January 6th, 2008
The distribution of products has been on since the very beginning of the mankind.
How does this distribution work?For instance, there is a manufacturing company A that manufactures some kind of product B. The company is a big one, it has huge manufacturing areas and its products are very well known to the customers. The company A doesn’t really have time to deliver “B” to its customers. It hires a third-party “C” to get this job done.
So, “C” takes “B” from the company’s warehouses and distributes among the customers.
“C” pays the manufacturer’s wholesale price to the manufacturer as it buys the products in great quantities. This is the lowest acceptable price for both the manufacturer and distributor.
“C” sells the products to a store “D” at the price a little higher than the manufacturer’s wholesale price (i.e. if the MWP(manufacturer’s wholesale price) is $1 for an item, the “C” sells it for $1.5 for an item then the benefit of “C” for each item is $0.5). Thus buying products from “A” and selling them to “D” is beneficial for “C”.
What is the reaction of “D” to buying the product “B?” Well, if they buy an item for $1.5, they have to increase the price in order to get revenue. Let’s say “D” increases the price to $2 for an item, thus making $.05 on each item. You see, that even at this stage the price of the product has already increased from $1 (MWP) to $2 (the price of the store “D”).
This is the simplistic and basic scheme of product distribution. Simplified more it looks like that: Manufacturer – distributor – retailer – end user. All the links of the chain get their profit, because the end user wants to spent his money on the product.
Still, there is one more scheme of selling goods. So-called “Drop Shipping.” What is the basic difference between two schemes? Well, drop shipping avoids the stage of distributing products. Thus distributor becomes a retailer at the same time. At the same time, you cannot be called a drop shipper in the proper sense of this word. You are a retailer (though you don’t stock products) and the manufacturing company is the drop shipper proper.
The scheme of drop shipping
1. You open an Internet Store, with a shopping cart and the ability to accept credit cardsYou create an Internet-Shop
2. You find a manufacturer who wants to collaborate with a shop like yours. Moreover, you can find a distributor or a service that will help you find this very manufacturer.
3. You come to agreement with a drop ship supplier
4. You place the products on your Internet shop
5. A user comes to your store and realizes that he/she cannot live without the beautiful rubber bracelet you offer. They order the item. You charge the money from the user’s credit card (let’s say for $30)
6. You order the item from your drop ship supplier
7. The supplier sends the item directly to the customer
8. You pay the supplier $15 plus the shipping fee (let’s say, $2)
9. The user gets the product and you benefit on the difference from the money you charge from the user’s credit card and the money you pay to the drop ship supplier ($30 – $17($15+$2) = $13).
That’s it. That’s the basic scheme of drop shipping. You don’t have to stock items or something like that. Just let the supplier do everything for you.