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How does Drop Shipping Work?

If you are looking out for some new and lucrative business options, then here is one. The drop shipping business. My article will tell you exactly how a drop shipping business works.
BusinessZeal Staff
Drop shipping is one of the latest distribution techniques used in marketing of products. The plus side of drop shipping is that it requires zero inventory recording at retailer's end and helps keep the retailer's cash flow cycle on the positive side. The retailer need not actually invest any capital in purchasing of goods and warehousing. He makes money by merely taking orders for products and passing these orders to the wholesaler or manufacturer. All he needs to do is ensure that the products are delivered to the customer. For this service, he earns a handsome profit or commission. Readers need to know that this system has no connection with telemarketing and distribution of products. Read more to find out how the whole process of drop shipping works.

Procedure of Drop Shipping

Here is how the supply chain of drop shipping works. The retailer or agents are always on a lookout for good quality and lucrative products available in the market. Using his connections in the marketing field, the retailer shall approach the wholesaler or manufacturer of the product. All the terms and conditions of the distribution contract for the product are discussed in detail. This contract usually involves details about the minimum quantity of sales to be generated by the retailer for the manufacturer, the price quotes for the retailer, the terms and conditions of shipment and delivery and the length of credit period before which the retailer has to make a payment to the manufacturer. This system basically relieves the manufacturer of expenses towards product marketing.

After the contract is signed, the retailer may display a sample of the marketed product in his shop. Alternately, he may market the products online or through distribution of catalogs. These products are now quoted with a marked up price keeping in mind the retailer's profit.

Prospective customers interested in the product, place orders with the retailer. The orders are then forwarded to the manufacturer. It is the manufacturer's responsibility to pack and ship off the product to the customer's address. All expenses towards packing and shipping of the products to the customer's address are to be borne by the manufacturer only. In most of the drop shipping contracts, the manufacturer is not allowed to mention his name and return address anywhere on the product package. At times, the package may contain the return address of the retailer or the product may be branded with retailer's name.

Meanwhile, the retailer receives the payment for the product from the customer. He also receives a delivery report of the product. Depending on the previously signed contract, the retailer makes a payment for all the orders to the manufacturer after the credit period. The process does not end here. The retailer is the face of the manufacturing company for the customers. The customers therefore, approach the retailer for any kind of after sales service regarding the product. The retailer has to get in touch with the manufacturer to get the customers' problems sorted out. With the goodwill thus generated, the customer loyalty increases and the chain of supply goes on and on.

Risks Borne by Retailer

One of the foremost risk borne by the retailer is that of product quality and product delivery. The onus of shipping goods actually lies on the manufacturer. But the retailer has to face the customer's brunt if the delivered products are damaged or are of inferior quality. Similarly, the products may not be delivered to the customer within the stipulated time frame. Sometimes, a retailer may accept bulk orders for products whose production has been terminated or else, the product may just be out of stock. Here, the commitment given by the retailer is usually at stake. This problem may arise on account of inadequate communication between the manufacturer and retailer.

Many a time, prospective retailers are fraudulently enticed to work for certain manufacturers. The retailers in this case, are promised a commission for generating new orders for certain products. These manufacturer charge an initial deposit fee from people, to work as their retailers and pass a meager percentage of their profit to the retailers upon sales generation. Retailers are often encouraged to enroll new candidates to play retailers so that the original retailer can get a payback of their deposit fee.

Some popular companies that run their business using drop shipping strategy are Amazon.com and eBay. Companies like 'CommerceHub' do drop shipping business for supermarket chain called Sears. For the past five years, China has emerged as a world leader in drop shipping distribution strategy. This strategy is just at its primary stage. But considering its worldwide popularity and removal of trade barriers, it is soon expected to be the keyword in global market distribution system.