for $300 each. This is the retail price, and you profit $100 per bicycle.

Now suppose you decide you don’t want to pay the monthly rent on a bicycle shop, or pay a worker to stay in the shop plus assemble the new bikes.

Without that expense, you feel comfortable selling the $300 bikes for $250, and you would make a $50 profit on each one.

You arrange a deal where you buy 100 bikes from the factory in China and the Chinese factory will ship the individual bikes direct to your customers’ driveways in a crate, delivered by UPS/FedEx.

You tell them the address, and China ships each one individually.

The customer has to assemble it, but…they saved $50.

The Chinese factory “could” do this without you, but…they would have dozens of countries and different languages to understand. They prefer to have someone local in each country to manage a website in the local language, and to handle customer service.

It’s price arbitrage. Find a product being sold for cheap somewhere and sell it somewhere else at a higher price. Pocket the profits.

In a traditional retail business model, a manufacturer (A) makes an item and then sells loads of that item in bulk to a distributor (B) shipping the items A→B, that distributor then breaks down those products into smaller lots and sells those lots to a retail store (C) shipping the items B→C, the retail store then puts the items up for sale individually and the customer (D) takes them home C⇢D. Altogether: A→B→C⇢D.

(Though there is also a fair amount of *”cutting out the middlemen”* that can occur, usually by a manufacturer “doing their own distribution” by selling direct to stores (AB)→C⇢D or other times a store gets big enough to start ordering in bulk direct from manufacturers A→(BC)⇢D. These kinds of arrangements generally absorb the middleman’s profit margin and also reduce costs by the cost of one → link.)

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Online retailing changed things up a little bit because these retail stores suddenly had to start paying for that last link in the shipping chain (and/or charging the customers for it explicitly), so A→B→C⇢D became A→B→C→D.

Drop-shipping is basically what happened when an online retailer asked themselves, why are we wasting time+money shipping this item through me from B→C→D when it would be logistically easier to ship B→D. So, they went to their distributor and said *”Hey, if you can start shipping individual orders direct to the customers I’ll cut you in on some of the money we save on shipping.”*. Conceptually, that means that the business model acts like A→B⇢C→D but actual delivery looks more like A→B→D.

In general, this is a smart idea for cutting down on unnecessary physical shipping costs, however, not all drop-shipping is created equal because not all distributors are going to say *”Ok, sure!”* to just any offer for a slightly larger cut. Some will decide that they need to charge at-least-$X-more-per-item to stay profitable (because shipping 1000x items via semitruck to one store is much cheaper/simpler than the increased handling costs that boxing and shipping individual items to 1000x customers via UPS/FedEx/USPS would involve). Furthermore, some will simply ship items in nondescript cardboard boxes for a low price, or others may offer to have store-branded packaging materials included for an additional fee. Et cetera, et cetera.

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Unfortunately, with the growing popularity of online retailing and small online boutiques, the “drop-shipping” buzzword has caught on in a number of *scammy* sales courses.

Sometimes this will just be a case of the scammer (S) posing as “the distributor” that they teach you to use (while they actually just drop-ship from a real unknown-to-you distributor), effectively taking a cut in the business model of A→B⇢S⇢C→D (shipped A→B→D). Or other times, they’ll follow that same model of A→B⇢S⇢C→D (shipped A→B→D) but instead of taking a cut as a middleman they will instead charge a subscription fee for the service that allows you to order through “the distributor” usually at high cost that will be charged whether-or-not your online boutique make any sales that month.