Drop-shipping is changing the game of retail. If you’re considering starting a drop-shipping business, read on to learn what it involves and our picks for the best drop-shippers on the market.
What is drop-shipping?
Drop-shipping is a unique supply chain model in which products ordered from a merchant ship from a third-party supplier (i.e., the “drop-shipper”) to the consumer.
The merchant doesn’t have to stock or handle the products at his store. The order flow is as follows:
1. The customer places and pays for an order with the merchant.
2. The supplier receives the order, and the merchant pays the supplier for it.
3. The supplier ships the order to the customer.
What are the benefits of drop-shipping?
A drop-shipping business model offers many perks over a traditional retail model. Hence, the advantages of this model are:
- Eliminates warehousing costs: Merchants avoid the initial and ongoing costs of investing in a warehouse where regular retailers would house their product stock.
- Reduces up-front and ongoing inventory costs: Retailers that go through the traditional distribution channels must buy an initial stock and then replenish their inventory to keep up with demand. Merchants procure products on a rolling basis and don’t have to pre-purchase inventory either at the time of a business launches or afterward.
- Prevents understock and overstock: Merchants only buy products that a customer has paid for, so issues of understock and overstock are not a concern.
- Avoids return and shipping hassles: Merchants don’t have to deal with customer returns or shipments of inventory from a supplier because the supplier controls these aspects of the supply chain.
Who can use drop-shipping?
Any entrepreneur can get into the business of drop-shipping if they have the following:
- Product: Strive to sell small, lightweight products with year-round appeal.
- Sales tax permit: If you operate in a state that imposes a sales tax (most do), you’ll need to get a sales tax permit to charge customers sales tax.
- Supplier: Reliability, affordability and drop-shipping experience is vital whether your supplier is a wholesaler or a manufacturer.
- Sales platform: Amazon, eBay and Etsy are well-known marketplaces that double as sales platforms through which you can conduct your drop-shipping business. You can also develop a business website with an online shop for further customization.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.