What Is Dropshipping? A Retailer’s Guide to Getting Started

Dropshipping gives retailers a way to sell more products online without carrying every item in-house. By working with suppliers or fulfillment partners, stores can test new categories, expand their digital catalog, and reach customers beyond the physical shelf.

That flexibility can be valuable, but it still depends on strong systems for tracking products, sales, margins, and customer relationships. For retailers managing both in-store and online sales, a platform like Toast Retail can help bring checkout, payments, inventory, reporting, loyalty, and sales channels into one connected workflow.

In this guide, you’ll learn how dropshipping works, why retailers use it, and how to decide whether it fits your retail strategy.

Key takeaways

• Dropshipping lets retailers sell products online without physically stocking every item in store.

• Retailers still manage the customer relationship, pricing, marketing, returns, and overall service experience.

• Dropshipping can help stores test new products, expand online assortments, and reduce upfront inventory risk.

• The biggest dropshipping challenges include lower margins, less fulfillment control, supplier reliability, and customer service responsibility.

• The best dropshipping products fit your brand, ship easily, have healthy margins, and complement your existing retail assortment.

What is dropshipping?

Dropshipping is a retail fulfillment model where a store sells products without stocking them directly. Instead of buying and storing inventory upfront, the retailer lists products through an online store or sales channel. Then they work with a fulfillment partner that stores, packs, and ships the product to the customer.

From the customer’s perspective, the purchase still happens through the retailer. The customer buys from the store, receives communication from the store, and expects support from the store — even though the retailer does not physically hold the inventory.

Dropshipping vs. traditional retail inventory

The main difference between dropshipping and traditional retail inventory is who holds the product before it sells.

• In traditional retail, the store buys inventory in advance, stores it, and sells it from its own shelves or warehouse.

• With dropshipping, the retailer sells the product first, then the supplier fulfills the order after the customer buys.

How does dropshipping work?

Dropshipping works by separating the sale from the fulfillment process. The retailer chooses which products to sell and lists them through an online store.

Even though the supplier handles fulfillment, the retailer still manages the customer experience. That includes product descriptions, pricing, customer communication, returns, service issues, and margin tracking.

• Choose products to sell: Retailers select products that fit their brand, audience, and sales goals.

• Partner with a supplier: The retailer works with a supplier, manufacturer, wholesaler, or dropshipping platform that can fulfill orders.

• List products online: Products are added to the retailer’s website, marketplace, or ecommerce sales channel.

• Receive customer orders: The customer places an order through the retailer’s store or sales channel.

• Send order details to the supplier: The supplier receives the order information needed to fulfill the purchase.

• Fulfill and ship the order: The supplier packs and ships the product directly to the customer.

• Manage the customer experience: The retailer handles customer communication, service, returns, and margin tracking.

• Track performance across channels: Connected systems help retailers monitor sales, products, inventory, and performance in one place. 

  • Example: Toast Retail Inventory Management can help retailers track sales, manage product updates, monitor inventory, and view performance across channels from one connected platform.

Why do retailers use dropshipping?

Online stores use dropshipping to expand what they sell without taking on the same upfront inventory risk as traditional retail. 

It can be especially useful for testing products before committing to inventory, warehouse space, or a larger product rollout. As Australian entrepreneur Davie Fogarty told Glam Adelaide:

“Use it only to test, improve and customise your product, before investing in a warehouse. To develop a relationship with your customer, over the long term you want to aim to ship items from your own warehouse.”

• Lower upfront inventory costs: Retailers can sell products without buying large quantities before demand is proven.

• Less storage space needed: Stores can expand product offerings without needing more backroom or warehouse space.

• Easier product testing: Dropshipping lets retailers test new products before committing inventory dollars or shelf space.

• Expanded online assortment: Retailers can offer more products online than they physically carry in store.

• Lower category risk: Test new categories without making large upfront purchasing decisions.

• Seasonal flexibility: Dropshipping can support seasonal products, limited-time offers, or specialty items.

• More ecommerce reach: Retailers can sell beyond the physical store without stocking every SKU in-house.

• Useful for limited shelf space: Smaller stores can expand their digital catalog while keeping the physical store focused.

Pros and cons of dropshipping

Dropshipping can help retailers increase sales, but it also creates trade-offs. As Jill Sherman, co-founder and CEO of a dropshipping software company, explains:

“Dropshipping’s low barrier to entry results in a crowded market where many businesses offer similar products. This intense competition can drive prices down, leading to slimmer profit margins and higher marketing expenses.”

Before adding dropshipped products to your retail strategy, it’s important to understand both the flexibility it offers and the operational risks it can create.

Pros

• Lower inventory risk: Retailers can sell products without buying large quantities upfront.

• More product variety: Stores can offer more items online than they physically stock.

• Easier product testing: Retailers can test demand before committing shelf space or inventory dollars.

• Less fulfillment work: Suppliers handle storage, packing, and shipping.

• Flexible ecommerce growth: Dropshipping can help retailers expand beyond the physical store.

Cons

• Lower margins: Supplier costs, shipping fees, platform fees, and marketing costs can reduce profit.

• Less control over fulfillment: Shipping speed, packaging, and accuracy depend on the supplier.

• Customer service responsibility: The retailer still handles customer questions, complaints, and returns.

• Supplier reliability matters: Stockouts, delays, or product quality issues can hurt the retailer’s reputation.

• More competition: Generic dropshipped products can be easy for other stores to copy.

What types of retailers can use dropshipping?

