Drop shipping

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Drop shipping is a form of retail business in which the seller accepts customer orders without keeping stock on hand. Instead, in a form of supply chain management, the seller transfers the orders and their shipment details either to the manufacturer, a wholesaler, another retailer, or a fulfillment house, which then ships the goods directly to the customer.

Contents

The seller is responsible for marketing and selling the product, but has limited control over product quality, storage, inventory management, or shipping. [1] By doing this, it eliminates the costs of maintaining warehouses – or even a storefront – purchasing and storing inventory, and employing necessary staff for such functions. As in any other form of retail, the seller makes profit on the difference between an item's wholesale and retail price, less any pertinent selling, merchant, or shipping fees accruing against them.[ citation needed ]

Dropshipping has become a popular business model as it requires minimal initial investment and overhead costs. A dropshipping operation can be managed from any location with an internet connection. However, dropshipping also has its drawbacks, including lower profit margins, less control over the quality of the products sold and an increased risk of shipping delays or supply chain issues. [2]

Amazon, the online shopping giant, found early success in a dropshipping business model where they could offer over a million different books to consumers while only keeping approximately 2000 in stock of the more popular titles. Publishers and wholesalers would receive forwarded orders from Amazon and would ship the products directly to the customer using packaging from Amazon. [3]

Procedure

A drop shipping business to consumer model does not require a brick and mortar store. It may be eliminated entirely, or combined with a drop shipped order fulfillment business model. A physical retailer may keep potential drop shipped items on display, provide details on mail order items via a catalogue, or maintain a website with information available only online. A virtual retailer only has a website.[ citation needed ]

Drop shipping retailers are not required to disclose the practice, nor, as with any other retailer, the wholesale source of the products they offer. This can be achieved by "blind shipping" (shipping merchandise without a return address corresponding to the seller), "private label shipping" (having merchandise shipped from the wholesaler with a return address customised to the retailer), or utilising a fulfillment house. The ultimate order fulfiller might also include a customised packing slip, including details such as the retailer's company name, logo, and contact information.

In unusual circumstances 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.

Sellers on online auction sites such as eBay also use drop shipping as way of distributing products without stocking the items sold. A seller will list an item as new, and have purchased items shipped directly from the wholesaler to the customer. The seller's profit is the difference between the selling and the wholesale prices, minus any pertinent selling, merchant, or shipping fees accruing to them. However, some of the drop shipping methods used by sellers are not allowed under the eBay terms of service. This includes drop shipping methods in which a seller fulfills an order by purchasing the item from another online marketplace and having the item shipped to the customer. Sellers who use this method can be suspended from eBay. [4]

Products may be listed by a drop shipping retailer as available but actually be back-ordered either with the wholesaler or the item's manufacturer. Such potential delays in order fulfilment are not always known, or even when known disclosed, by a seller. They also can be extended, beyond the control of the seller. Likewise order fulfilment and shipping delays are beyond the seller's control, yet can reflect badly on the purchaser's ultimate satisfaction with their transaction. This puts a premium on timely and accurate information provision by the seller on both sides of the purchase, both before and after it is made.[ citation needed ]

Economics

The economics of dropshipping can be complex and depends on a number of different factors such as cost of goods, handling and shipping fees, marketing and advertising expenses, profit margins and scale or efficiency. [5]

Cost of goods is important as the markup from the wholesale price is the dropshipper's profit margin. Dropshippers do not physically handle their products thus, shipping and handling fees can vary depending on supplier and customer location. Suppliers may charge a flat rate or percentage of sales price impacting profit margins of the dropshipper. Furthermore, in order to attract customers, dropshippers invest in marketing and advertising campaigns such as social media ads, influencer partnerships and search engine optimization. [6]

In China

With the ever growing relevancy of drop shipping, this business model has become increasingly popular with the rise of e-commerce platforms and the ease of global trade, from China especially. China is globally recognised as a manufacturing powerhouse, producing a vast array of products at competitive prices. [7] This has made it a promising source for drop shippers whose interests require cost-effective and diverse products to sell in their online stores. Through establishing a partnership with Chinese suppliers, drop shippers can offer a wide range of products without the need to invest in inventory. [8] In addition, China has extensive access to global markets which enables to drop shippers to continually expand their investments. [9] China provides a well-established shipping and logistics infrastructure in place, enables efficient and cost-effective transportation of goods to customers worldwide, providing a crucial component for the success of the drop shipping model, as timely and reliable shipping is a key factor in customer satisfaction. [10]

