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Wei Linchao

Wei Linchao

Dropship and Logistics Specialist, the founder of Bestfulfill that help you with order fulfillment from product sourcing, shipping, branding, and customized package.​

Drop Shipping vs. Wholesale

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Dropshipping or wholesale? What does each of these business models entail and which of them is better for your eCommerce store? Though similar in some ways, the two models differ from each other considerably.

Get to know what each of these business models entails, including their pros and cons. This guide will also help you figure out which of the two models is the best suited to your online business.

AttributeWholesaleDropshipping
InventoryBuys and keeps an inventoryDoes not keep an inventory
Order FulfillmentFulfills own ordersOrder fulfillment is handled by the dropshipping supplier
Start-Up CostsHigh startup and overhead costs, especially for establishing and maintaining the inventoryMinimal startup and overhead costs, especially for website design and marketing
Quality AssuranceCan carry out checks to guarantee consistent qualityHas no control over product quality nor the fulfillment time.

What is Dropshipping?

Think of Dropshipping as an order fulfillment method that does not require you to acquire or keep an inventory beforehand. As a dropshipper, you will be listing the various products you offer on your online store. When a customer places an order through your store, you forward it to your preferred dropshipping supplier.

Following the payment, your supplier will then ship the ordered item(s) to your customer’s destination. One of the perks of this business model is that it does not require you to purchase, ship, or store the items you are selling. This, in turn, reduces the costs and risks associated with the transportation and storage of merchandise in your business. 

Image Source: (https://commons.m.wikimedia.org/wiki/File:Dropshipping-come-funziona.png)

This type of business requires minimal starting and overhead costs, making it preferable for entrepreneurs on a tight budget. It may sound a little hands-off, but you still need to handle your marketing and supplier(s). Occasionally, you’ll be required to process returns and customer service as well.

Pros 

1. Low Startup and Operational Costs

starting a conventional business requires you to have a sizeable amount of money to invest in the business, right? Well, applying the dropshipping business model will save you much of the upfront capital requirements associated with a conventional business.

To begin with, dropshipping does not require you to own or hold any inventory. As such, you can save the money other businesses use to establish, store, and replenish their inventories. Dropshipping also helps you avoid the costs and risks associated with order fulfillment and shipping—these are borne by your dropshipping supplier.

Image Source: (https://dodropshipping.com/the-pros-and-cons-of-dropshipping/)

Since you don’t need to incur such overhead costs, you could channel more money and time to establishing your brand identity, website design, and marketing.

2. Easy to Add New Product Lines

With dropshipping, you only pay for the items you order from your dropshipping supplier—which only happens after a customer has ordered the item on your eCommerce store. As you can imagine, this business model allows you to experiment with different product types and niches are pretty much risk-free.

Image Source: (https://dodropshipping.com/the-pros-and-cons-of-dropshipping/)

It allows you to test various items and identify the ones that work best for your store. This will come in handy whenever you need to diversify your offerings by introducing new product lines. As opposed to a conventional retailer, you won’t have to deal with excess stock if a newly-added product does not take off.

3. Allows You to Take More Risks

Well, calculated risk is the recommended approach to business. Even so, it is comparatively hard to become a risk-taker when you are buying and maintaining an inventory. What if you decided to offer a new line of products and your customers are not interested?

In such a case, you can incur a considerable loss as you had already invested in the new inventory. Since dropshipping does not require you to own an inventory, failed products will not have such a devastating effect on your revenue.

4. Fast Start-Up

All you need is an online store and the right product niche to launch a dropshipping business. You really don’t need to worry about inventory acquisition, logistics, and infrastructure. That said, your dropshipping business can be up and running in as little as 30 minutes.

Image Source: (https://dodropshipping.com/the-pros-and-cons-of-dropshipping/)

5. Comparatively Easy to Scale

Just as it is easy and fast to start, a drop shipping business makes it easy for you to scale your operations. Essentially, you only need to list products on your eCommerce store and carry out extensive marketing campaigns. The order fulfillment and shipping part of the business is handled by your supplier(s).

If the demand for a certain product on your store increases, you only need to place a larger order with your dropshipping supplier. Alternatively, you could partner with a few more suppliers to cater for any deficit that may be created by the increasing demand.

Possible Drawbacks

a. Low Profit Margins

Managing a drop shipping store comes with relatively low overhead costs, but so are the returns. The low margins mean that you have to complete a lot of transactions to turn a profit and stay afloat in the increasingly competitive industry.

b. Highly Competitive

Owing to its low capital requirement, dropshipping is more appealing to a lot more entrepreneurs than a wholesale business. Again, the larger companies in your niche are likely to charge lower prices for the same products you are offering.

This kind of competition makes it increasingly difficult for startup businesses and inexperienced entrepreneurs to succeed. However, with the right pricing, creativity, and product differentiation, you can still thrive in the dropshipping world.

c. Legal Liabilities

This is not much of a problem for most dropshippers, but it can still happen. As you may be aware, some suppliers may not be as legitimate as they claim to be. If you happen to work with a fraudulent supplier, you could end up selling products that infringe another company’s trademark or intellectual property.

This could land your business into problems. To avoid such an eventuality, try using appropriate Dropshipping Agreement Contracts whenever possible. 

How Does the Wholesale Business Model Work?

Wholesaling is a business model whereby the merchant sources their merchandise from a manufacturer in bulk, and at a discounted rate. The merchant then sells those items in large quantities to retailers at a profit. As opposed to drop shipping, wholesaling requires you to acquire and maintain an inventory. 

