What is drop-shipping?
Drop-shipping is a fulfillment model where retailers sell products without holding inventory. Suppliers ship orders to customers on the retailers behalf.
The drop-shipping process works as follows:
A customer buys a product from a retailer’s website
The retailer sends the order to the drop-shipping supplier
The supplier ships the item directly to the customer
The retailer handles any questions, complaints or returns
Drop-shipping vs traditional retail fulfillment
Drop-shipping and traditional retail differ fundamentally in inventory ownership and fulfillment control.
The traditional retail model buys inventory upfront, stores it in company warehouses and controls fulfillment quality. Drop-shipping outsources inventory management and fulfillment to suppliers, so retailers never touch the products.
Traditional retail achieves economies of scale and margin control. Drop-shipping achieves capital efficiency and speed to market. Drop-shipping works best for product categories with predictable supplier reliability, while traditional fulfillment works best where quality control and speed matter more than capital efficiency.
What are the benefits of drop-shipping?
You can start a retail business with minimal overhead, because you do not pay for warehouse space and inventory. You only pay suppliers when customers place an order, so it is very low risk.
You can also scale rapidly as your business grows by working with additional suppliers.
What are the challenges of drop-shipping?
Drop-shipping has many benefits, but it is not without challenges.
It is important to choose the right supplier and make sure customer demands are met. Low-quality products and long delivery times can frustrate customers, leading to lost customers, refunds and chargebacks.
High competition and market saturation can also lead to low product margins, so that once you have paid your supplier you do not make enough profit. It is vital to do your research and choose the right products to sell. For a closer look at supplier-led fulfillment, see vendor drop-ship.
Dropshipping, up close
How technology supports drop-shipping
Drop-shipping depends on getting accurate information between the retailer, the supplier and the customer. An order management system (OMS) keeps the retailer in control of the customer relationship while suppliers handle the physical fulfillment.
An OMS supports drop-shipping by:
Sending each order to the right supplier automatically, based on rules for cost, speed and stock
Connecting suppliers that use different formats and systems, so onboarding a new partner takes less time
Showing when a supplier accepts an order or changes a shipping date
Giving customers and service agents accurate order status from placement through delivery
Routing orders between your own stock and drop-ship suppliers, so each order uses the best available source