China's relation with the drop shipping business model is already well established with e-commerce platforms such as Alibaba and AliExpress which have facilitated the growth of drop shipping by supplying in a high demand marketplace for suppliers and drop shippers to connect. [11] Subsequently with these platforms continually expanding, China has experienced exponential economic growth, leading to increased disposable income for its citizens. [12] Moreover, internet penetration and smartphone adoption have also increased quite drastically. [13] The combination of these factors have manifested an extensive domestic platform for e-commerce, supplying greater opportunities for drops shipping businesses to expand.

The Chinese government has established the significance of e-commerce and cross-border trade for the country's economic development. [14] Subsequently, the Chinese Government have instilled policies, initiatives and regulations to aid and promote the market platform of e-commerce. A distinct example can be identified when the government established special economic zones and implemented tax incentives to encourage e-commerce and export-specific industries. [15]

Scams

Drop shipping has also been a component of internet-based work-at-home schemes posted on social networking services. [16] Scam artists will promote drop-shipping as a work-at-home scheme, in which victims 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 use of their services. In 2019, the Gimlet Media podcast Reply All investigated the drop-shipping phenomenon, exploring the way drop shippers microtarget [17] 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 proponents, few drop shippers actually make any profits. [18]

In 2016, Buzzfeed News published an article exposing unscrupulous drop-shippers in China, describing how customers were receiving products that were not as those were advertised, or not receiving any products at all. [19]

One effect of drop-shipping scams is that customers who receive a drop-shipped package may realise that they overpaid for the item, return the item to the seller, then reorder the identical item directly from the manufacturer. The cost of processing the return and the loss of the unsalable returned product can result in significant losses to the drop shipper. [20]

See also

Related Research Articles

<span class="mw-page-title-main">Wholesaling</span> Sale of goods or merchandise to retailers rather than end consumers

Wholesaling or distributing is the sale of goods or merchandise to retailers; to industrial, commercial, institutional or other professional business users; or to other wholesalers and related subordinated services. In general, it is the sale of goods in bulk to anyone, either a person or an organization, other than the end consumer of that merchandise. Wholesaling is buying goods in bulk quantity, usually directly from the manufacturer or source, at a discounted rate. The retailer then sells the goods to the end consumer at a higher price making a profit.

<span class="mw-page-title-main">Distribution (marketing)</span> Making products available to customers

Distribution is the process of making a product or service available for the consumer or business user who needs it, and a distributor is a business involved in the distribution stage of the value chain. Distribution can be done directly by the producer or service provider or by using indirect channels with distributors or intermediaries. Distribution is one of the four elements of the marketing mix: the other three elements being product, pricing, and promotion.

<span class="mw-page-title-main">Disintermediation</span> Eliminating middlemen from a supply chain

Disintermediation is the removal of intermediaries in economics from a supply chain, or "cutting out the middlemen" in connection with a transaction or a series of transactions. Instead of going through traditional distribution channels, which had some type of intermediary, companies may now deal with customers directly, for example via the Internet.

<span class="mw-page-title-main">List price</span> Price that the manufacturer recommends for a retailer to charge

The list price, also known as the manufacturer's suggested retail price (MSRP), or the recommended retail price (RRP), or the suggested retail price (SRP) of a product is the price at which its manufacturer notionally recommends that a retailer sell the product.

Bait-and-switch is a form of fraud used in retail sales but also employed in other contexts. First, customers are "baited" by merchants' advertising products or services at a low price, but then, when they visit the store, those customers discover that the advertised goods are not available and are pressured by salespeople to purchase similar but higher-priced ones ("switching").

