Dropshipping
Dropshipping lets retailers sell products without holding inventory. The manufacturer or wholesaler ships directly to the consumer.
Definition
The retailer never physically stocks the goods; instead, the manufacturer or wholesaler holds inventory and ships directly to the consumer once an order comes in. The retailer's role is limited to running the storefront, accepting the order, and handling billing. As a consumer, it's often impossible to tell whether an order was fulfilled via dropshipping: there's no mandatory disclosure requirement. The model is also referred to as direct trade, drop shipment, or direct shipping.
How dropshipping works
- The consumer places an order in the retailer's online shop
- The retailer forwards the order details to the manufacturer or wholesaler
- The manufacturer or wholesaler picks, packs, and ships the item directly to the consumer
Dropshipping vs. traditional retail fulfillment
In traditional retail, the seller carries inventory risk. They buy stock upfront and are responsible for storing and shipping it. In dropshipping, that risk shifts to the manufacturer or wholesaler, while the retailer trades a lower margin for lower upfront investment and no warehousing cost. This makes dropshipping attractive for testing new products or entering a market with minimal capital, but it comes at the cost of control over stock levels, packaging, and shipping speed.
Dropshipping in a hybrid model
Most established retailers don’t rely on dropshipping alone. They use it to extend their assortment alongside their own stock, so a single order can include items from their own locations and from a supplier. To make this work, supplier stock needs to be visible next to the retailer’s own inventory and each order line has to be routed to the right location automatically.
Advantages of dropshipping
- Low barrier to entry: no need to purchase inventory upfront or manage a warehouse
- Easy to test new products: retailers can list items without committing capital to stock
- Competitive pricing for consumers: lower overhead can translate into lower prices
Disadvantages of dropshipping
- Thin margins: retailers typically earn less per sale than in traditional retail, since the supplier controls cost and fulfillment
- Limited control over consumer experience: delivery times, packaging, and stock accuracy depend entirely on a third party, which means a poor experience often reflects on the retailer even though they didn't handle fulfillment
- Weak visibility into fulfillment status: since the retailer isn't the one shipping, they often have limited real-time insight into where an order actually stands, which makes it harder to answer consumer questions accurately