Definition: An arrangement between a business and the manufacturer or distributor of a product the business wishes to sell in which the manufacturer or distributor--and not the business--ships the product to the business's customers

If you've been interested in starting your own internet business but you've been trying to avoid the hassles of things like developing and producing products, tracking your inventory, setting up warehouse space, and maintaining a confusing shipping/receiving infrastructure, then drop shipping may be your answer. It allows you to sell quality, brand-name products on your website for a hefty profit, while someone else looks after product development and order fulfillment.

Although the process can be a boon to internet entrepreneurs, you should know the advantages and disadvantages to this business model before getting started.

In addition to not having to worry about shipping products yourself, there are a few other advantages to this business model. First, it saves you the cost of building your own inventory. If you're like most people starting a small business, you don't have a ton of extra money lying around, so the last thing you want to do is tie up your cash in inventory that you may or may not be able to sell.

Second, no inventory also means no leftovers. If the product you sell suddenly becomes outdated, obsolete or just plain untrendy, you aren't the one with a room or warehouse full of stock nobody will buy. Many online retailers find themselves having to offer deep discounts--and taking huge losses--on old products just to get them out of their homes or warehouses to make room for more inventory.

Third, you'll be able to add new products to your site almost instantly. Since you don't have to worry about stocking inventory, if you find your customers clamoring for a particular product, it's not unrealistic to expect you could add the item to your site in just a few days.

Have you noticed there are literally hundreds, if not thousands, of sites selling huge mish-mash selections of inexpensive gift items . . . things like plastic gnomes and porcelain figurines? That's because there are a few very large drop shipping companies that import these items and then recruit websites to sell them on their behalf. Unfortunately, this is not the way for you to go if you're getting started with drop shipping. There are already a lot of giant gift sites out there--and way too much competition for you to reasonably expect to be successful at it.

Instead, spend some time researching different kinds of products that you might want to sell. The products you choose should be in demand but not widely available online. It's most likely preferable to target a niche market rather than try to find a product that everyone wants to buy.

Whenever possible, you'll want to set up drop shipping arrangements directly with the manufacturers of the products you want to sell. The fewer middlemen you have to go through, the bigger your profits will be.

If, after contacting the manufacturer, they agree to drop ship for you, great! You can be fairly confident they'll offer you a competitive price. If they don't agree to drop ship for you, you'll have to look for another alternative. This usually means tracking down a distributor. A distributor is simply a company that maintains a large inventory of another company's products and distributes those products to smaller companies. The best way to locate a distributor is to simply ask the manufacturer of the product to recommend one. Another great way to find a distributor for the type of product you wish to sell is by looking through related trade magazines. You'll frequently find manufacturers and distributors advertised in the backs of these publications.

Most companies you contact will be more than happy to speak with you--after all, you're going to be selling their products for them. When you call, simply ask to speak with someone about becoming a vendor for their products. Once the switchboard puts you through to the right person, they'll be able to answer any questions you have, including:

1. What's the wholesale price they can offer you on their products? You'll need to make sure the wholesale price they offer is low enough that you'll be able to generate a good profit based on what you'll be able to sell their products for.

2. Do they charge a handling fee for drop shipping? If so, how much? Most companies that drop ship will simply add the cost of UPS or FedEx shipping onto your wholesale price, but some will also charge you a handling fee (generally between $1 and $5). This is to offset their cost of picking, packing, and processing the order for you.

3. How do they ship their products? Almost every company that drop ships products will use a major nationwide delivery service like UPS or FedEx. Ask them to include tracking numbers with the order confirmations they send. This will save you many potential problems when customers ask, "Where is my order?"

4. How do they bill you? Most drop shippers will bill your credit card the wholesale price of the product plus shipping and handling as soon as they receive an order from you. With others, you may be able to set up a monthly billing cycle where you submit payment for all orders at the end of each month.

5. How do they deal with product returns? Be sure to find out what their policy is regarding returns. Most reputable companies will offer some kind of guarantee or warranty on their products and will deal with returns for you. This way, if a customer contacts you with a return, you can simply tell them the manufacturer will be happy to speak with them directly. If your manufacturer doesn't accept returns, look out! You'll be the one stuck replacing defective merchandise for your customers.