Drop shipping is a supply chain management technique in which the retailer does not keep goods in stock, but instead transfers customer orders and shipment details to wholesalers, who then ship the goods directly to the customer.
In order for your order to be delivered with a drop ship service, the website you have ordered from have to pass your details on to the wholesaler in order for them to pack and dispatch your order to you. Your details are NOT kept confidential!
See our example at the bottom of the page to see how it works!
The retailers make their profit on the difference between the wholesale and retail price. Profit margins are often very small, to ensure the drop shipper gets the sales they want. Often, the drop shipper will have a full time job to rely on for money and the drop shipping is just a sideline, so large profit margins are not important. Many drop shipping retails are not Tax and VAT registered and therefore not fully complying with UK business law.
This can divert custom away from genuine retailers charging RRP prices and paying taxes, are their prices will be higher.
Some drop shipping retailers may keep "show" items on display in stores, so that customers can inspect an item similar to those that they can purchase. Other retailers may provide only a catalogue or website.
Retailers that drop ship merchandise from wholesalers may take measures to hide this fact to avoid any stigma, or to keep the wholesale source from becoming widely known. This can be effected 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). A customized packing slip may also be included by the wholesaler, indicating the retailer's company name, logo, and/or contact information.
Many UK drop shippers use a standard generic invoice from one of the main adult drop shippers, which has very little reference to the website you have bought from, no sellers contact details and the return address provided is that of the wholesaler. Many drop shippers also use the pictures and description provided by the wholesaler to advertise the products for sale – these will often have the wholesalers logo on and are very noticeable when visiting several sites looking for one product in particular.
Some wholesalers can also provide drop shippers with a website – again, these are all generic, with the same categories, products, layouts and descriptions.
Drop shipping can occur when a small retailer who typically sells in small quantities to the general public receives a single large order for a product. Rather than route the shipment through the retail store, the retailer may arrange for the goods to be shipped directly to the customer.
Many sellers on online auction sites, such as eBay, also drop ship. Often, a seller will list an item as new and ship the item directly from the wholesaler to the highest bidder. The seller profits from the difference between the winning bid and the wholesale price, minus any selling and merchant fees from the auction site. A seller is permitted to list items that are currently not in his/her own possession, provided that he/she follows eBay's policy on pre-sale items.
A new 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 varies from simple key chains and t-shirts with custom logos or pictures to customized formulations for vitamins and nutritional supplements and even re-packaged adult toys and lingerie.
The two main benefits of drop shipping are - no upfront inventory to purchase and a positive cash flow cycle. A positive cash flow cycle occurs because the seller is paid when the purchase is made. The seller usually pays the wholesaler using a credit card or credit terms. Therefore, there is a period of time in which the seller has the customer's money, but has not yet paid the wholesaler. Often, web retailers starting their own business will confuse drop shipping services with those offered by a fulfilment house.
As in any business, some risks are involved in drop shipping. For example, back ordering may occur when a seller places a shipment request with a wholesaler, but the product is sold out. Back ordering may be accompanied by a long wait for a shipment while the wholesaler waits for new products, which may reflect badly on the retailer. A good wholesaler will keep retailers updated, but it is the business owner's job to be aware of the quantities that the wholesaler has available.
Drop shipping has also featured prominently in some Internet-based home business scams. Scam artists will promote drop shipping as a lucrative "work from home opportunity." The victim who buys into this 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.
** PUT INTO PRACTICE **
Mrs A buys a vibrator from Mr Bs website. She pays £15.00 for the toy and £2.95 for delivery. She puts her credit card details into Mr B’s website and the transaction is completed!
Mr B now completes a credit card transaction to take the £17.95 from Mrs A’s card – the transaction is successful, and the money goes straight into Mr B’s bank account.
Mr B now goes onto Company C’s website. He logs into his account and places an order for the vibrator Mrs A wants using Mrs A’s delivery details and any other specific delivery information she may have supplied. Mr B now pays for the vibrator, for delivery and VAT. He pays with his debit card, so the money comes straight out of his bank, and the transaction is complete.
The staff at Company C now pack the vibrator in a box for Mrs A, put a sticker on the box with Mrs A’s details on and a generic invoice inside the box with no company details on at all, except the name of Mr B’s website and Company C’s return address in case the vibrator is faulty.
Mrs A gets her parcel in the post, thinking it has come straight from Mr B, Mr B has never touched the item but has made a profit!
Mr B is not paying Tax or National Insurance for those earnings, nor is he trading in compliance with Distance Selling regulations! Mr B has very little knowledge about the products he is selling and is unable to give detailed technical advice.
Some of main text taken from Wikipedia.org
