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What Is Drop Shipping: Meaning & Definition

By
Joshua Weatherwax
Table of Contents

More and more entrepreneurs are choosing dropshipping when they learn how to start an eCommerce business and start coming up with dropshipping business ideas.

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So, what is dropshipping and why are so many types of eCommerce businesses using the dropshipping model?

Keep reading to learn what dropshipping is, how it impacts businesses, how to dropship, and how to start a dropshipping business.

Dropshipping Meaning & Dropshipping Definition

Dropshipping is an order fulfillment method where products are shipped directly from the supplier to the customer without the seller ever handling them. This model eliminates the need for warehousing, reduces costs, and lets new businesses grow more quickly.

What dropshipping means to businesses is an opportunity to increase sales without increasing associated overhead expenses and inventory carrying cost. This is key when looking at how to make money dropshipping.

What Is Dropshipping Business?

A dropshipping business is a business that sells products that it doesn't own or stock. They essentially operate a storefront that lists and sells products on behalf of another business, much like consignment inventory. However, unlike consignment, these products are never touched by the reseller.

Dropshipping businesses only pay for products from their suppliers at the time a customer places a purchase. This keeps inventory costs low and these businesses don't have to deal with issues like shrinkage or the bullwhip effect in supply chain.

Benefits of Dropshipping

So, is dropshipping worth it? Well, there are many advantages of the dropshipping business model, both for the business and the customer. These benefits offer many incentives for many business owners to start new ventures using the model.

Benefits of Dropshipping

Here are the biggest benefits of dropshipping to include in your drop shipping business plan:

Low Startup Costs

The biggest benefit of dropshipping, and the reason so many startups choose the model, is the low cost to start. With dropshipping, you don't have to invest in warehousing or inventory (see what is inventory), and maybe even eliminate some warehouse jobs (see what is warehouse job) and create some dropshipping jobs. Instead, you can focus all of your effort and money on setting up a headless eCommerce storefront or using an online marketplace and start sourcing products to sell. This low cost also means low risk, so it's easier than ever to work on starting an eCommerce business.

Wide Product Selection

Since you won't be investing in any inventory, you can seek out and sell a much wider selection of products. This makes the model ideal for most eCommerce business ideas. It also allows you to build a storefront with ample opportunity for cross selling and upselling a broad range of the best dropshipping products further increasing your revenue. All you have to do is learn how to find vendors and get some wholesale items to sell.

Minimal Overhead Cost

Dropshipping businesses aren't just cheap to start, they're cheap to operate. Overhead expenses don't grow as quickly as they do in the traditional model since you don't have to deal with increasing costs of utilities and staff. Many successful dropshipping businesses are run as home-based stores well beyond the first few months. If you can afford a laptop, web hosting, dropshipping ads, and a few other costs you can sell baked goods online, selling food online, sell clothes, and more.

Easy to Scale

Traditional business growth is limited by their ability to handle order fulfillment (see order fulfillment meaning) and buy and store inventory. So, if you don't have to do any of those, it stands to reason that growth is much easier. Dropshipping businesses can invest all of their time and money into eCommerce marketing to increase eCommerce sales without many limitations. As long as their supplier has product and the ability to fill large orders, growth is nearly unlimited.

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Disadvantages of Dropshipping

Unfortunately, dropshipping isn't all upside. There are a few disadvantages to the dropshipping model that make it not feasible for all businesses and a few dropshipping beginner mistakes to be wary of. Remember, you won’t have your own safety stock available in case something goes wrong.

Here are the biggest disadvantages of dropshipping:

No Control Over Inventory

The biggest drawback of not owning the inventory you sell is that you have no ability to enforce inventory control and inventory management measures. Manufacturing problems, increased lead time, poor decoupling inventory planning, and more are in the hands of your suppliers. This means your ability to meet demand relies entirely upon the quality and skill of your vendors, not your own demand planning or inventory forecasting. Make sure to do thorough research and maintain a strong relationship with yours to stay on top of issues as they happen.

Low Profit Margins

Though costs are low in the dropshipping model, so are dropshipping profit margin (see markup vs margin). This is particularly true if you operate in a highly competitive and congested dropshipping niches like clothing. Most dropshippers also choose to sell lower quality products in large quantities, further exacerbating the issue. This has even led some to ask "is dropshipping dead?" and "is dropshipping legal"?Try to focus on providing superior service, invest in a quality dropshipping website builder, and find a niche with more room for growth like DTC food. You can also look into drop surfing or reverse dropshipping to maximize the amount of money you can make off of your offerings.

Limited Branding Opportunities

Since the products you sell aren't your own, you have very limited opportunity to offer customization or branding on the eCommerce packaging. Most products will be picked, packed, and shipped by the supplier with their own branding. Work with yours to see if they'll be willing to a branded packing slip in the shipments to maintain some form of branding for you. You can also look into kitting to get your company logo put on packing materials, but this will greatly increase your costs. You should also look at other dropshipping websites to see how they overcome this hurdle and check out the differences between affiliate marketing vs dropshipping to get more insight into the model.

Complex Shipping

Very few dropshippers get all of their products through a single supplier. This means your customers' orders will need to be fulfilled by multiple suppliers in separate shipments. This complicates and increases shipping costs since bundling isn't available. You need to know how to find dropshipping suppliers that are reliable. You also can't pass these costs along to your customers, or you'll likely scare them away when they see such high costs. Invest in the right eCommerce software for automated dropshipping to automatically calculate shipping costs, pass a certain amount on to the customer, and track individual shipments for your customer service for dropshipping team.

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Stop, Drop, and Sell

Dropshipping is a unique business model with low costs and great growth potential. It's an easy entry-point for many entrepreneurs and requires little experience or capital to get running. For more information, check out our free drop shipping for dummies guide or try reading dropshipping books and taking dropshipping courses.

Now that you know about dropshipping, you can decide if it's the right model for you or if you should look into another model like cross docking or the subscription box business model, just make sure to find the right subscription box suppliers.