UPSC Prelims 2026Question 87Economy

An e-commerce revenue model where the seller has control over pricing but doesn’t keep products in stock and instead transfers customer orders and shipment details to a third-party supplier,who then ships the goods directly to the customer, is called:

Options

(a)Dropshipping Model
(b)Affiliate Revenue Model
(c)Transaction Fee Revenue
(d)Model Agency Revenue Model

Correct answer: a

Decision rule

Classify e-commerce models by two tests: who sets the price and who holds stock. Price control without inventory is dropshipping; no price control is affiliate.

Explanation

Correct Answer

(a) Dropshipping Model

Explanation of the Correct Answer

The model described in the question is the Dropshipping Model.
In dropshipping:
- The seller lists products on an online store.
- The seller usually controls the selling price and customer-facing experience.
- The seller does not maintain inventory.
- Once a customer places an order, the seller forwards the order and shipment details to a third-party supplier.
- The supplier then ships the product directly to the customer.

Therefore, an e-commerce model where the seller does not keep stock but routes orders to a supplier for direct delivery is called dropshipping.

Why Other Options Are Incorrect

Option	Verdict	Explanation
(a) Dropshipping Model	Correct	The seller does not hold inventory and forwards customer orders to a third-party supplier, who ships directly to the customer.
(b) Affiliate Revenue Model	Incorrect	In affiliate marketing, the seller/promoter earns commission by referring customers to another seller’s website. The affiliate usually does not control pricing or order fulfilment.
(c) Transaction Fee Revenue	Incorrect	This model involves earning fees for enabling transactions between buyers and sellers, such as marketplace commissions. It does not necessarily involve inventory-free fulfilment.
(d) Model Agency Revenue Model	Incorrect	This is not the standard term for the model described. It may refer broadly to earning commission as an intermediary, but not specifically to inventory-free e-commerce fulfilment.

Relevant Supplementary Information

Comparison of E-commerce Revenue Models

Revenue Model	How It Works	Inventory Held by Seller?	Revenue Source	Example Use Case
Dropshipping Model	Seller takes order and forwards it to supplier for direct shipment	No	Margin between selling price and supplier cost	Shopify store selling products sourced from suppliers
Affiliate Revenue Model	Promoter redirects customers to another seller	No	Commission on sales or leads	Blog recommending Amazon products
Transaction Fee Model	Platform charges fee for each transaction	Usually no	Commission or transaction fee	Amazon Marketplace, eBay, Airbnb
Subscription Model	Users pay recurring fees for access	Not necessarily	Monthly or annual fee	Netflix, SaaS platforms
Advertising Model	Platform earns from displaying ads	No	Ad revenue	YouTube, Google, news websites
Marketplace Model	Platform connects buyers and sellers	Usually no	Commission, listing fee, fulfilment fee	Flipkart, Amazon Marketplace
Inventory Model	Seller buys and stores goods, then sells directly	Yes	Product margin	Retailer-owned online store

Dropshipping vs Affiliate Marketing

Basis	Dropshipping	Affiliate Marketing
Control over pricing	Seller usually controls pricing	Affiliate usually does not control pricing
Customer relationship	Customer buys from dropshipper’s store	Customer buys from third-party seller
Inventory	No inventory held	No inventory held
Order fulfilment	Supplier ships on behalf of seller	Third-party seller handles everything
Revenue	Profit margin	Commission
Risk level	Higher than affiliate marketing	Lower than dropshipping
Customer support responsibility	Usually seller/dropshipper	Usually actual seller or platform

Key Takeaways from the Tables

Point	Explanation
Dropshipping means selling without stock	The seller does not keep inventory but still sells under their own store or brand.
Supplier handles fulfilment	The third-party supplier directly ships the product to the customer.
Seller controls price	Unlike affiliate marketing, the dropshipper usually decides the final selling price.
Profit comes from margin	The dropshipper earns the difference between customer price and supplier price.
Affiliate model is commission-based	The affiliate only refers customers and earns commission, without handling sales or pricing.

Point	Explanation
Dropshipping = no stock + direct supplier shipping	This is the defining feature of the model.
Dropshipper controls the customer-facing store	The customer usually buys from the dropshipper, not directly from the supplier.
Affiliate marketing is different	Affiliate earns commission but does not control price, order, or customer experience.
Marketplace model is broader	It connects multiple buyers and sellers, while dropshipping can be done by a single seller.
Inventory model has higher control but higher risk	The seller owns stock, so quality and delivery control are better, but unsold inventory risk is higher.

