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What is dropshipping?

Drop shipping is a retail method that has grown in popularity as the ecommerce industry has matured. In its most simple state, drop shipping is an agreement between a retailer and a wholesale distributor. The retailer advertises a product, and when a consumer purchases this product, the retailer notifies the wholesaler. The wholesaler then ships the product directly to the consumer, often times in the retailer's packaging. Both parties involved can benefit from the drop ship method. Retailers are able to bypass the costs of maintaining and storing inventory, while wholesale suppliers have the opportunity to boost their sales and increase their reach by associating with well-known sites and companies.

Who benefits form drop shipping?

The drop ship method is ideal for retailers who wish to reduce, minimize or completely avoid carrying inventory. Such retailers pocket the difference between the wholesale price of the product (which they pay to the distributor) and the retail price that they charge. The shipping costs generally go to the wholesalers as well, because they are responsible for the packaging and the delivery of the product. Drop shipping allows retailers to opt out of operating a warehouse and paying additional employees to work there, which in turn allows them to lower their prices and compete with rival retailers. Drop shipping makes larger selections of high-quality, brand name merchandise available to every type of retailer. Drop shipping can also increase the value and the convenience of the online purchases that consumers make. Online retailers in particular may benefit from drop shipping.

Pros and cons of drop shipping

Retailers who are interested in experimenting with the drop ship method must keep several things in mind. The easiest way to make a profit in this type of agreement is to select a small range of products that will sell in bulk, even when they are reasonably marked up from their wholesale price. Research into the demand for a product and its market (in terms of consumers and competing retailers) will go a long way in figuring out how you want to promote and price the merchandise on your site. It is best to limit the items that you offer at first so that you can concentrate your efforts in one area or towards one specific target market. The retailer in a drop shipping agreement holds little to no inventory, so while the potential for lost revenue decreases, your profit margin diminishes as well. In an open market with almost every retailer using the drop ship method, it is extremely difficult to succeed without pricing your products competitively.

Retailers should also research the wholesale suppliers that they are considering doing business with. Low product prices may be associated with an outrageous membership fee, and it's imperative that your wholesaler has a solid reputation in both the quality of its inventory and the reliability of its shipping. Be prepared to file for taxes, handle backordered purchases, and assume the shipping expenses for returned items. Online businesses can grow at a breakneck speed, so you want to be ready to deal with any potential customer service issues and the responsibilities that go along with making a sizeable profit.