What is Dropshipping?
Dropshipping is an order fulfillment method where a store doesn’t keep the products it sells in stock. Instead, the seller purchases inventory as needed from a third party – usually a wholesaler or manufacturer – to fulfill orders.
What is dropshipping?
Dropshipping is a method of retail fulfillment where a store does not keep the products sold in its inventory. Instead, when a store sells a specific product, there’s no inventory, but they buy the product from a 3rd party and ship it directly to the customer. As a result, those salespeople never see the product or handle it.
The biggest difference between Dropshipping and other retail models is that merchants sell without a warehouse or without inventory. Instead, these merchants buy inventory as needed from a 3rd party – usually wholesalers or manufacturers – to fulfill their orders
How does dropshipping work?
Two of the most common approaches for dropshipping on Shopify or Amazone are to seek out a supplier located in North America (or anywhere else in the world) using supplier databases, or to seek out a Shopify app that connects you and your store to thousands of suppliers.
Drop shipping is a supply chain management method. (If you recently opened a retail business or an online store, a supply chain is a network of suppliers, materials, manufacturers, and retailers involved in the creation and distribution of a product, from production to customer delivery.)
These are the parties involved in drop shipping:
- Manufacturers create the products. They usually don’t sell to the public; they sell in bulk to wholesalers and retailers instead.
- Wholesalers buy products from manufacturers, and then mark them up before selling them to retailers. Wholesalers usually stock products from a variety of manufacturers.
- Retailers sell products directly to the public, at a markup.
And here’s how it works:
- The customer places an order with your business, the retailer.
- You alert the drop shipping partner — either the manufacturer or the wholesaler — who packages and ships the product to the customer.
- The drop shipping partner charges you, the retailer, for the service, and you charge the customer.
- Generally, the shorter the supply chain, the greater your profits will be because there are fewer parties taking a cut. A short supply chain is one where you deal directly with the manufacturer.
The benefits of a drop shipping business
Drop shipping is a retail inventory management method that can help your business decrease risk, but there are other benefits as well. This order fulfillment method is popular for ecommerce businesses or other companies looking to mitigate inventory risk and increase business flexibility.
- It lowers the costs of starting and maintaining a business: Drop shipping drastically reduces the initial costs of starting an online business since you don’t have to invest in building inventory upfront, which can be cost prohibitive for new and small businesses. And because you don’t have to deal with purchasing inventory (or managing storage for that inventory), your overhead remains relatively low. It also means you aren’t stuck with products that won’t sell, and you won’t have to mark down those items and take a loss.
- Your location can be flexible: Drop shipping businesses can also be more nimble than businesses with more traditional structures. Because you don’t have physical inventory, you can basically run your store from anywhere you find an internet connection.
- You can offer customers a wider selection of products: Since you don’t have to invest in building your own inventory, you can stay on top of trends and quickly add new products to your site. You can also quickly switch up your offerings without first having to order new items or clear out backstock.
- You don’t have to manage inventory: A lack of inventory also means that you won’t have to manage it. Managing inventory can be complicated and time consuming (although inventory management software can make the job much easier). Not having to watch stock, reorder it, and process it means that you and your employees have more bandwidth to work on other aspects of your business to help it grow.
The cons of Dropshipping
- It’s hard to find a good distributor who provides you with a stable source of goods at a reasonable price.
- Shipping problems will be very difficult when you have too many suppliers.
Defective products from suppliers: You will not be able to control product quality. Think about it if customers are not satisfied with the product, surely your website’s reputation will be significantly affected.
Low Profits: Low margins are the biggest downside to a highly competitive dropshipping business environment. Because it is so easy to get started and the investment and operating costs are minimal, many merchants will set up a store and sell bargain items in an effort to increase sales. They invested very little to start the business so they could afford to operate with low turnover.