Definition
Dropshipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock. Instead, when a store sells a product using the dropshipping model, it purchases the item from a third party and has it shipped directly to the customer. Thus, the merchant never sees or handles the product.
Key Takeaways
- Dropshipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock. Instead, when a store sells a product using the dropshipping model, it purchases the item from a third party and has it shipped directly to the customer.
- This business model has low overhead costs as it does not require the retailer to maintain a physical store or keep goods in stock. Importantly, a dropshipping business can be run from anywhere with an internet connection.
- While dropshipping can significantly reduce operation costs, dropshippers typically have lower control over delivery times and product quality. They also rely heavily on their suppliers to fulfill orders correctly and in a timely manner.
Importance
Dropshipping is a significant concept in finance and e-commerce because it provides a low-risk, low-cost entry point for businesses, particularly start-ups.
It eliminates the need for maintaining an inventory, significantly reducing overhead costs and potential losses from unsold stock.
Instead, businesses can focus on marketing products and customer service, outsourcing storage and shipping to third-party suppliers.
This model also allows business flexibility in offering a wide variety of products without investing in goods upfront.
Thus, dropshipping is vital due to its potential for cost-efficiency and risk management, and its capacity to broaden a company’s range of product offerings.
Explanation
Dropshipping is a business model that offers entrepreneurs a way to start a business with relatively low upfront cost while simultaneously mitigating the level of risk typically associated with inventory handling. The core purpose of dropshipping is to remove the need for a business to maintain a stockpile of goods. Rather than investing heavily in inventory and using significant space for storage, businesses can focus primarily on marketing and customer service, leaving inventory management and item shipment to third-party suppliers.
The business only buys the product from the supplier once an order has been placed by a customer, reducing the financial risk of unsold inventory. Dropshipping is typically used by e-commerce businesses as an accessible entry point into the retail sector, especially for new entrepreneurs or small businesses with limited financial resources. It allows you to offer a broad product range without the need to buy in bulk before sales are made.
In essence, it’s a tripartite arrangement between the customer, the retailer (you), and the supplier. The customer places an order for a product on the retailer’s online store. The retailer then forwards the order and customer details to the supplier, and the supplier ships the product directly to the customer.
The retailer’s profit is the difference between the wholesale and retail price. Therefore, dropshipping can be an effective way to streamline operations, minimise overhead expenditures, and maintain customer satisfaction by ensuring prompt product delivery.
Examples of Dropshipping
Amazon: One of the biggest global marketplace’s, Amazon, is a prime example of dropshipping. Many third-party sellers list their products on Amazon’s platform. When a customer places an order, these sellers directly ship the product to the customers. Amazon functions as a medium, providing a platform for sellers and buyers to conduct business.
Printful: Printful is a dropshipping website which provides printing and delivery services for businesses. They print designs onto t-shirts, mugs, posters, and other related products. When a customer places an order through a business’s online store (powered by Printful), the company prints the design on the chosen product and ships it directly to the customer. The business does not need to manage any inventory.
Zappos: This American online shoe and clothing retailer started as a dropshipping company. They listed shoes from suppliers on their website and when a customer placed an order, the supplier would ship the shoes directly to the customer. This allowed Zappos to offer a wide range of products without having to maintain large inventories.
FAQs on Dropshipping
What is Dropshipping?
Dropshipping is a supply chain management method where a retailer doesn’t keep the goods it sells in stock. Instead, when a retailer sells a product using the dropshipping model, it purchases the item from a third party and has it shipped directly to the customer.
How does Dropshipping work?
Dropshipping works in three easy steps. First, the customer places an order for a product on the retailer’s online store. Then, the retailer manually or automatically forwards the order and customer details to the dropship supplier. The dropship supplier packages and ships the order directly to the customer in the retailer’s name.
What are the benefits of Dropshipping?
Dropshipping has several benefits such as requiring less capital to get started, allowing you to run your business from anywhere, allowing access to a wider product offering, reducing risks and costs of managing inventories, and giving more time to focus on customer service and marketing.
What are the drawbacks of Dropshipping?
Some of the disadvantages of dropshipping include low margins, supplier errors, and inventory issues. Also, because dropshipping is so easy to start, you might face heavy competition, making branding and marketing important for business success.
Is Dropshipping a profitable business?
Yes, Dropshipping can be a profitable business model because you do not have to pay for the inventory up-front and you can start your business with minimal upfront investment. However, like any business, the success of a dropshipping business hinges on your hard work and smart strategies.
Related Entrepreneurship Terms
- E-commerce
- Inventory Management
- Supplier Relationships
- Online Retail
- Fulfillment Strategy
Sources for More Information
- Investopedia: This is a reliable source for understanding financial terms and concepts including dropshipping.
- Entrepreneur: This site offers numerous articles covering different aspects of dropshipping, from starting a dropshipping business to managing it efficiently.
- Shopify: Shopify is not only a platform where you can start a dropshipping business, but also provides resources and articles explaining how dropshipping works.
- Ecommerce Guide: This website provides comprehensive guides on ecommerce topics including dropshipping.
