What is dropshipping and how does it work?

What does drop-ship mean in business?

What is drop shipping, exactly? It is a business model that owes a lot of its success to eCommerce, the buying and selling of goods or services using the Internet. Wondering how to drop ship? Unlike conventional brick-and-mortar and online stores that keep and sell their own inventory, drop-shipping companies do not physically maintain any inventory of their own.

Instead, these businesses purchase their products with a partnered third-party vendor, such as a wholesaler or manufacturer, who then provides and ships all the retailer’s products directly to the customer. The drop-shipper (the retailer that is dropshipping) takes the customer orders, forwards them on to the drop-shipper’s supplier, and the drop ship supplier then completes the purchase order.

Drop surfing vs. dropshipping

Drop surfing is a lot like drop-shipping, except in drop surfing, retailers work with multiple suppliers to fill orders, shipping around from vendor to vendor on a per-order basis in order to find the best deal.

Another way to define drop surfing vs drop-shipping is:

Drop-shipping + Checking multiple vendors for the lowest price to fulfill the product purchase = Drop surfing

Dropshipping business examples

Some of the more popular drop shipping eCommerce platforms include:

• Amazon: Amazon is a well-known, multinational company that consists of eCommerce, cloud computing, digital streaming, and artificial intelligence. Amazon’s drop-shipping policy states that drop shippers must always:
  • Be the seller on record of their products
  • Identify themselves as the seller of their products on all packing slips, invoices, and the external packaging
  • Be responsible for accepting and processing customer returns
  • Comply with all other terms of their seller agreement and Amazon policies
• ASOS: An online fashion and cosmetics retailer that sells over 850 brands, as well as their own. ASOS avoids the auction-style marketplace, so drop-shippers may not always find the best price for sourcing inventory. However, they can still successfully sell to the ASOS customers, given that their inventory appeals to the right crowd.
• CafePress: An online retailer of stock and customized on-demand products founded in 1999. CafePress is a company that requires the merchant to design and sell their own inventory.
• eBay: Multinational eCommerce corporation that facilitates consumer-to-consumer and business-to-consumer sales through their website.
• Etsy: After their launch in 2005, Etsy quickly became known as the eCommerce platform that focused on their handmade and vintage items, as well as their craft supplies. They sell a wide variety of items, such as jewelry, bags, clothing, party decor, home decor, furniture, toys, art, and craft supplies.
• Shopify: This Canadian eCommerce company was founded in 2004, is a platform for an online store and offers online retailers a variety of services, including payments, marketing, shipping, and other customer engagement tools. Fishbowl integrates with Shopify by allowing hundreds of thousands of stores to connect their ecommerce platform with an advanced inventory management system through the Fishbowl plugin.
• Zazzle: An online marketplace that allows customers and designers to design their own products with independent manufacturers. Zazzle is a company that was launched by founders Robert and Jeff Beaver in their garage in 2005, and it’s an online platform that aims to empower artists.

Dropshipping pros

There are a couple of notable benefits associated with drop-shipping:

• Ease of entry into the industry: It’s a lot easier to run a business when there aren’t any physical products to handle. The dropshipping model prevents merchants from having to deal with managing warehouses, packing and shipping orders, tracking inventory and ordering products. And there are the potential savings that come from not having to invest in thousands of dollars worth of inventory upfront
• No EOQ, MOQ and reorder points:
  • EOQ: The economic order quantity is the optimum quantity of an item that is to be purchased at once, in order to decrease the combined annual costs of replenishing and carrying an item in inventory.
  • MOQ: This is the minimum order quantity. This is a set minimum number of quantities from which they agree to prepare an order.
  • Reorder points: the level of inventory that calls to action to replenish that particular inventory stock.
• No set location: Like most internet-based jobs, running a dropshipping business can be done virtually anywhere, as long as there is access to a laptop and Internet.
• Savings on overhead costs: Overhead expenses are low with help from not having to pay for warehouse costs and not having to purchase inventory from multiple suppliers.

Dropshipping cons

There are a few downsides to dropshipping, which could include the following:

• Covering supplier’s profits: Since you are not your own supplier, you’ll be responsible for covering those costs.
• Liable for supplier’s mistakes: Mistakes are bound to happen, but it is important to take full responsibility and apologize if there is an error, even if it isn’t technically your fault.
• Little control over shipping: Since the products that get shipped out to your customers aren’t coming straight from you, you don’t have any control over whether or not the correct items are being shipped.
• Overpopulated with retailers: The ease of entry means that some dropshipping markets are overpopulated with retailers, making the competition extremely high.

How to start drop shipping with your business

Very little is needed to start a dropshipping business, or to transition an existing business into a dropshipping model.

• Products: Start a drop-shipping business by figuring out what product or products you want to sell. Create a concept that you want to center your brand, content, and product collection around.
• Engaging website: You need a website to engage users, as well as a supplier, or suppliers that you trust to deliver quality products on time. How you combine your business concept and your overall drop-ship plan will help to dictate which website platform would work best.
• Software: You need eCommerce inventory management software that can automatically track your dropshipping orders to help keep everything structured and organized

Manual vs. automatic eCommerce:

Managing inventory as an eCommerce business can feel overwhelming, but it doesn’t have to be. There are two basic ways for eCommerce companies to track their inventory:

• Automatically: Tying all of your eCommerce channels together into a central hub that manages your inventory, is a better, more accurate solution than trying to manage them all separately.
• Manually: When you sell products on multiple eCommerce channels you may have to go through to each site manually to update the number of products you have left in stock.

The bottom line

With the numerous benefits of dropshipping, it’s an industry worth investing in. If you’re looking to start or expand your business, make sure you have all the best inventory management software to guide you to success. Check out our automated inventory management solutions to get started today.