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Decoding Drop Shipping in the Retail Supply Chain

Video - 2 Min.

Discover how drop shipping works, how it can affect overhead, inventory, customer experience and returns, and how to get started.

With the drop shipping fulfillment model, retailers don’t have to house inventory, worry about shipping costs or even handle logistics.

Watch the video to learn about the benefits, risks and best practices for setting up shop, then read the article below for a more in-depth exploration.

How Drop Shipping Works

Step 1. The customer pays you for the product.
Step 2. You pay the supplier to fulfill the order.
Step 3. The supplier ships the product directly to the customer.

The Benefits of Drop Shipping

Set Up Shop Anywhere

It doesn’t matter how large or small your business is. Even a small online retailer can set up and manage a drop-shipping shop from anywhere in the world as long as they have an internet connection.

Low Barrier of Entry

With this fulfillment model, you don’t have to purchase or manage inventory. The supplier does that for you. That means you don’t have to spend money building out your stock, and you can set up an online shop with hundreds of products for little money down. It also means you have more time to focus on what you do best—selling product.

Manage Less Overhead

Because your supplier will be managing inventory, shipping and logistics, you’ll be able to spend less time and money on your staffing, supplies and space.

Scale Easily

You don’t need a large investment to grow your business. Even if sales peak, this model protects you from overspending on inventory and related costs.

The Risks of Drop Shipping

Customer Satisfaction

Because your supplier will be managing inventory and shipping, you’ll have little control over the customer experience. A strong focus on customer satisfaction will be necessary to prevent lost customers as a result of incorrect orders, poor quality products, delays in shipment and more.


Suppliers and wholesalers can partner and sell the same products to countless retailers, so you’ll also be competing against copycats trying to mimic your product selection. Unique marketing will be the key to helping you stand out from the pack.


Your suppliers will be handling shipping, which means your return policy will have to mirror theirs. Also, some suppliers manage the returns process themselves, which may make it difficult for you to give customers up-to-the-minute updates. Some suppliers will require the business to manage returns, making it necessary to create space for receiving and storing returned goods.

Low Profit Margins

Because you won’t be purchasing merchandise in bulk, you’ll pay higher prices for suppliers’ products. These suppliers may also charge fees for managing their logistics.


For online stores, packaging can be an important part of the customer experience. However, drop shipping offers few options to customize your packaging, which means you may miss out on an important branding opportunity.

Drop Shipping Best Practices

1. Picking the Right Product to Sell

Product selection will determine the success of your business model. Choose products that align with your marketing vision. Consider smaller items that will be cheaper to ship; this can help you improve your profit margins.

2. Working with Suppliers

Be sure to establish relationships with backup suppliers. That way, if your go-to supplier goes out of business or runs out of stock, you’ll have another wholesaler ready to ship. Test out multiple suppliers before committing to one. The best will be organized and efficient, easy to reach and highly knowledgeable.

3. Choosing Shipping Carriers

You should also gain insights on the shipping carriers the suppliers use. Work with your suppliers to select the right shipping partner for you.

4. Setting Up Your Online Store

You can set up your online store on a variety of digital platforms. Look for a web hosting provider with creative tools that will help you make a dynamic, well-organized website for your online store.

5. Dealing with Shipping Costs

With this fulfillment model, shipping costs can rack up quickly. Establishing a flat shipping rate can help save you money in the long run.

6. Managing Returns

To efficiently manage returns, establish a return policy that matches your suppliers’. Ask suppliers about restocking fees, the average turnaround time for returns and what their return process is like. Then create an all-encompassing policy.

Map out your returns process from start to finish. Allow customers to request a return. Ask suppliers what information they’ll need to approve the return, learn who will be handling returns and then have a confirmation email ready to send once the package has been received and you’ve issued a refund.

7. Building the Right Customer Support

Customer support should be your number-one priority and your biggest investment. Create an extensive FAQ page. Offer more customer-support channels—such as email, phone, social media and online chat—and commit to timely responses. That’s the surest way to earn your customers’ love.

In Conclusion

Drop shipping has proven to be an effective strategy for many retailers. Is it the right fit for you? Weigh the risks and benefits before kick-starting your online business.

Working with USPS

Talk to an expert at USPS about the benefits, risks and best practices for leveraging this popular fulfillment model, and explore your options for getting started.

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