Knowledge Base

What is Drop Shipping & How Does it Work?

What is Drop Shipping?

Drop shipping is an eCommerce fulfilment method that allows online retailers to sell products without having to warehouse inventory.

Basically, you market and sell products on your site, while the manufacturer fulfills your orders.

How Does Drop Shipping Work?

Drop shipping requires an agreement between you and a partner manufacturer or supplier. This agreement allows you to list, market and sell your partner’s products on your eCommerce store.

When a customer purchases a product on your website, they are ordering from your partner, who then ships your customer’s order directly to your customer. Depending on your agreement, your partner then charges you for the wholesale or retail price of the items (and any additional conditional fees), allowing you to keep the margin you have upsold the product for.

The Pros & Cons of Drop Shipping

There are a number of benefits to drop shipping; the most obvious being that you can begin an eCommerce business without having to spend anything on inventory up front. You don’t actually have to purchase a product until you’ve made the sale; so with the right margins, you can become profitable right away.

Drop shipping also allows for greater scalability. By eliminating the need to manufacture your products, you can easily increase your online inventory by forging more drop shipping partnerships.

However, margins can sometimes be very low with drop shipping – as low as 5-10%.  If you are selling low price items, you can often achieve higher margins. But for expensive and extremely competitive niche products, you will likely live on the lower end.

Also, while it’s easy to increase your online offerings, your existing inventory is technically dependent on the actual inventory of your partners. If your supplier is out of stock, you’re also out of stock. The ebb and flow of daily inventory fluctuations and catalog changes can sometimes be a frustrating demand to keep up with.

Working with multiple third party vendors can sometimes result in customer service and shipping issues as well. If there is a shipping or product return problem, you have to act as the middleman between your customer and your supplier. This can sometimes be a real hassle.

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Comments

  1. Amanda Drew says

    That’s good to know that drop shipping is when you manufacture something and list it then when someone buys it, your partner ships it for you. One thing that this would probably work well for is jewelry. With that, you’d just need to create your products and only concentrate on making them look good and be available. It sounds like it’d be a good idea for any eCommerce store to do drop shipping.

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