<span class="mw-page-title-main">Online shopping</span> Form of electronic commerce

Online shopping is a form of electronic commerce which allows consumers to directly buy goods or services from a seller over the Internet using a web browser or a mobile app. Consumers find a product of interest by visiting the website of the retailer directly or by searching among alternative vendors using a shopping search engine, which displays the same product's availability and pricing at different e-retailers. As of 2020, customers can shop online using a range of different computers and devices, including desktop computers, laptops, tablet computers and smartphones.

<span class="mw-page-title-main">Gross margin</span> Gross profit as a percentage

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Amazon Marketplace is an e-commerce platform owned and operated by Amazon that enables third-party sellers to sell new or used products directly to consumers on a fixed-price online marketplace alongside Amazon's regular offerings. Using Amazon Marketplace, third-party sellers gain access to Amazon's customer base, and Amazon expands the offerings on its site without having to invest in additional inventory.

Consignment is a process whereby a person gives permission to another party to take care of their property and retains full ownership of the property until the item is sold to the final buyer. It is generally done during auctions, shipping, goods transfer, or putting something up for sale in a consignment store. The owner of the goods pays the third-party a portion of the sale for facilitating the sale. Consignors maintain the rights to their property until the item is sold or abandoned. Many consignment shops and online consignment platforms have a set time limit at which an item's availability for sale expires. Within the time of contract, reductions of the price are common to promote the sale of the item, but vary by the type of item sold.

<span class="mw-page-title-main">Closeout (sale)</span>

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Fulfillment house and fulfillment center are modern terms for a packing warehouse. The terms were coined in the middle of the 1990s, and "fulfillment center" is usually used about an in-house packing warehouse, while "fulfillment house" tends to be used about companies that specialize in warehousing and packing for others.

A marketing channel consists of the people, organizations, and activities necessary to transfer the ownership of goods from the point of production to the point of consumption. It is the way products get to the end-user, the consumer; and is also known as a distribution channel. A marketing channel is a useful tool for management, and is crucial to creating an effective and well-planned marketing strategy.

Direct-to-consumer (DTC) or business-to-consumer (B2C) is the business model of selling products directly to customers and thereby bypassing any third-party retailers, wholesalers, or middlemen. Direct-to-consumer sales are usually transacted online, but direct-to-consumer brands may also operate physical retail spaces as a complement to their main e-commerce platform in a clicks-and-mortar business model. In the year 2021, direct-to-customer e-commerce sales in the United States were over $128 Billion.

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A revenue model is a framework for generating financial income. There can be a variety of ways for revenue generation such as the production model, manufacturing model, as well as the construction model. A revenue model identifies which revenue source to pursue, what value to offer, how to price the value, and who pays for the value. It is a key component of a company's business model. A revenue model primarily identifies what product or service will be created and sold in order to generate revenues.

Wholesale fashion distribution refers to the global market of bulk clothing sales, in which producers, wholesalers and sellers are involved in a commercial, business-to-business process.

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The invoice price is the actual price that the end-customer retailer pays to the manufacturer or distributor for a product.

Worldwide Brands is a Maitland, Florida based company that was founded by Chris Malta in 1999; it was registered as a corporation in 2001. It is a product sourcing research company that operates WorldwideBrands.com, a website whose primary function is to locate and qualify factory-authorized wholesale suppliers and wholesale manufacturers that are willing to sell to home businesses and Internet retailers. Worldwide Brands publishes the results of its findings in an online wholesale directory. The company's target market consists of small to medium-sized retailers, home businesses, and online merchants who sell on popular ecommerce platforms like eBay and Amazon, as well as on independent ecommerce websites.

