What is the drop shipping business model?
Drop shipping, or dropshipping, is a business model where an ecommerce store sells products that are kept in stock and shipped by a third-party supplier, not by the store itself. Unlike a typical order fulfillment method, the store does not own or maintain any inventory; instead, it purchases the inventory as needed from the supplier. First, a shopper places an order via the store’s website. Next, the store sends the customer’s order to their third-party supplier for fulfillment. Finally, the supplier prepares and ships the order directly to the customer, without the store ever having handled the product.
Risks and benefits of the dropshipping business model
There are many benefits of dropshipping for an ecommerce business. Because inventory is often a significant startup cost for new businesses, the dropshipping model requires upfront less capital. It also doesn’t require a brick and mortar storefront to operate, or a warehouse and warehouse staff to manage that inventory, making it often a faster and less costly way to launch a business.
An online store should also consider the potential risks of the model. For one, the processes of inventory management, shipping, and returns can all become particularly complex when not managed in-house. Outsourcing inventory, while reducing upfront costs, can create low margins, which can make it difficult to cover other business expenses. If supply chain issues occur, drop shippers have little control over resolving the issues themselves. Finally, despite enabling stores to sell a wide variety of products, the model can present barriers to customization of those products.