The brand operates the storefront, the marketing, and the customer relationship; the supplier operates the warehouse. When an order lands, an automated app or EDI link forwards it to the supplier, who picks the units, packs the parcel, often applies the brand’s packing slip, and hands it to a carrier from their own facility. The brand collects retail at checkout and pays the supplier a lower wholesale price on the back end, so the spread between the two is the brand’s margin. Inventory ownership, working-capital exposure, and fulfillment labor all sit with the supplier.
On the upside: near-zero inventory risk, no warehouse lease or 3PL contract, low capital intensity to launch, and the ability to test SKU breadth without buying any of it. On the downside: gross margins are structurally compressed because the supplier captures the manufacturing margin a brand would otherwise own; shipping times are slower and less predictable, often direct from overseas; pack quality and unboxing are bounded by what the supplier can do; and stockouts can happen without warning because the brand doesn’t control the inventory ledger.
The model fits catalog testing and niche-category brands that compete on assortment or discovery rather than logistics. It tends to break for brands competing on shipping speed, on unboxing experience, or on differentiated product where the supplier’s stock SKU is the entire moat.
Dropshipping is routinely confused with using a 3PL, but the inventory ownership is the dividing line: a 3PL warehouses and ships goods the brand has already bought, while a dropship supplier owns the goods until they leave the building.