References

  1. ↑ Kale, Sirin (1 May 2020). "'It's bullshit': Inside the weird, get-rich-quick world of dropshipping". Wired .
  2. ↑ Khouja, Moutaz (2001). "The evaluation of drop shipping option for e-commerce retailers". Computers & Industrial Engineering. 41 (2). Computers & Industrial Enginnering: 109–126. doi:10.1016/S0360-8352(01)00046-8.
  3. ↑ Girotra, Karan; Netessine, Serguei (July 2014). "Four Paths to Business Model Innovation". Harvard Business Review.
  4. ↑ "Drop shipping". eBay .
  5. ↑ Haskel, Fredrika; Mulolli, Liridona. "The Role of Drop Shipping in E-Commerce". University of Gothenburg.
  6. ↑ Lei, Jinqiong; Xue, Musen (2022). "Drop-shipping or batch ordering: Contract choice in the presence of information sharing and quality decision". Journal of Management Science and Engineering. 7 (2): 287–302. doi: 10.1016/j.jmse.2021.11.002 . S2CID   244536703.
  7. ↑ McKay, Huw; Song, Ligang (2010-01-17). "China as a Global Manufacturing Powerhouse: Strategic Considerations and Structural Adjustment". China & World Economy. 18 (1): 1–32. doi:10.1111/j.1749-124X.2010.01178.x. hdl: 1885/23994 . S2CID   153747896.
  8. ↑ Sun, Yu; Li, Ling; Shi, Hui; Chong, Dazhi (July 2020). "The transformation and upgrade of China's manufacturing industry in Industry 4.0 era". Systems Research and Behavioral Science. 37 (4): 734–740. doi:10.1002/sres.2714. S2CID   225720438.
  9. ↑ Moore, Thomas Geoffrey (2002-03-18). China in the World Market: Chinese Industry and International Sources of Reform in the Post-Mao Era. Cambridge University Press. ISBN   978-0-521-66442-4.
  10. ↑ Gan, Lin (2003-05-01). "Globalization of the automobile industry in China: dynamics and barriers in greening of the road transportation". Energy Policy. 31 (6): 537–551. doi:10.1016/S0301-4215(02)00097-6. hdl: 10852/32767 . ISSN   0301-4215.
  11. ↑ Bamansoor, Samer; Baker El-Ebiary, Yousef A.; Hazman Yusoff, Fakhrul; Pathmanathan, P. Ravindran; Iryani Ahmad Saany, Syarilla; Abu Bakar Fasc, Zainab Binti; Aseh, Khairi; Pande, Bishwajeet; Al Moaiad, Yazeed (2021). "Evaluation of Chinese Electronic Enterprise from Business and Customers Perspectives". 2021 2nd International Conference on Smart Computing and Electronic Enterprise (ICSCEE). pp. 169–174. doi:10.1109/ICSCEE50312.2021.9498093. ISBN   978-1-6654-3222-1. S2CID   236920468 . Retrieved 2023-04-24.
  12. ↑ Lardy, Nicholas R. (2015-01-12), "China: Toward a Consumption-Driven Growth Path", Seeking Changes, Joint Imprint with Central Compilation and Translation Press, China, pp. 85–111, doi:10.1142/9789814656306_0004, ISBN   978-981-4651-97-4 , retrieved 2023-04-24
  13. ↑ Hong, Y. Alicia; Zhou, Zi; Fang, Ya; Shi, Leiyu (2017-09-11). "The Digital Divide and Health Disparities in China: Evidence From a National Survey and Policy Implications". Journal of Medical Internet Research. 19 (9): e7786. doi: 10.2196/jmir.7786 . PMC   5613190 . PMID   28893724.
  14. ↑ Trappey, Charles V.; Trappey, Amy J.C. (2001-01-01). "Electronic commerce in Greater China". Industrial Management & Data Systems. 101 (5): 201–210. doi:10.1108/02635570110394617. ISSN   0263-5577.
  15. ↑ Pak, Chŏng-dong (1997). The Special Economic Zones of China and Their Impact on Its Economic Development. Greenwood Publishing Group. ISBN   978-0-275-95613-4.
  16. ↑ "Drop-Shipping: What you Need to Know Before You Buy or Sell Online". State of Michigan.
  17. ↑ Belsky, Scott (March 30, 2018). "Attack of the micro brand". Medium .
  18. ↑ "The World's Most Expensive Free Watch". Reply All (podcast) . Gimlet Media. 2018-03-01.
  19. ↑ Maheshwari, Sapna; Fu, Beimeng (April 5, 2016). "Say No To The Dress". BuzzFeed News .
  20. ↑ Feifer, Jason (July 27, 2016). "Why It's Nearly Impossible to Stop This Amazon and eBay Scheme" . Entrepreneur .
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