Dropshipping
Selling without holding inventory — a supplier ships directly to the customer. Low margin (5-20%), no quality control.
In practice
Dropshipping is great for validating a product. It's risky as a long-term model due to low margins and competition.
Common misconception
'Dropshipping is a passive business.' Managing campaigns, customer service, and supplier tracking are all intensive work.
How to fix it
Not profitable? (1) calculate true margin including advertising, fees, and returns, (2) shipping times — 25 days means customers don't return, (3) consider private label.
Example
An entrepreneur: $22 sale, $12.50 supplier cost, $7 advertising, $1.50 platform fee = $1 profit. After returns, a net loss.
Priority
Use dropshipping to validate a product for 3-6 months. Once proven, move to private label.
Related terms
Keep learning. Metrics that touch the same area:
- Private LabelOperationsSelling externally manufactured products under your own brand. The supplier manufactures, you brand and sell. Higher gross margin than reselling, control over pricing, and building a brand asset.
- Lead TimeOperationsThe time from ordering with a supplier to receiving inventory. Critical for calculating the reorder point.
- Gross MarginFinance(Sale price - COGS) / sale price × 100. The basis for every pricing and advertising decision.
- SKU – Stock Keeping UnitOperationsA unique identifier for each product variation. The basis for precise inventory management.
- Inventory ManagementOperationsTracking, ordering, and maintaining inventory. Too much means cash tied up. Too little means stockouts.
- StockoutOperationsA product unavailable for shipping. Immediate lost sales plus damaged trust.
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