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how drop shipping works

How drop shipping works? Is drop shipping the best way to bootstrap an e-commerce company?

by Matthew Carroll

how drop shipping works

 

Everyone here at Brightpearl talks with customers and new prospects dozens of times per week about drop shipping, but we definitely found that there really wasn’t a greatoverview of the process to give growing retailers a detailed analysis of this process as part of a lower-risk vertical expansion strategy. how drop shipping works? we will try to find the answer from the below discussion:

What is drop shipping?

Let’s start out by getting a good general definition of drop shipping to make sure that we are all on the same page:

Drop shipping is an inventory management technique that enables a retailer to sell a product for which the retailer is not currently holding in inventory.  The retailer is able to do this because they have have setup a drop ship arrangement that allows the retailer from the product manufacturer’s inventory of Available To Sell* products.
There are three primary drivers for employing this methodology are:

  • Positive Cash Flow:  Once the drop shipping agreement has been arranged, the retailer is in a prime spot – they have product to sell, but they are not financiallyobligated to purchase any of it.  When a customer places an order, the retailer receives the cash for the transaction and then enters into a financially binding relationship with the brand / manufacturer / supplier for transferring ownership rights of the product.
  • Reduces Inventory Risk:  We all remember how scary and painful  the Great Recession was and it actually becomes one of the most significant driving forces to widespread adoption of this technique.  Drop shipping provides the cash flow flexibility to the retailer (only paying for what you sell) without the shackles of inventory from pre-packs or case-packs (pre-defined assortments that most of the time sticks the retailer with odd sizes or odd colors).  Additionally, the manufacturer retains ownership of the product, so it reduces much of the apprehension and risk from consigning goods.
  • Reduces Transportation Expenses:  The theory of drop shipping is brilliant because it cuts out the retailer’s Inbound Shipping (the amortized cost for the shipment from the brand’s / manufacturer’s store to the retail shop) – this figure is about 2.75% to 4.25% of Retail Price ( for a $100 Retail Price item).
[*  Available to Sell is a report of the available inventory from the brand / manufacturer that is currently not allocated to orders (i.e. Qty. of Medium Green T-Shirts – Sum of allfuture orders with a Medium Green Shirt Currently remaining to be sold = Medium Green T-Shirts Available to Sell.  Basically, the report tells the retailer how many units are able to purchased by the retailer – not necessarily how many are on hand at the warehouse.  This is an important difference because, as you’ll see, sometimes drop shipping can get a little messy – so that distinction could potentially be of use to grease the wheels to make your customer happy ]

Three primary implementations of drop shopping?

For purposes of explaining the different the different drop shipping models, we are going to define just a couple of terms to make sure that we are all on the same page:

Customer – the person who has engaged in the transaction with the retailer

FashionSite.com – the retailer who is selling the product that the customer has purchased

BrandXYZ – the brand / manufacturer / supplier of the product to our retailer, [Read more…]

dropshipping

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