With ecommerce, you can turn a humble website that’s dependent on advertising for profit, into a digital storefront and burgeoning business of its own.
This glossary is a complete collection of terms, concepts, products, and services you should know to master dropshipping.
What is Dropshipping?
Traditional ecommerce typically sees retailers maintaining the inventories used to fulfill their customers’ orders. Dropshipping is a different strategy for ecommerce. Retailers don’t actually maintain inventory for the product or products that they’re selling. Instead, the dropship model means the retailer passes incoming orders to either a manufacturer, supplier, or distributor to fulfill the order and ship it to the customer.
It may sound straightforward, but there are actually a lot of pieces to the dropshipping puzzle. Fortunately, we’ve provided a roadmap for all the important terms and concepts you should know as you consider implementing dropshipping for an ecommerce business.
Dropshipping 101
In this first section, we’re covering the dropshipping basics. These terms are the most fundamental aspects of dropshipping.
What is an Affiliate?
Affiliates are site owners or publishers that recommend a retailer or merchant to their audiences. The idea is for the affiliate to help increase revenue for the retailer by forwarding qualified leads and traffic. The affiliate, in turn, gets a percentage of revenue for every sale.
What is a Blog?
Blogs are websites that post primarily short, narrative articles called ‘blog posts.’ They originated as the digital journals of individuals — in fact, the word blog is a portmanteau of “web” and “log” — but have increasingly become tools for marketing. Merchants and retailers frequently hire bloggers to promote their products and services via content marketing.
What is a Distributor?
Distributors are businesses that maintain inventories of products from a number of manufacturers and sell those products to a number of different retailers. Typically, distributors offer shorter windows for shipping orders to customers than the manufacturers of those products.
What is Inventory?
Inventory is a term used to refer to the amount, quantity, or value of products that a retailer currently has available. It does not account for products that have been ordered from suppliers; inventory accounts only for what is physically on hand and could be shipped at any given time.
What is a Manufacturer?
Manufacturers are the businesses or companies that produce products for the purposes of selling to consumers.
What is Gross Profit?
Gross profit refers to the difference between the amount of money generated through sales of a product and the retailer’s costs of producing or acquiring that product (also known as the cost of goods sold).
What is Net Profit?
Net profit refers to the difference between the amount of money generated through sales and the retailer’s total costs, which can include not only the cost of goods sold, but things like payroll, operating expenses, and marketing. Net profit reflects the amount of revenue that’s left over after all the necessary expenses have been paid.
What is Outsourcing?
Outsourcing is when a business, company, or individual hires a third party for a task, project, or specific type of work.
What is a Reseller?
Resellers are businesses that purchase products or services for the purpose of resale rather than for consumption. With ecommerce now ubiquitous, affiliate marketers are becoming resellers sometimes, too, as this promotes rebranded products or services.
What is a Retailer?
Retailers are companies and businesses that sell directly to the end user or consumer.
What is a Supplier?
Suppliers are companies, businesses, or individuals that supply something the retailer needs. This could be a product, service, or something else.
What is a Tracking Number?
Tracking numbers are alphanumeric identification numbers assigned to items that are shipped through services like USPS, FedEx, and UPS. The purpose of tracking numbers is to allow the sender and receiver to track the progress of the shipment as well as to confirm its delivery.
What is a Wholesaler?
Wholesalers are manufacturers and distributors that sell to retailers. Oftentimes, wholesalers offer discounts when the retailer orders larger quantities of the products and services, which is the origin of expressions like “buying wholesale” and “bulk discount.”
Intermediate Dropshipping
Now that we’ve covered the basics of dropshipping, let’s move into the intermediate terms and concepts. This section will help you to understand some of the complexities of the dropship model of retail, including chargebacks, listing fees, overhead, and supply chains.
What is an Affiliate Link?
Affiliate links are URLs with a unique identification number affixed to the end that provide a way to quantify an affiliate’s performance. Retailers provide affiliate links to affiliates that can share them on social media and in content marketing on blogs. Since the identification number attached to the URL is associated with a specific affiliate, you can track how much traffic the affiliate is forwarding through the link.
What is an Authorization?
Authorizations are one of the steps for processing payments. Before a payment is processed and the order is submitted, an authorization allows the system to determine whether the account has the funds available to complete the order.
What is an Authorized Distributor?
Authorized distributors are companies and businesses that have been designated or approved by the product manufacturer to sell the product in quantity to commercial retailers.
What is an Authorized Retailer?
Authorized retailers are merchants that have been designated or authorized by the product manufacturer to sell the product directly to consumers.
What is a Chargeback?
Chargebacks occur when a refund is forcibly issued by the customer’s bank, taking transaction funds from the retailer and returning them to the customer. This tends to occur when a customer files a complaint, such as in cases of fraudulent purchases, false advertising, or when the order wasn’t fulfilled. If chargebacks occur at a high frequency, the rate a retailer pays to process payments for customers’ online purchases could increase.
What is a Delivery Confirmation?
Delivery confirmations occur when shippers are notified of delivery. This is a service offered by many package carriers like FedEx and USPS. However, delivery confirmation isn’t the same as when a recipient signs for delivery.
What is Fulfillment?
Fulfillment is the process of putting an order together so that it’s ready for shipment. The term also refers to when third-party companies with their own inventories ship orders on behalf of a retailer.
What are Listing Fees?
Listing fees are costs associated with listing products or services on third-party online marketplaces. An example of such an online marketplace is eBay, which usually charges a fee for listing.
What are Logistics?
Logistics refers to the management of products as they progress from origination to destination. In the world of ecommerce, logistics often encompasses the different phases of transport that occur between a product’s manufacturing and its delivery to the customer, including transport from the manufacturer to the supplier, transport from the supplier to the retailer, and transport from the retailer to the consumer.
