What is drop shipping?

Nowadays marketplaces and drop shipping are fast becoming buzzwords, made famous by the likes of Amazon and Ali Baba, but what is an online marketplace? and what is drop shipping?

In the physical world a marketplace is somewhere multiple vendors and/or suppliers trade together in a common space, offering greater choice and availability of products to customers in an “All under one roof” type of a setup.

In the olden days these multi vendor trading places where known as bazaars however their more modern counterparts today are known as Malls, where many vendors run their own shops under their own brands in a shared space, that provides the infrastructure and footfall.

A bazaar is a permanently enclosed marketplace or street where goods and services are exchanged or sold. The term originates from the Persian word bāzār.

Other types of physical marketplaces are large departmental stores such as Walmart, Macy’s, Harrods or Selfridges which sell multiple brands under their own umbrella brand; as an example a customer would buy a branded Nike product from Macy’s.

Online marketplaces are similar in nature to these department stores which create a unified customer experience using their own brand, such as Amazon , Alibaba, AliExpress, Etsy or Farfetch.

Traditionally physical bricks and mortar department stores and online stores “stock” the products they sell, meaning they buy and store the products in advance of selling them.

Online marketplaces however transfer customer orders to one or multiple of their suppliers or vendors to fulfil, on demand. This vendor managed shipping of products is known as drop shipping.

Meaning marketplace operators manage customers and orders whilst their vendors/suppliers take care of the warehousing and shipping of the products to the customers of the marketplace.

Drop shipping is a supply chain management method in which the retailer does not keep goods in stock but instead transfers the customer orders and shipment details to either the manufacturer, another retailer, or a wholesaler, who then ships the goods directly to the customer. Wikipedia

The major benefit of an online marketplace model to the operator, i.e. the one who sells the products to the end customers, is that he/she owns the customers but more importantly doesn’t hold any inventory or stock – massively reducing operational costs associated to warehousing and logistics.

The last point here is key to understanding how marketplaces that drop ship operate and what benefits they promise, as some of the largest costs in running an online store are attributed to warehousing and logistics i.e. storage and management of a large number of products, shipping them to customers and managing refunds and returns.

The logistics overhead is a limiting factor for both small and large online stores as it inhibits them offering larger ranges of products and hence choice to their end customers, as the cost of logistics operations can be exponential over time.

Drop shipping as a business model is a game changer as it allows online stores to offset the cost of warehousing and logistics to their vendors, suppliers or manufacturers.

So how do you get started?

With technology moving at pace the ability to connect a marketplace to its vendors is becoming easier by the day. Converting your existing online store to a marketplace can be done quite painlessly today and there are a good few multi-vendor management platforms out there, including our very own www.marketcube.io; check it out.

Watch out for the next article on setting up a multi-vendor marketplace and dealing with challenges linked to commission management, shipping, returns and taxes.