Dropshipping is another term for a drop-ship business characterized by a triangular relationship between online retailer, buyer and wholesaler or manufacturer. Dropshipping is a special type of trade in which the retailer has no direct contact with the goods.
Process of a dropshipping transaction
A dropshipping transaction differs significantly from a normal online purchase. The customer first places his order in an online store and pays the invoice amount to the retailer. However, the retailer does not ship the goods himself, but has them shipped directly by the respective manufacturer or by a wholesaler. The customer is usually unaware of this, because in dropshipping the supplier chooses either neutral packaging or a packaging design from the online retailer. Although the retailer usually does not even get his hands on the goods in this type of trade, he acquires ownership of them.
Cost savings with dropshipping
Using dropshipping has a number of advantages for retailers. They do not have to build up their own warehouse for the products in question. This not only minimizes the amount of capital tied up, but also the sales risk. Although dropshipping continues to produce slow-moving goods that remain in stock for an unnecessarily long time, this risk is borne by the wholesaler or manufacturer. At the same time, the transport costs for transporting the goods between his warehouse and that of his supplier are reduced, because the costs for direct shipping are usually borne by the buyer. To the same extent, the logistical effort for the online retailer is reduced, as he does not have to assemble, pack and ship the orders himself. This saves on personnel costs and packaging materials.
Dropshipping: Other advantages
The retailer can work with his money in dropshipping. As a rule, he receives immediate payment for the value of the goods from the customer, since prompt shipment is desired. At the same time, he can take advantage of longer payment terms with the supplier. Dropshipping allows online retailers to easily offer a huge assortment of goods even when space is limited, without having to take any risks themselves.
Risks of dropshipping
The risks of dropshipping relate in particular to the reliability of the dropshipping partner. If there are problems there with defective packaging, incorrect compilation of the order or lack of delivery reliability, the retailer can only control this to a limited extent or not at all. However, since the shipment is made in his name, difficulties always fall back on him. In the case of dropshipping, the retailer must always deal with complaints or defective shipments himself and, if necessary, contact his wholesaler or manufacturer.
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