Drop Shipping Key Terms

Read these key terms for drop shipping and decide if it's right for your business

Since a lot of business has migrated online, drop shipping has become a popular setup for retail. With drop shipping, a seller places orders from a manufacturer as they come in from customers, rather than stocking up initially. Though this seems like a good way for sellers to avoid the costs and liabilities of inventory, it is not without its hazards. Reading up on some key concepts behind drop shipping can help you figure out if you should try this somewhat new system of commerce.

 

Order fulfillment

This term is used frequently in all kinds of business situations. Order fulfillment is simply the process of filling an order and delivering it to a customer who has ordered. In drop shipping, the order fulfillment process is a cooperative endeavor between the seller and the shipper.
Try: 3LINX is a third party provider that specializes in order fulfillment.

Profit margin

This is another fundamental business term. A profit margin is the difference between expenses and revenues. It is what a seller has "left over" after completing the sale. This is a significant factor to consider in all drop shipping operations.
Try: See Investopedia for an in-depth discussion of profit margins.

Third party providers, or 3PL

A third party is any other business or individual that enters into a transaction between two parties. For instance, drop shipping allows a company to go outside its own inventory to sell from a third party. This is important for the customer because it changes the equation, so companies that use drop shipping have to be sensitive about it and treat it as a real aspect of their business.
Try: Inbound Logistics lists the top 100 third party providers.

E-commerce

Many firms that use drop shipping are engaged in e-commerce, which is simply the phenomenon of selling online; but within that realm, the labels of business to business (B2B), customer to customer (C2C) and business to customer (B2C) differentiate different kinds of transactions and marketing campaigns.
Try: Learn more about B2B, C2C, B2C and the alphabet soup of e-commerce from ECommerce Digest.

Restocking fees

Any time a customer wants a guaranteed product with a return policy, restocking fees enter the equation. Not all returns trigger restocking fees, but each company decides if a fee is appropriate. With drop shipping, it's a little more complicated, because the seller's restocking fees have to cover any costs on the part of the drop shipper.
Try: Find out more about restocking fees from PC Guide.

Charge back

A charge back happens when a customer files a complaint against a company. Charge backs are something to watch out for in drop shipping operations as the process can get complicated.
Try: Find out more about the hazards of charge backs at Taming the Beast.

Copyright © 2011 Business.com, Inc. All Rights Reserved.

---