How does dropshipping work?
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In a typical retail business the business will have a warehouse with their stock which they buy from the manufacturer in bulk for a lower price and when they sell it at retail price they make a profit on the sale. The benefit of this is that they can generally move large volumes of product but the downside is that the shipping and storage adds extra cost to the retailer and there’s no guarantee they’ll sell all of their stock, and leftover stock is sold at a loss. Therefore in order for this to be profitable you have to consistently sell large volumes of merchandise.
With dropshipping the retailer does not have a warehouse with stocked items, rather they simply place the order to the manufacturer as they receive it from the customer and the item is shipped directly to the customer. As such they don’t need to have their own logistics or warehouse and this is a much better system for smaller businesses. The downside is that the retailer has a lot less control over the product and the shipping process and many things are not in their control. They may also not be able to have physical store locations or have only one and operate mainly online. Dropshipping can work very effectively if the retailer takes the time to ensure they make the right deal with the right supplier and make sure to have good quality control.
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