Dropshipping is a method of business logistics which reduces stock movement and initial outlay.
The traditional business model for retail and wholesale is to first acquire some stock, then sell it. Aside from whatever development and manufacturing costs apply with a new product, the potential profits for an item decrease with every day it is stored in a warehouse.
Let’s say the business trades in mugs. The traditional model would be to obtain a few thousand mugs, either from an overseas factory or from a local supplier or manufacturer. 2000 mugs at £1 each, to sell for £4. You would have to pay for the storage costs, fulfilment and outbound delivery.
There are some companies that might fulfil your order directly to your customer without the need for you to handle it. This is dropshipping. You pass your order onto the mug dropshipper and they despatch the order with whatever labelling and packaging you have agreed upon.
The advantage to using a dropshipping service is that you save time and money on buying and storing the stock in the first place. The business could feasibly be started with just a retail website and enough promotion to get sales.
The downside with this is that the margins are lower. Your £1 unit price would be more like £2.50, because the dropship company does pretty much all the work. All you have to do is obtain the sale and take payment.
The example above is a very basic explanation of the dropshipping method, and in reality there are several variations to this in operation today. One popular one is t shirts, where the retailer/designer has lots of styles on the website and just passes the artwork and the garment information to the dropshipper when they get an order.
These types of direct dispatch retailing need a high volume of orders to become lucrative, but there are many businesses on both sides of the equation that rely on this model. Another option is to buy the components for the products then ask a fulfilment house to create each product to order. Using dropshipping as a business model enables the retailer to handle the user experience, whilst the manufacturing and logistics experts do what they do best.