Drop shipping is a supply chain management method in
which the retailer does
not keep goods in stock but instead transfers the customer orders
and shipment details to either the manufacturer, another retailer, or a wholesaler,
who then ships the goods directly to the customer. As in retail
business, the majority of retailers make their profit on the difference
between the wholesale and retail price, but some retailers earn an agreed
percentage of the sales in commission, paid by the wholesaler to the retailer.
A drop shipping retailer might
keep display items on display in a physical brick
and mortar store or provide a hard copy or online product
catalog to enable customers to review items before purchase.
Retailers that drop ship
merchandise from wholesalers can take measures to hide this fact or keep the
wholesale source from becoming widely known. This can be achieved 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). The wholesaler
might include a customized packing
slip, including details such as the retailer’s company name, logo, and
Drop shipping can occur when a
small retailer (that typically sells in small quantities to the general public)
receives a single large order for a product. The retailer may arrange for the
goods to be shipped directly to the customer from the manufacturer or
distributor. Drop shipping is common with expensive products.
Sellers on online
auction sites also use drop shipping as way of distributing products
without handling the stocking and shipping of the inventory. A seller will list
an item as new and then ship the item directly from the wholesaler to the
customer. The seller profits from the difference between the sales of the
product and the wholesale price, minus any selling, merchant, or shipping fees.
An emerging trend in the drop
ship business is private label drop shipping, in which a manufacturer produces
a custom item for a retailer and drop ships it. The range of private label drop
shipped items available includes simple keepsakes, apparel with custom logos,
pictures, and customized formulations for vitamins and nutritional supplements.
Back ordering may occur when a
seller places a shipment request with a wholesaler, but the product is sold
out. Back orders may be accompanied by a long wait for a shipment while the
wholesaler waits for new products, which may reflect badly on the retailer.
Major drop shipping suppliers and
fulfilment services are primarily based in the USA.Since 2006, many drop ship
companies have emerged in China, many of which offer wholesaleand
drop shipping services to both companies and individuals. This is largely
due to the increasing ease of e-procurement and
the growing part that the internet is playing in e-commerce. Drop ship
suppliers based in China have increasingly been able to compete with
same-country distributors because of improved logistics for small packets and
the easing of trade barriers.Some
reports indicate that nearly 33% of internet retailers may use drop shipping as
their main method for order fulfilment. eCommerce platforms like Shopify, Woocommerce and Magento provide
drop shipping entrepreneurs with an easy plug-and-play style option for selling
products online. As of December 31st 2018, Shopify alone reported that it had
more than 800,000 businesses in approximately 175 countries using its platform.
Drop shipping has also featured
prominently in Internet-based home business scams. Scam artists will
promote drop shipping as a lucrative “work from home opportunity”. The
victim of the scam will be sold a list of businesses from which drop shipment
orders can be placed. These businesses may not be wholesalers, but other
businesses or individuals acting as middlemen between
retailers and wholesalers, with no product of their own to sell. These
middlemen often charge prices that leave little profit
margin for the victim and require a regular fee for the retailer’s
usage of their services. In 2018, a Gimlet media podcast Reply All investigated the drop-shipping
phenomenon. The journalists explored the way that drop-shippers micro-target their client, but also found that micro-shipping itself is a rather
dubious industry in that despite the promises of some of the most well-known
drop-shipping acolytes, few drop-shippers actually make any profits. In 2016,
Buzzfeed published an article exposing unscrupulous drop shippers in China. The
article shows how customers were receiving products that were not as advertised
or receiving no product at all.
One effect of drop shipping is that customers who receive a drop-shipped
package will realize that they overpaid for the item on eBay, return the item
to the manufacturer, then reorder the identical item directly from the
manufacturer. The cost of processing the return and the loss of the unsellable
returned product can result in significant losses to the manufacturer.
Knock off name
brand products being sold by drop shipping wholesalers is another problem.
While some of these products may look genuine, they can be spotted by the
extremely high profit margins available on them. If colors, styles or other
physical characteristics do not match those of the manufacturer, the product is
probably a counterfeit. Selling non-genuine products could destroy one’s
eCommerce reputation and possibly ruin a drop shipping business. It might also
cause legal problems.
The converse of drop shipping is will call,
where a customer picks up directly from a wholesaler rather than at a retail
As with drop shipping, affiliate marketing allows a blogger, website owner, or another form of internet content owners commonly known in that industry as publishers or partners, to list or promote a product or advertisement campaign on behalf of a third party brand typically called merchants. In affiliate marketing, the product or advertisements are not owned or designed by the affiliate publisher and often the affiliates and their content must adhere to contractual standards detailing how the brand and promotion may be represented. Affiliates often may not imply in their marketing that they own or represent the brand. In contrast with drop shipping, the potential customer, often called a lead, is typically redirected to the third party merchant’s own website, sales portal, or shopping cart. Thus in traditional affiliate marketing transactions, the lead is redirected to the merchant’s own sales campaign and so are only processed directly through the third party’s network. Therefore, an affiliate commission is generated for leads and sales occurring directly on the third party merchant’s website and would not be combined with any processes or commissions arising from a drop shipping relationship.