Many types of retailers can use dropshipping to expand their product assortment without carrying every item in store. It can be especially useful for businesses with limited shelf space, seasonal demand, or an online audience that wants more product options.

• Convenience stores: Dropshipping can help convenience retailers test packaged goods, branded merchandise, local products, or specialty items online without crowding limited shelf space.

• Bottle shops: Bottle shops can use dropshipping for accessories, gift sets, branded merch, glassware, bar tools, or non-alcoholic specialty products.

• Grocery stores: Grocers can use dropshipping to expand into specialty pantry items, gift baskets, kitchen tools, local goods, or shelf-stable products that complement their in-store assortment.

• Butcher shops: Butcher shops can use dropshipping for grilling accessories, sauces, rubs, branded apparel, gift boxes, or specialty kitchen items.

• Restaurant and retail hybrids: Restaurants with retail shelves can use dropshipping to sell branded merch, packaged goods, sauces, coffee, pantry items, or gift products online.

• Local retailers expanding ecommerce: Stores that want to sell online without adding storage space can use dropshipping to test demand and grow their digital catalog.

What products work best for dropshipping?

For retailers, dropshipping usually works best when the product feels like a natural extension of your brand — not a random item added just because it is available from a supplier. As digital marketing expert Neil Patel explained to Business Insider:

"[Some dropshippers] go out there and try for a week or a month, and it's really hard to build a good business within a month, and they're going to give up when they don't see results… The people who find products they love and are passionate about do extremely well in the long run because they put in the effort and the time and the consistency with their marketing efforts to do well."

• Products that fit your brand and audience: Choose items your existing customers would expect from your store, whether that means specialty food accessories, branded merch, gift items, or complementary retail products.

• Products with manageable shipping costs: Lightweight, compact items are often better suited for dropshipping because shipping fees can quickly reduce margins.

• Items with enough margin: Make sure the retail price leaves room for supplier costs, fulfillment fees, platform fees, payment processing, marketing, returns, and customer service.

• Products that complement in-store inventory: Dropshipping can help retailers expand around what they already sell, such as accessories, bundles, specialty add-ons, or related gift items.

• Seasonal or limited-time items: Dropshipping can be useful for testing holiday products, event-based merchandise, summer items, or seasonal gift collections without committing to bulk inventory.

• Products that are not easy to find everywhere else: Unique, niche, local, curated, or brand-aligned products can help retailers avoid competing only on price.

How to start dropshipping for your retail business

Starting a dropshipping strategy begins with choosing the right products, suppliers, and systems. The goal is to test demand and expand your retail assortment without running into avoidable problems.

• Choose a product category that fits your brand: Start with products that make sense for your existing customers and store concept.

• Research customer demand and competition: Look for products shoppers actually want, but avoid categories where every retailer is selling the same thing.

• Find reliable suppliers: Evaluate product quality, shipping speed, fulfillment accuracy, return policies, and communication.

• Order samples before selling: Test the product experience before putting your brand behind it.

• Calculate margins: Account for product costs, shipping, platform fees, payment processing, marketing, returns, and customer support.

• Add products to your ecommerce store: Create product pages with clear photos, descriptions, pricing, and shipping expectations.

• Set policies: Be clear about shipping timelines, returns, refunds, exchanges, and customer service responsibilities.

• Promote products: Use email, SMS, loyalty, social media, in-store signage, and product displays to drive awareness.

• Track sales and customer feedback: Monitor what sells, what gets returned, and what creates customer service issues.

• Keep or remove products based on performance: Tools like Toast IQ can help surface insights and trends, helping you understand which products are worth keeping, improving, or cutting.

No inventory, no problem

The strongest dropshipping approach starts with products that fit your brand, suppliers you can trust, and margins that actually make sense.

With the right systems in place to track sales, inventory, product performance, and customer feedback, you can use dropshipping to grow flexibly without overextending.

FAQs

What is dropshipping in simple terms?

Dropshipping is a retail model where a store sells a product online, but a supplier stores, packs, and ships the product directly to the customer. The retailer does not physically stock the item before it sells.

Can a physical retail store use dropshipping?

Yes, physical retail stores can use dropshipping to expand their online catalog without adding more shelf, backroom, or warehouse space. This can be useful for testing new products, selling seasonal items, or offering complementary products that are not stocked in store.

What are typical profit margins in dropshipping?

Dropshipping margins vary widely based on product cost, supplier fees, shipping, platform fees, marketing costs, and return rates. Retailers should calculate true margins before selling, since lower upfront inventory costs can still come with thinner profits.

What’s the biggest operational risk in dropshipping?

The biggest operational risk is relying on suppliers you do not fully control. Shipping delays, stockouts, packaging issues, fulfillment mistakes, or product quality problems can hurt the customer experience, even if they’re not your fault.

How does dropshipping affect inventory management for retail operators?

Dropshipping reduces the need to physically hold some inventory, but it does not eliminate inventory management. Retailers still need to track what products are listed, what suppliers can fulfill, what is selling, and how dropshipped items perform across sales channels.

Is dropshipping legal?

Yes, dropshipping is legal when retailers follow applicable business, tax, consumer protection, marketplace, and product safety rules. Retailers should also be transparent about shipping timelines, returns, and customer service policies.

Can you dropship on Amazon or other marketplaces?

Yes, some marketplaces allow dropshipping, but retailers must follow each platform’s rules. For example, marketplaces may require the seller of record to be clearly identified, prohibit certain supplier arrangements, or set strict standards for shipping, returns, and customer service.