Published on May 20, 2008 What is drop shipping?
Drop shipping is an arrangement between a retailer and a wholesaler or manufacturer. It means that when a customer purchases goods from the retailer, the retailer accepts payment from the customer but the wholesaler or manufacturer delivers the product directly to the customer. The retailer then pays the manufacturer the wholesale cost of the item.
What is drop shipping and how could it help?
Drop shipping is an arrangement between a retailer and a wholesaler or manufacturer. It means that when a customer purchases goods from the retailer, the retailer accepts payment from the customer but the wholesaler or manufacturer delivers the product directly to the customer. The retailer then pays the manufacturer the wholesale cost of the item.
Advantages of drop shipping
The advantage of a wholesale drop ship arrangement for someone running a website business with an online shopping cart is that little or no stock needs to be held on site. This can greatly improve cash flow and reduce costs of finding storage facilities for stock, getting insurance for it and all of the hassle of dispatch.
For manufacturers and wholesalers, a drop ship agreement effectively gives their product another reseller with no additional costs for them. It also saves time, effort and delivery costs in managing regular and bulk deliveries of product to retailers – compared to the cost of using inexpensive courier or express mail services to get products to customers.
Disadvantages of drop shipping
The disadvantages to drop shipping are that these agreements can make manufacturing or wholesale purchase quantities difficult to predict for the manufacturer or wholesaler and that in many cases the cost of delivery is on-charged to the end customer which could affect sales for large products such as furniture that would be expensive to deliver. You may also have to manage situations where there are backorders if there is a delivery or manufacturing problem at the supplier’s end – which could lead to returns if it takes too long to produce more stock of that item.
Ecommerce businesses: drop shipping is usually worth it if you’re careful
For ecommerce website businesses, the benefits of drop shipping agreements usually outweigh the disadvantages. The wholesalers look after delivery, which is one less administrative hassle and there is no stock management either.
Products well suited to drop shipping include books, computer parts, lingerie, adult toys, clothing, bicycle parts, office products or anything that is easy to deliver to customers.
Drop shipping in Australia and New Zealand
Drop shipping can benefit your ecommerce business a lot, but you have to be careful where you’re buying from. It pays not to assume that local drop shippers are the best for your profits, or your customers.
For example, as the wholesale and distribution market is not as competitive in Australia and New Zealand as it is in the United States, some drop shippers in Australia and New Zealand can get away with charging high prices that leave little mark-up opportunity for e-tailers like you to make money on them. Some may be discount stores selling clearance stock and others may be purchasing from other wholesalers to become middlemen under the guise of drop shippers. This also applies to Asian drop shippers who may have low costs of production, but have realised they can charge high prices and still be cheaper than their competition.
It pays to shop around for drop shippers. If you can find the right one for your business, it will make selling online easy. If not, you’ll be struggling to make profits on your income and still holding an advantage over competitors with physical stores.
If you can find reputable US drop shippers who will sell to Australia and New Zealand you may be better off going down that route. You will have to check the postage costs using this item however, as you may still need to hold a bit of stock to make the overall costs low enough for you.
For some products it can sometimes be cheaper and faster to purchase at wholesale prices from the US through regular wholesale arrangements than drop shipping, so make sure you investigate the total cost and turnaround times with the supplier you choose. There is plenty of information on the Internet about finding reputable drop ship wholesalers in the US, so we would recommend a bit of Googling before you get going.
Drop shipping is a powerful business tool for your ecommerce website business – if you use it carefully.
Support for drop shipping is built in to Ozcart – find out how it could help you.
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