What is Drop Shipping? How does it benefit sites like Amazon?

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Learning new business model is exciting, because often new ways comes with a better workflow, lesser cost and increased growth potential. Imagine selling your stuff in time when Ebay was not there? Scary isn’t it? It was nice about Ebay to make inroads in the Online Auctions that helped a lot of us (including Ebay of course). The same goes for Amazon, as a leading Internet Retailer.

Retailers like Amazon could not possibly stuff the inventory they sell online. What they do instead is remove one line item in their business model and gets rid of their inventory altogether.

Traditional Shipping:

1. Retailer purchase items from Wholesaler
2. Store the inventory
3. Updates list of items available
4. Sell and delivers the products

Drop Shipping:

1. Tie-ups with multiple wholesalers and aggregates a huge list of product available
2. Sells the products
3. Passes the order details to Wholesaler who ships it along with the retailer’s label etc.

Ex: Imaging you buying a Laptop for $800 plus $30 shipping from Amazon. So when you make the payment, Amazon might contact say BlueDart or FedEx or someone with whom it have the tie-up and transfer the order request. Now it is the job of the wholesaler to deliver the package to you as if it was delivered by Amazon

Advantages to Retailers:

1. No inventory cost (makes a huge difference)
2. No shipping cost and hassles
3. Buy at wholesale price, sell at retail price
4. Easier to maintain a huge list
5. Less risky
6. Less working capital required. (read Negative Working Capital)

Dis-Advantages to Retailers:

1. No entry barriers means constant new entrants
2. Works only for Online / Catalog type items
3. Success to the business depends on the margin you have with the wholesaler

(Negative Working Capital: Working capital is a measure of a company’s efficiency. It basically is a measure of its financial health. A business model where the customer pays first, even before the company spend in acquiring the product, the Working Capital is negative. This model was first popularized by Dell)

As you see, this business model is better than the traditional model. It lets retailers focus on marketing and offloads them with storage and delivery tasks. However, the success of such a business model lies on the following factors:

1. Availability of wholesaler for the products
2. Cracking good deals with wholesaler
3. Performance of the wholesaler with delivery (timely delivery and packaging)
4. Real time tracking service availability
5. Bearing cost for DOA (Damage on Arrival) goods

Drop shipping business model have gain a lot of popularity because of its low entry barriers and better margins. Amazon, Newegg, PriceGrabber are good examples.

Have a nice Day..!!

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