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What is drop-shipping?

By Edited Jul 16, 2016 0 0

Introduction

Drop-shipping is a method of buying stock at wholesale prices, in wholesale quantities, without the need for the retailer to take physical possession of the stock at any time. Drop-shipping is designed specifically for online or mail order sales and can be an ideal fit if you want to sell on Internet auction sites such as eBay.

Traditional Wholesaling

Traditionally, a retailer (or eBay seller) would purchase stock in bulk from a wholesaler, supplier, distributor or manufacturer. The retailer would take delivery of the stock and store it until it was required to fulfil orders. At this point the individual items would be packed and shipped to the purchaser (or eBay buyer). This is how businesses have worked for years but there are one or two downsides…

Firstly the retailer has to make an outlay upfront to pay for the stock and this means that their money is tied up in stock until such time as it is sold. Clearly once the stock is sold the retailer will need to purchase more stock and therefore there will always be an amount of capital invested in stock. In addition, it might be necessary to purchase products in minimum quantities, thus a new retailer may not be able to afford to offer many different products for sale as they simply don't have sufficient funds to buy the minimum amount of each item. The second downside is that the retailer has to store the stock and whilst this might not be a problem if you are selling something small such as CDs, it can be more of a problem with larger products. Just think how much room fifty television sets would take up. The final downside is the fact that once a product has been sold, it has to be picked, packed and shipped to the buyer by the seller.

Drop-shipping

The key difference between traditional wholesaling and drop-shipping is that with drop-shipping, the retailer never takes physical possession of the product. Instead, when the retailer makes a sale they simply pass the order details onto their wholesaler or drop-shipper for fulfilment. The drop-shipper looks after all of the stock and handles the shipping of orders to the purchaser. On the face of it, this looks like a perfect solution and there are several significant benefits to drop-shipping however there are also several downsides…

Advantages of drop-shipping

  1. No need for the retailer to tie up capital in stock

  2. No requirement for the retailer to rent storage space (ie. warehousing etc)

  3. The drop-shipper handles the work of packing and shipping

  4. Retailers can offer a wider choice of stock since they don't need to purchase products upfront – they only purchase once a sale is made

Disadvantages of drop-shipping

  1. Stock prices tend to be higher due to the fact that the supplier needs to cover the cost of the extra work involved on their part. This can make it hard for retailers to compete on price especially when trading in competitive marketplaces such as eBay.

  2. Not all wholesalers offer a drop-shipping service so product choice may be limited

  3. The retailer is very much in the hands of the drop-shipper to ensure that orders are fulfilled in a timely manner. If the retailer makes sales only to find that the drop-shipper is out of stock of particular items, it may reflect badly on the retailer.

Drop-shipping can offer an easy route to starting an eBay or other online sales business but new sellers should be very aware of the risks and downsides as stated above. Remember that in most cases, the ultimate buyer of a given product will not be aware of the existence of a drop-shipper so if anything goes wrong the buck stops well and truly at the door of the retailer.

If you plan to use drop-shipping to sell on ebay, you may find my article, 'How to Get Started Selling on eBay' of interest.

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