Definition of Drop Shipping
Drop shipping is when a seller ships its customers' orders direct from its supplier's warehouse.
Drop shipping is a popular logistics and supply chain shipping strategy in the e-commerce retail industry.
Drop Shipping Operational Process
Rather than purchasing the product, then shipping the inventory and holding it in a warehouse in anticipation of customer orders, the e-tailer purchases the product and processes the customer order at the time the order comes into its order management system (OMS). While the orders are processed simultaneously, the order is then shipped out from the supplier to the end customer.
Drop Ship Benefits Summary
- Lower Capital Requirement
- Ability to Offer a Diverse and Broad Product Mix to the Market
- Maintain Profitability Without Carrying the Inventory
- Lower Financial Risk
- Increased Scalability
- Convenience and Practicality
Benefits of Drop Shipping
Drop shipments are beneficial to supply chains in several ways.
Lower Capital Requirement
Ability to Offer a Diverse and Broad Product Mix to the Market
- An additional benefit of not having to invest in inventory is being able to offer a diverse base of SKU's for customers, since it does not require a business to purchase their inventroy in advance of a customer sale. The dropship model therefore can change the business owner's mindset from building out a product offering for a select audience to one where they could constantly look for the next deal to offer a vast array of customers.
Maintain Profitability Without Carrying the Inventory
- With drop shipping the seller does not purchase the inventory until the sale is made by buyer.
Lower Financial Risk
- One of the biggest risks and hinderance to a start-up or mature business is cash flow. By not having to put the upfront investment into inventory, a business is less susceptible to being exposed to a loss or reduction margins associated with excess and obsolete inventory.
- A drop ship business model is far easier to scale because of its limited need for capital and distribution space.
Convenience and Practicality
- As was just mentioned, a DC or warehouse is not needed. A company only needs to bring an easily to navigate website that allows customers to find the product quickly and easily. One of the best software / website / services options for companies just starting out a drop ship business is through utilizing Shopify. This company has created an incredibly powerful platform for drop ship and more conventional businesses to open an ecommerce marketplace.
Profit margins of a drop ship business vary by the products and market the business is focusing on serving. As an example, expensive electronics will likely have lower margins, while lower priced products will provide higher margins. Although 5% of $1,000 is much more than 35% of $25.
It has been estimated drop shipping gross margins are usually in the 10% to 15% range.
There are several companies out there that offer a directory of products available from around the world available for drop shipping.
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