What is dropshipping? Definition, examples, benefits

What is dropshipping? Dropshipping is a retail fulfillment model where the store doesn’t actually have any products in stock. That’s right: Unlike a traditional retailer, with dropshipping there is no inventory to purchase, no packages to send, no warehouse to maintain.

Instead, a dropshipper sells products and fulfills orders by buying items from a third party that ships them directly to the customer. Shoppers place orders through the dropshipper’s e-commerce website, which are then routed to the third-party manufacturer, distributor or wholesaler who packs and ships.

Dropshipping’s popularity has exploded in recent years. Forrester Research data from 2019 found that over 40% of retailers were already dropshipping even before the COVID-19 pandemic sent e-commerce sales soaring. And according to a 2020 report, the market is projected to reach $591.77 billion by 2027. Even large online e-commerce businesses such as Stitch Fix are reportedly considering adding elements of dropshipping to their mix.

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In an age when e-commerce has grown more fiercely competitive, dropshipping offers entrepreneurs a tantalizing way to get up and running quickly with less risk and deeply reduced costs, since there’s no investment in inventory. Many use commercial e-commerce platforms to set up their shops and then promote their chosen products widely on Facebook, Instagram and other social media networks.

Not surprisingly, you’ll find dropshipping spelled several different ways:

• Drop shipping
• Drop Shipping
• Drop-shipping

No matter how you choose to spell it, however, there’s no doubt that dropshipping doesn’t require a brick-and-mortar store or a warehouse, nor does it require a full-time commitment. But whether it’s a side hustle or a day job, this fulfillment model can offer retailers the opportunity to build a low-risk, flexible, scalable e-commerce business.

Of course, dropshipping has both benefits and challenges to consider before getting started.

The biggest benefits of dropshipping

1. Dropshipping is a low-cost model. You can sell thousands of items, but you don’t have to spend any money until you receive customer payment. In addition to saving money on purchasing inventory, dropshippers do not need to invest in storage or rent.
2. It’s easy to get started. Since products are handled by outside suppliers, it’s easy to go from zero to 60 with a dropshipping model. No product development, no storing inventory, just selling.
3. Flexible expansion. Expanding an online store is as simple as adding new brands, sizes and color options to the website. Testing new products is also a snap; if one product doesn’t sell, it can be removed and replaced with another.

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Top dropshipping challenges

1. Loss of control. While a dropshipping business doesn’t keep inventory on hand, it’s fully dependent on third-party distributors or wholesalers following through on orders. If not, customers will complain to the business they ordered from.
2. Building a brand and product website can be time-consuming. Dropshipping doesn’t mean selling is a snooze. Creating a successful business means building an attractive online store brand and all the landing pages, product descriptions, taglines and links that make a professional e-commerce site stand out.
3. Competition is fierce. Dropshipping may have low overhead, but competition is also sky-high. Dropshippers don’t have exclusive contracts with suppliers, so it can be tough to keep prices low, while choosing the right product niche can be a challenge.

Smart strategies for dropshipping success

Dropshipping can help retailers compete with the “Amazon effect.” That is, customers have come to expect fast delivery, free or low-cost shipping and endless options—just what they get when they shop at Amazon.

Success with this model isn’t a slam-dunk, however. Store owners should keep these strategies in mind:

• Research deeply to choose the right niches and suppliers.
• Use multiple suppliers to improve success rates and provide a backup plan.
• Choose products carefully to make sure they are available or interchangeable.
• Track data and analytics to see what’s working and what needs tweaking.
• Prioritize customer service and support to keep shoppers coming back.