Context and Current Relevance

Dropshipping became popular with platforms like Shopify, WooCommerce, Amazon, and AliExpress-based supplier networks.
It allows low-entry e-commerce entrepreneurship because sellers do not need warehousing or upfront inventory.
However, its challenges include quality control, shipping delays, supplier dependence, low margins, and customer service issues.

Table: Important E-commerce Revenue Models

Revenue Model	Meaning	Inventory Requirement	Revenue Source	Example
Dropshipping Model	Seller lists products but does not keep inventory; supplier ships directly to customer	No	Margin between selling price and supplier price	Shopify store using third-party suppliers
Affiliate Revenue Model	Promoter redirects customers to another seller and earns commission	No	Commission per sale, lead, or click	Product review blog linking to Amazon
Transaction Fee Model	Platform charges a fee for facilitating transactions	Usually no	Commission or transaction fee	Amazon Marketplace, eBay, Airbnb
Subscription Model	Users pay recurring fees for access to a product or service	Not necessarily	Monthly or annual subscription	Netflix, Spotify, SaaS tools
Advertising Model	Platform provides free or low-cost content/services and earns through ads	No	Advertisement revenue	YouTube, Google, news websites
Marketplace Model	Platform connects buyers and sellers	Usually no	Commission, listing fee, fulfilment fee	Flipkart, Etsy, Amazon Marketplace
Inventory Model	Seller buys, stores, and sells products directly	Yes	Product margin	Online retail store owning stock
Freemium Model	Basic service is free; premium features are paid	Not applicable	Upgrade fees	Canva, LinkedIn, Dropbox
Commission Model	Intermediary earns a percentage from successful sales or bookings	Usually no	Commission	Travel booking portals, food delivery apps
Lead Generation Model	Platform collects potential customer leads and sells them to businesses	No	Fee per lead	Policy comparison websites, education enquiry portals
On-demand Service Model	Platform connects users with service providers instantly	No physical inventory	Service fee or commission	Uber, Urban Company
White-label Model	Business sells products/services made by another company under its own brand	May or may not	Product margin or service margin	Private-label skincare or SaaS resale

Table: Dropshipping vs Other Similar E-commerce Models

Basis	Dropshipping	Affiliate Marketing	Marketplace Model	Inventory Model
Who sells to customer?	Dropshipper	Original seller	Third-party sellers on platform	Retailer itself
Who controls pricing?	Dropshipper usually controls pricing	Original seller controls pricing	Seller/platform depending on arrangement	Retailer controls pricing
Who holds inventory?	Third-party supplier	Original seller	Sellers or fulfilment partners	Retailer
Who ships product?	Supplier ships directly to customer	Original seller ships	Seller/platform fulfilment network	Retailer
Revenue source	Margin	Commission	Transaction fee / commission	Product margin
Customer support responsibility	Usually dropshipper	Usually original seller	Platform and/or seller	Retailer
Entry barrier	Low	Very low	High for platform owner	Higher due to inventory cost
Main risk	Supplier quality and delivery delays	Low conversion and dependency on seller	Platform scaling and seller management	Unsold inventory

Table: Key Features of Dropshipping

Feature	Explanation
No inventory ownership	Seller does not stock products physically.
Third-party fulfilment	Supplier packs and ships the product directly to the customer.
Seller controls storefront	Seller manages website, product listing, pricing, and branding.
Profit through margin	Seller earns the difference between customer price and supplier cost.
Low initial investment	No major spending on warehouse or inventory is required.
High supplier dependence	Product quality, packaging, and delivery depend heavily on supplier reliability.
Customer-facing responsibility	Even if supplier makes a mistake, the customer usually blames the seller.
Scalable but competitive	Easy to start, but many sellers may sell similar products.

Table: Advantages and Disadvantages of Dropshipping

Advantages	Disadvantages
Low startup cost	Low profit margins in competitive niches
No warehouse requirement	Limited control over product quality
Wide product range can be tested	Shipping delays may affect customer experience
Easy to start with e-commerce platforms	Supplier errors can damage brand reputation
Less risk of unsold inventory	Difficult to build strong differentiation
Can operate from anywhere	Customer service burden remains with seller
Useful for testing product demand	Dependence on third-party supplier availability

Table: Revenue Model Identification Clues

Clue in Question	Likely Model
Seller does not keep inventory and supplier ships directly	Dropshipping
Website earns commission for referring buyers	Affiliate Revenue Model
Platform charges fee per transaction	Transaction Fee Model
Users pay monthly or yearly fee	Subscription Model
Free platform earns through ads	Advertising Model
Platform connects many buyers and sellers	Marketplace Model
Seller owns stock and sells directly	Inventory Model
Basic version free, advanced version paid	Freemium Model
Platform sells customer enquiries to businesses	Lead Generation Model

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