What is Dropshipping?

What is Dropshipping?
Dropshipping is a popular inventory method online businesses are implementing. Learn about how dropshipping works and decide if it’s right for your business.
by Square Nov 18, 2021 — 6 min read
What is Dropshipping?

Managing your inventory is a challenging aspect of your business, especially in the e-commerce space. But your inventory worries could subside with a different supply chain method that has become increasingly popular.

What is dropshipping?

Dropshipping is when a retail business does not keep the products it sells in stock. Instead, when a customer places an order, the seller purchases the item from a third-party supplier (a manufacturer, wholesaler or another retailer) and has it shipped directly to the customer.

So, if your business adopts dropshipping, you act as a shopfront that customers visit and order products from. Once they place an order, you charge the consumer and the dropshipper charges you. You never handle the actual products.

How does dropshipping work?

Dropshipping is management method for a supply chain (the network of suppliers, materials, manufacturers and retailers involved in the creation and distribution of a product, from production to customer delivery).

These are the parties involved in dropshipping:

Generally, the shorter the supply chain, the greater your profits will be because there are fewer parties taking a cut. A short supply chain is one where you deal directly with the manufacturer.

The benefits of a dropshipping business

Dropshipping is a retail inventory management method that can help your business decrease risk, but there are other benefits as well. When you develop a good business model, it can prove very successful.

Here’s a look at some of the advantages of dropshipping:

The challenges of dropshipping

Dropshipping can be beneficial for business owners, but there are drawbacks that might not bode well with your overall business strategy. Here are a few examples of why some businesses decide against dropshipping for their business:

How to select a dropshipping supplier

The third party you choose as a supplier will determine your supply chain’s success, so you need to do your due diligence during the selection process.

Generally speaking, you want to set up dropshipping arrangements directly with the manufacturers of the products you want to sell. The fewer middlemen you have to go through, the bigger your profits will be. Each additional fee charged by your supply chain partners affects your bottom line, so whenever possible, it’s best to work directly with a manufacturer.

Here are some questions to ask potential suppliers:

Tips for a dropshipping business

There are a few best practices to implement to assure success for your dropshipping business.

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