A fulfillment model where the seller does not hold inventory. When a customer places an order, the seller purchases the item from a third-party supplier who ships it directly to the customer.
Understanding Dropshipping
Dropshipping is an order fulfillment method where the seller does not keep products in stock. Instead, when a customer places an order, the seller purchases the item from a third-party supplier (often a wholesaler or manufacturer) who ships it directly to the customer. The seller never handles the product physically.
This model has low startup costs because there's no need to invest in inventory upfront. However, it typically offers lower margins because the per-unit cost from dropship suppliers is higher than bulk wholesale pricing. The seller also has less control over shipping times, packaging quality, and inventory availability.
From an accounting perspective, dropshipping simplifies inventory management (there's no inventory to track) but creates complexity in COGS recording, since each order triggers a separate purchase from the supplier that must be matched to the corresponding sale.
Why It Matters for Ecommerce
Dropshipping sellers must carefully track the cost of each order placed with suppliers to calculate accurate COGS and profitability. Since there's no bulk inventory purchase, COGS is recorded per-order and may vary due to supplier price changes, shipping costs, or currency fluctuations. Without meticulous expense tracking, dropshippers easily overestimate their margins.
Practical Example
A customer orders a $45 product from your Shopify store. You place the order with your supplier for $22 (including shipping to the customer). Shopify charges $1.61 in payment processing. Your gross profit is $45 - $22 - $1.61 = $21.39. But if the supplier raises the price to $26 without notice, your margin drops to $17.39 — a 19% decrease you might not catch without proper accounting.
Related Terms
Cost of Goods Sold (COGS)
The direct costs attributable to producing or purchasing the goods a business sells, including materials, labor, and shipping. Subtracted from revenue to calculate gross profit.
EcommerceMulti-Channel Selling
The practice of listing and selling products on multiple platforms simultaneously (e.g., Amazon, Shopify, eBay, Walmart). Requires careful inventory sync and consolidated bookkeeping.
EcommerceSKU (Stock Keeping Unit)
A unique alphanumeric identifier assigned to each distinct product or variant for inventory tracking and management. Different sizes or colors of the same product each get their own SKU.
Put This Knowledge Into Practice
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