What is a Margin?
Margins refer to the difference between what a retailer pays for a product and the amount the consumer pays when purchasing the product. Retailers’ profits are dependent on the margins they have on their products. Margins represent how much of what consumers pay is actually profit for the retailer. Retailers can increase their margins by either negotiating a lower rate from suppliers or increasing the purchase price for consumers.
What are Net Terms?
Net terms refer to an agreement between supplier and retailer. It allows the retailer to pay the supplier for the products a predetermined amount of time after those products have been shipped to consumers.
An example of net terms is “net 30,” which indicates the retailer has until 30 days after shipping to a consumer to remit payment for the product to the supplier. There can be discounts involved, too. For instance, “10/5 net 30” means the retailer would receive a discount of ten percent if payment is made in the first five days, but the discount would be forfeited is payment is made between day six and day 30.
What is Overhead?
Overhead is a catch-all term for expenses associated with operating a business that doesn’t include things like labor, direct materials, and direct expenses. Expenses that are part of the overhead can be things like advertising costs, interest accrued on loans, rent, utilities, repairs, maintenance, insurance, taxes, and legal fees.
What is a Preferred Supplier?
Preferred suppliers are businesses and companies from whom a retailer prefers to source products. A preferred supplier arrangement usually occurs when special rates have been negotiated — which, in turn, means better margins for the retailer — or when there’s a long-term partnership between the supplier and retailer. As such, preferred suppliers are advantageous to both the retailer and the supplier.
What is a Supply Chain?
Supply chains refer to a network of businesses or companies involved in moving a product from its point of origin to the consumer. For ecommerce, this usually equates to the manufacturer and distributor of a product.
What is Wholesale?
Wholesale is a term that refers to buying products at a discount in large quantities. These businesses and companies — referred to as wholesalers — sell products in quantity to retailers that, in turn, sell those products individually to consumers.
Advanced Dropshipping
Having covered both the basics and the intermediate dropshipping concepts, it’s time to turn our attention to advanced dropshipping. In this final section, we’ll be going over the minutiae of dropshipping, like multi-channel ecommerce and restocking fees, as well as some specific services and players in the dropship space, including PayPal, Alibaba, and Stripe.
What is an Address Verification System (AVS)?
Address verification systems originated as a way to combat payment fraud. With an address verification system in place, the billing address provided during order checkout is compared to the address the creditor has on file for the card; if the addresses don’t match, it indicates a fraudulent purchase and prevents the transaction from being processed. Retailers use address verification systems as a deterrent for payment fraud to minimize the frequency of chargebacks.
What is Alibaba?
Alibaba is the largest online marketplace in China and by some accounts, the entire world. It consists of hundreds of millions of users who buy from millions of retailers and merchants across three websites. Alibaba processes more transactions for online purchases than any other ecommerce site, so a growing number of retailers are listing their products on Alibaba in an effort to target Asian consumers.
What is AliExpress?
AliExpress is a popular online marketplace owned by Alibaba that is more international in focus. In fact, AliExpress has at one time or another, been the most visited website in Brazil and Russia which is an indication of its international appeal. Compared to Alibaba, AliExpress has become an ideal marketplace for small businesses to list their products for global audiences.
What is Amazon?
Amazon is a U.S. online marketplace and mega-retailer with a growing international presence that has allowed it to become the largest online retailer in the world in terms of revenue and market capitalization. Today, around half of Amazon’s sales are driven by third-party retailers that list their products on the Amazon Marketplace. Amazon is also growing rapidly in the software-as-a-service and infrastructure-as-a-service industries.
What are Analytics?
Analytics refers to reviewing data to infer patterns of significance, especially when it comes to user behavior. Typically, analytics are used to determine consumers’ purchasing habits and how they engage with a retailer’s website. With analytic data, you can implement changes that might lead to increased sales and revenue.
What is eBay?
eBay is a popular online marketplace that facilitates consumer-to-consumer and business-to-consumer purchases. Though traditionally associated with online auctions, eBay allows items to be listed with set prices which gives retailers the chance to extend their reach by creating eBay listings for the products they offer. This has become a popular practice for both small businesses and larger companies.
What is a Manufacturer’s Suggested Retail Price?
Manufacturer’s suggested retail price, or MSRP, is the price at which a product’s manufacturer recommends selling the product to consumers. Retailers can choose whether they want to actually sell a product at the manufacturer’s suggested price or sell at a higher price to increase the margin.
What is a Minimum Advertised Price?
When ecommerce retailers agree to a minimum advertised price (MAP) for a product, they agree not to advertise that product at a price lower than the MAP. Manufacturers may require adherence to a minimum advertised price as a condition of selling their products.
What is Multi-Channel Ecommerce?
Multi-channel ecommerce, also called multi-channel selling or multi-channel retail, is an increasingly common model of retail where the retail lists products on multiple online marketplaces, such as on eBay, Amazon, and AliExpress. The idea is to reach a larger audience of potential customers.
What is PayPal?
PayPal is an online payment system that facilitates online purchases as well as money transfers. Though originally associated with eBay, PayPal has become ubiquitous and as such, is supported by many digital storefronts.
What is a Restocking Fee?
Restocking fees are either a flat fee or a percentage of the purchase price that is charged to customers when they return the products they’ve purchased. This is particularly common with products where the value is lower after they’ve been opened because it affects whether the items can be resold. It’s common practice for restocking fees to be deducted from the customer’s refund.
What is Stripe?
Stripe is an online payments system similar to PayPal. PayPal is more consumer-facing, whereas Stripe is geared toward businesses and professionals as a means of allowing them to accept payments for their products and services.
Now You Know
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