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Dropship and Automated Dropshipping Explained

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In the traditional marketplace, a business sells the products that it has in stock. For this business, the buyer comes into the shop, places an order for a product, and upon payment, the buyer is given his/her product, hence concluding a transaction.

This transaction can be divided into 3 stages: transaction opening (TO), order fulfillment, and transaction closing.

To open the transaction (the TO), the buyer chooses a product and then places an order to buy it, usually by picking it up from the shelf and carrying it to the counter so as to signal to the seller that (s)he [buyer] wants to purchase the product.

Next, the seller chooses whether to sell the product or not. If the seller decides to sell the product, she/he [seller] accepts payment of an agreed amount from the buyer and then gives the product to the buyer, and this is called order fulfillment as the buyer can now walk out of the shop with his/her legally acquired product.

The process of transferring ownership of the product to the buyer by providing proof of purchase entails the process of transaction closing.

The advent of the internet and electronic commerce (e-commerce) platforms have revolutionized the way transactions are done, with the greatest impact being on order fulfillment.

This is because a new form of order fulfillment has been introduced, the dropship fulfillment model.

This model is fundamentally different from the traditional order fulfillment, and it is best served by an e-commerce platform rather than a brick-and-mortar business.

Dropship Fulfilment Model

This model can be said to have existed in a rudimentary form before the advent of e-commerce, but it is e-commerce that popularized it.

To understand it, it is important to discuss a key demerit of the traditional (or conventional) order fulfillment because dropshipping was created to overcome this demerit.

This demerit is running out of stock, or lack of stock due to the unavailability of capital. Another related demerit is the high warehousing/storage charges for storing stocks, and dropshipping greatly eliminates these charges.

So, what exactly is dropshipping? Simple answer – dropshipping is the act of conducting/executing a dropship. This leads to an obvious question: what is a dropship?

Dropship is a method of supply chain management that supports order fulfillment for a business that has sold items that it does not have in stock but can purchase these items from another business that stocks them, and then ship the items directly to its customers.

It, therefore, permeates both business-to-business (B2B) and business-to-customer (B2C) domains.

Normally, dropshipping is considered as part of the retail business because the business using dropshipping – the drop-shipper – takes the order of products from the end consumer, and then sources the items from a wholesaler or manufacturer/producer.

In the marketing channel, dropshipping usually falls under the two-level channel where the retailer sells a good to the consumer.

Evidently, the dropshipper (also called, retailer, seller, or dropship merchant) does not stock the products but (s)he can sell them as if (s)he already has them stocked.

This is quite useful for online shops which market their products in their webstore. This is because such an online business can list a wide range of items on its products page without necessarily having these products in its stock.

Most importantly, it minimizes the chance of selling out-of-stock products in the online store, which in turn builds the reputation of the business. The end result is the growth of its customer base, as well as accretion of loyal (repeat) customers.

As mentioned earlier, the advent of e-commerce has popularized dropshipping. However, dropshipping itself is facilitated by e-procurement which makes order fulfillment easy and straightforward.

E-procurement (or electronic procurement) is a B2B or B2C form of purchase and sale transaction that is done through e-commerce platforms that are supported by a payment processing framework.

It is e-procurement that allows the dropshipping transaction to be initiated, processed, and completed.

Dropshipping Transaction

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The consumer places an order for a product with the dropship merchant. The business that receives the business orders from this (dropship) merchant is described as the fulfillment entity, and this form of product ordering is called back-ordering.

The fulfillment entity, which can be described generically as the supplier, can be a manufacturer, wholesaler, or another retail business (that stocks the products), or even a fulfillment house.

A fulfillment house is a specialist business that stocks products in its warehouse and offers packaging and shipping services to other businesses, for example (e.g), drop-shipping companies.

If these warehousing and packaging services are only offered to the company that owns the warehouse, then the fulfillment house is called a fulfillment center, and rarely do drop-shippers use a fulfillment center.

Relatedly, back-ordering is a hands-off process that allows the dropshipper to use a third-party supplier to fulfill the order.

