Dropshipping is a retail fulfilment method where online stores market products but don’t own or maintain an inventory. Instead, customers purchase items from retailers but the manufacturer handles the shipping.
This is the biggest differentiator between this model and a traditional eCommerce business – no need to handle inventory and shipping.
This is huge, as it allows almost anyone with an internet connection, a website (and some marketing skills) to open their own online storefront and get a cut of all sales they generate. In addition, it’s as easy as ever to source products through a third-party supplier as business owners. This ensures that the target audience finds what they’re looking for. While the profit margins aren’t usually as high with drop shipping for store owners, many of them focus on high AOV products to make up for it.
Let’s look at the old model of retail vs. dropshipping.
Let’s consider someone making a purchase at like Argos , one of the biggest electronics retailers in the UK.
A customer walks into like Argos, buys a new smart TV, pays their bill, and walks out. In this case, like Argos has to purchase the TV wholesale from the manufacturer and store it in their retail location so that the buyer can preview it and take it home.
Not only that, but they also have to pay for retail space to keep it on display, hire workers to move the products from storage, hire workers to collect payments at the cash register, hire security guards, and (in the case of ordering from argos.co.uk), ship the TV themselves.
It’s a lot of work and all of the manual labor drastically cuts down on profit margins.
Dropshipping cuts out a lot of these steps.
In this instance, a customer visits an online retailer and purchases a Samsung TV. The dropshipper then sends the customer and order information to Samsung and that’s it.
No workers to hire, no products to display, and no physical retail space.
Have a look at these dropshipping statistics:
In the year 2016-2017, around 23% of all online sales, which amounts to $85.1 billion, were made via dropshipping.
In fact, even Amazon made 34% of its total sales via drop shipping, way back in 2011. The numbers have only increased every year.
And it’s a very lucrative medium of conducting business. A study proves that manufacturers who do business with dropshipping retailers end up earning 18.33% more profit than those who rely on more conventional channels.
Here the exact steps required in a drop shipping purchase:
You (the retailer) market products online.
You attract an online consumer to make a purchase.
You forward the buyer information to the manufacturer, wholesaler, or distributor, along with order details.
The manufacturer ships the items to the customer.
With this model, the customer is not aware that the online store they purchased from did not actually ship the products. This is especially true if the manufacturer adds retailer packing slips in the boxes.
Overall, dropshipping requires a good deal of trust and a long-term partnership between retailers and distributors.