Drop shipping is a method of retail sales that allows the retailer to sell items without having to physically hold any inventory.
The retailer has an agreement with either a manufacturer, wholesaler or distributor to have items drop-shipped directly to their clients.
Here’s a simple example transaction to illustrate how it works.
1) Bob is a retailer, he sells painting supplies. 2) Acme Painting Supplies, Inc. agrees to drop-ship items directly to Bob’s clients. 3) Bob lists some items for sale. 4) Jane buys a paintbrush from Bob for $20.00. 5) Bob, turns around and buys the paint brush from Acme Painting Supplies, Inc. for $17.00. 6) Acme Painting Supplies, Inc. ships the paintbrush directly to Jane. 7) Bob made a profit of $3 without having to buy and hold any inventory or having to ship any items.
Here’s a diagram showing visually what a transaction looks like: