At its core, dropshipping refers to a retail fulfillment strategy where the retailer does not keep products in stock. Instead, they purchase items from a third party—usually a wholesaler or manufacturer—after they've received orders from customers. The third-party supplier then packages and sends the product directly to the customer, hence the 'drop' in dropshipping.
In doing so, businesses often forgo the cost of managing or owning inventory. Thus, capital investment becomes substantially low, making this an attractive model, particularly for fledgling online businesses.
So how do dropshipping business earn profit? Here's where an essential concept comes into play: Markup. After the retailer sells an ordered product at a retail price, the cost they pay the supplier is subtracted, and the remaining amount is their income.
For example, let's say you're operating a dropshipping business that sells designer mugs. Your supplier charges you $5 for each mug, but you list the same mug on your website for $15. When a customer orders a mug, you pay your supplier $5, and they ship the mug directly to your customer. With this transaction, you earn a profit of $10, without ever handling the mug.
While it all might seem relatively straightforward, dropshipping isn't without complexities. One such term is 'Lead Time.' It refers to the duration necessary to fulfill a customer's order, beginning from the time an order is placed till it reaches the customer's doorstep. Extended lead times could lead to customer dissatisfaction, which is why good partnerships with reliable suppliers are paramount.
Another term is 'Minimum Order Quantity' or MOQ. This is the least amount a supplier is willing to sell. MOQ can be a hurdle for dropshippers who are just starting because it requires upfront investment. However, finding suppliers with low or no MOQs can help navigate this challenge.
Dropshipping may not be the route for all businesses, but for those seeking to test products, offer a wide range without holding stock, or just to side-step logistical hassles, it's an attractive proposition. Like all ventures, understanding the lingo and defining terms is key. Here's hoping this glossary has elucidated the core tenets of this e-commerce model!
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