Automated Dropshipping System

ecommerce dropshipping

This aforementioned transaction can be done online using an e-commerce platform that integrates e-procurement with inventory management and back-ordering.

If this e-commerce platform is designed for use exclusively by dropshipping merchants, then it is called an automated dropshipping system. Two such systems are Inventory Source and Wholesale2B.

It is evident that in dropshipping, the orders from the customer are transferred to the wholesaler or manufacturer. Even so, are the shipment details of the customer also transferred to the wholesaler​?

The answer is yes. Likewise, are the wholesaler details transferred to the customer through the package invoice? This depends on whether the seller has identified his/her business as a dropshipping business or not.

Usually, most dropship merchants don’t publicly acknowledge that they use the dropship fulfillment model, and as such ask the wholesaler or manufacturer to ship the products to their customers after they have been packaged and labeled to appear as if they are coming from the drop-shipping business.

This form of dropshipping where the dropship merchant/retailer does not disclose to the public that (s)he operates a dropshipping business, nor reveal the source of goods, as well as instruct the fulfillment entity to label the package as coming from the retailer, is called private label shipping.

If neither wholesaler nor the retailer address is written on the label, then this form of dropshipping is called blind shipping.

Normally, in private label shipping, the fulfillment entity attaches a customized packing slip and receipt to the package, and these slip and receipt feature the logo, name, and contact information of the retailer.

However, in some cases, the dropship merchant allows the wholesaler to ship the products with labels that reveal that the products were packaged and shipped by the wholesaler. This usually happens if the dropshipper contacts a fulfillment center for order fulfillment.

By deduction, the dropship merchant (henceforth called merchant) only serves to market and sell the product, and (s)he earns a profit if the sales price agreed with the customer exceeds the purchase price of the product and related shipping and packaging costs.

This also means that the merchant cannot vouch for the product quality, nor does (s)he exercises control over product storage, inventory management, and shipping plans.

The sale price that the dropship merchant offers the customer is called the markup price.

The automated dropshipping system allows the dropship merchant to operate a retail webstore, and this makes the merchant a virtual retailer, and his dropshipping business can be considered as virtual retailing.

A good thing about virtual retailing is that it can be done at home as an internet-based business. On the downside, this exposes the entire virtual retailing niche to scams related to product sourcing and shipping.

These scams are collectively designated dropshipping scams.

Dropshipping Scams

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Dropshipping scams feature prominently in internet-based, work-from-home business scams. The common form of scam is where the victim is given a list of (order) fulfillment entities for a fee, and then informed to place orders with these entities.

However, these entities are not really wholesalers or manufacturers but other dropshipping or retail businesses that sell items at premium prices which leaves the victim with a very narrow margin of profit. This can be described as double dropshipping.

To make things worse, these fulfillment entities require the victim to pay a flat fee for using their services, and this usually causes the victim to suffer a loss.

Another form of dropshipping scam is where the consumer receives a product that was not advertised, e.g (s)he receives a second-hand product for the price of a new product or receives a faulty product.

A related dropshipping scam is where the dropshipping retailer sells a budget-quality item for the price of a premium-quality item. This can cause the customer to return the product and initiate a chargeback.

The worst form of dropshipping scam is where the consumer does not receive the product at all, and this leaves the retailer liable to legal punishment for false advertisement and acquisition of money using false pretenses.

If the retailer is not part of the scam, then the fulfillment entity is to blame, and it is for this reason that the retailer is advised to use reputable fulfillment entities for order fulfillment.

One of the goals of this series of review is to appraise reputable providers of dropshipping services to virtual retailers so as to direct readers to reliable, legal, and market-experienced providers of automated dropshipping systems.

Chargeback

At times, the customer can return the fulfilled order to the retailer after requesting for a chargeback, and this leaves the retailer at a loss because (s)he has to cover the processing fee for the return, in addition to remaining with the rejected product.

Featured Image: Reycenas, CC BY-SA 4.0, via Wikimedia Commons

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