Hawk Jason. - Dropshipping: Six-Figure Dropshipping Blueprint: Step by Step Guide to Private Label, Retail Arbitrage, Amazon FBA, Shopify

Dropshipping is a method by which you, as a retailer, sells products to the public without actually holding on to any stock or product. When you sell a product, you send the order directly to your chosen supplier; they ship the product, process the payment, and then send you the difference between the charge they make for the product and the price you charge. You never see the product, you never handle it and you dont need to handle or process any payments. While you dont need to handle the payments, there are some suppliers that will allow you to process your own payments and even some that will allow you to contract your own shipping company. Utilizing these choices, however, defeats the purpose of choosing to run your business using dropshipping.

There are many differences between a normal ecommerce business and a business using the dropshipping model. Some of those differences include the operating margins, operational logistics, operational costs, profit velocity, and barriers to entry. Below we are going to cover each of the differences individually.

Operating Margins : The operating margin is the ratio that is used to measure a companys pricing strategy and operating efficiency. It is the measurement of the proportion of the companys revenue that is left over after paying for variable costs of production. The operating margin for a company that uses dropshipping is always going to be lower than that of a typical ecommerce company because you dont have the burden of carrying inventory or shipping product.

Operational Logistics : If you are running a business using dropshipping, you dont need to carry any inventory or ship any products, which gives you the freedom to run your store from virtually anywhere in the world. When you are running a typical ecommerce store, you need to consider the logistics of running a warehouse and replenishing your stock, as well as coordinating shipping.

Operational Costs : If you are running a traditional ecommerce business you must consider the cost of paying for your warehouse, paying for the staff to run your warehouse, paying for the stock, shipping, and handling customer service. In comparison, the cost of running a business using the dropshipping method is limited to just customer service to take orders and send them on to the wholesaler or manufacturer.

Profit Velocity : While the hands-off nature of dropshipping is incredibly attractive from an operational standpoint, carrying inventory is a much faster way to ramp up profitability. This is because the profit margins are much higher when you have the option of purchasing product in bulk from an overseas suppliers and selling them at a higher cost.

Barriers to Entry : Barriers to entry include the existence of high start-up costs and the other obstacles that prevent a new competitor from entering an industry. A company that is using dropshipping is a lot easier to copy and start up than a company that carries and ships its own stock.

A Real World Example

Lets assume that you choose to sell guitars. With a traditional store, you would need to buy in physical stock so you buy 25 guitars and store them. Then you would need to find customers who want to purchase the guitars. Lets say that you sell 3 guitars and then sales drop off. You go out of business and end up with a room full of guitars that you cant sell and no money in your bank account. With dropshipping, life is much easier:

You set up a website with an online store to sell guitars.

You sell a Silver Shadow guitar for $350

You receive an order for one Silver Shadow through your online store

That order is sent to your supplier the manufacturer or wholesaler that you have chosen