Definition: Drop shipping is a type of supply chain management by which an online retailer does not keep inventory or fulfill customer orders. Instead, orders placed on an ecommerce website are sent to and fulfilled by a wholesaler. Drop shipping alleviates retailers of the responsibility to oversee inventory and fulfillment, allowing them to focus on marketing, product sourcing and customer support.

Drop Shipping: Reduced inventory, little capital required

One of the key advantages to drop shipping is that the merchant does not have to keep any sort of stock or inventory on-site. In fact, the merchant does not actually own inventory, eliminating the significant overhead of storage space and shipping costs. When an online order is placed, it is sent directly to the fulfillment provider.

Third parties are fully relied upon for the inventory and shipping, making drop shipping a pursuit with low capital requirements. An entrepreneur can start a drop shipping ecommerce store without having to make a major investment to acquire inventory — even established merchants can leverage drop shipping. Products are only purchased when a sale is made and the customer actually pays, a convenience that many retailers embrace.

Drop shipping also reduces the laborious expense of tracking inventory for accounting purposes. Nor does he or she have to handle returns or any inbound deliveries. Since drop shipping companies are not required to pre-purchase the items they sell, it is possible to offer a diverse selection of products.

Launching and operating a drop shipping business

Drop shipping is a low overhead business that appeals to entrepreneurs who want to start selling, but lack seed capital. Very little is needed to launch a drop shipping operation:

  • A laptop and internet connection
  • Website builder and ecommerce software
  • A means of communicating with suppliers and customers

Items can be listed on a the merchant's website as long as their suppliers have enough of the products in stock. Since shipping and fulfillment is done by suppliers, the entrepreneur is not responsible for much of the legwork. As the business grows, there is eventually a need for customer service agents and an ability to further invest in marketing. The outsourced nature of drop shipping makes it considerably easier to start and manage than a traditional brick-and-mortar business.

The challenges of drop shipping

A drop shipping operation can be launched and see great success in a relatively short period of time, but it does come with challenges. There is a significant reliance on third parties to follow through on delivering requested products — which is both the upside and downside to drop shipping. These dependencies can have negative results, such as:

  • Suppliers run out of inventory without properly communicating to the storefront. Customers can then place orders for items that aren't in stock, which is highly negative from a customer service perspective.
  • Products are delivered in poor condition or with defects, something that is much easier to control when online merchants manage the inventory.
  • Orders are not fulfilled in a timely manner by the supplier, yet the online merchant is responsible as the customer-facing representative.

While all of these downsides are legitimate challenges to look out for, they are avoidable. Finding a supplier who is organized, honest, and committed to doing the right thing for your customers is crucial to drop shipping success.

Learn more about how to start a drop shipping business.

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