What Does the Term Drop Ship Mean?

Drop shipping is a business arrangement between retailers and product manufacturers. It is a type of business model that requires no physical inventory. Many online businesses employ this method because it requires little start-up costs.

How It Works

Retailers set up shops online and promote various goods. When sales orders are received, they simply tell manufacturers to ship the merchandises directly to the customers. Manufacturers who agree to ship individual units of goods for retailers are called drop shippers.

How Sellers Profit

Drop shippers charge retailers wholesale prices of the merchandise plus shipping. Retailers profit from the markup they put on the products.

Advantages

Online retailers do not stock or ship the actual products. They carry lower risks by avoiding "dead" stocks. If a particular item begins to lose popularity, sellers are not tying up their cash in inventory. They also have a lower overhead with no storage facilities.

Disadvantage

Online retailers have no control over quality and handling time of the drop-shipped merchandise. Not all manufacturers deal with product returns. Seller will be responsible for their customers' satisfactions.

Competition

There are fewer drop shippers than there are online sellers, and often multiple sellers use the same drop shipper. This means that a drop shipper can often set very competitive pricing for its services.

Resources

• What Does Drop Shipping Mean?
• Entrepreneur.com: Drop Shipping