Image Source: (https://businessmodelanalyst.com/wholesale-business-model/amp/

If you wholesale your merchandise, you are selling the products in large quantities—from an inventory you already acquired—to retailers. The retailers later on sell to the final consumers. On average, wholesaling attracts better profit margins, as compared to drop shipping.

Just like dropshipping, wholesaling has a unique set of pros and cons to offer your business, as explained below:

Pros 

1. Higher Profit Margins

Most wholesalers source their products from manufacturing partners in bulk. Bulk buying allows your business to access generous discounts and lower per-item processes. Even after factoring the shipping and inventory management costs, you will get a better profit margin wholesaling than you would drop shipping.

2. Allows You to Offer Branded Experience

The Wholesale business model gives you direct control over various stages of the supply chain. For instance, it ensures that your business is in full control of the order fulfillment process. This way, it is possible to personalize the unboxing experience to your business.

This can, in turn, help encourage customer loyalty and generate repeat business for your wholesale store.

3. Access to Considerable Discounts

When purchasing items in bulk directly from a manufacturer, you are in a better position to negotiate for better prices. It will also give you access to generous discounts, which would not be available if you were to buy the same products one unit at a time.

This alone means that wholesalers get to enjoy better profit margins than dropshippers.

Possible Drawbacks

a. High MOQs

While manufacturing partners offer some of the best prices and discounts, they often require you to buy a very large number of items at once. Some manufacturers are known to impose minimum order quantities of 1,000+ units.

Since you are actually purchasing the items from the manufacturer, this can be a significant capital investment for your business.

b. High Upfront Investment 

Wholesale businesses require a significant amount of capital investment to start. Much of this investment is uncured while acquiring and replenishing the inventory. 

The Main Differences Between Wholesale and Dropshipping Models

Both of the two business models involve the selling of merchandise at a profit. Even so, each of them is distinct in several ways. These are some of the key differences between dropshiping and Wholesale businesses:  

Inventory

The wholesale vs dropshipping topic pretty much boils down to the ownership and management of the inventory as illustrated below:

·         Wholesale

With the wholesale business model, you need to purchase and hold an inventory prior to selling. As such, managing a wholesale business involves inventory management.

It also means that wholesalers need to worry about it inventory storage as well as shipping costs and risks. However, having the stock in hand allows wholesalers to implement certain checks. For instance, you can guarantee your customers consistent product quality.

Image Source: (https://abas-erp.com/en/products/inventory-management)

·         Dropshipping

As opposed to a wholesaler, a dropshipper does not see the products before they are delivered to their customers. The good thing about this is that you never have to purchase or manage an inventory before selling. In turn, it reduces the initial investment as well as overhead costs associated with the business.

However, this also means that you won’t have any control over the inventory and order fulfillment in your business. As a result, you cannot guarantee your customers consistent product quality, nor timely deliveries.

That said, the success of your dropshipping business will—to a great extent—depend on the reliability and reputation of your supplier(s).

Upfront Capital Requirement

When you are starting the business for the very first time, wholesaling requires a considerably higher capital investment. A wholesale business is also more demanding in terms of the time and effort required to run the business. 

To start a wholesale business, you first need to order the inventory and wait for it to arrive at your warehouses. A drop shipping business, on the other hand, does not require you to own an inventory before selling.

To start a drop shipping business, all you need is a good product niche and an online store, making it the cheapest model of the two.

Product Sourcing Options

With wholesale buying, your supplier can either be a reseller or a manufacturer. Alternatively, a wholesaler can depend on the wholesale marketplace you use to source for suppliers.

Dropshippers usually source their products from resellers, especially when using AliExpress. Oftentimes, unless you’re working with a trusted supplier to dropship, there’s also a slight risk of other issues. 

Fraudulent  suppliers – or resellers, in this case – could end up shipping defective items or items that are of a lower quality than what’s advertised to your buyer in an attempt to offload bad stock. 

Packing and Shipping 

Since you’re holding stock with wholesale, you’re also in charge of packing and shipping, making it possible to personalize customer shipments. For instance, you could use branded packaging or just include product samples to encourage cross-selling.

It also gives you control over shipping options, which can come in particularly handy over the year-end holiday season or when pandemics affect supply chain operations. With dropshipping, someone else ships the products.

It is one less job for you and frees you up to attend to other aspects of your business. However, it also means relinquishing control over packaging and shipping. One downside to this is that you do not have any control over delivery—which could result in a slow customer experience.

Dropshipping or Wholesale: Which Model is Ideal for My Store? 

While both dropshipping and wholesale are great revenue channels for an eCommerce store, oftentimes you just have to choose one. So, how can you tell which of the two models is better suited for your online business?

To decide which of the two business models to adopt, here are some of the questions you should ponder upon:

1.    How Much Control Do You Wish To Have?

Wholesaling gives you more hands-on control over the products. It allows you to quickly form relationships with suppliers who can assist your business as it grows. Wholesale also allows you to check the quality of each product as it leaves your possession. This ensures that your customers receive exactly what you’ve promised them. Conversely, dropshipping forces you to relinquish control on everything from quality control to shipping. 

2.    How Fast Do You Want To Start Selling?

Dropshipping allows you to get started with selling almost immediately. All you need to get set up is your online storefront. Depending on the number of products you want to offer and how customized you want your ecommerce website to be, you can have one ready in a matter of minutes.

With wholesale, you need to purchase the inventory and wait for the items to arrive. There’s also inventory management to handle and in-store product placement, both of which consume time. All in all, the preparation can take quite a while—ideally several months before you are ready to launch a wholesale business.

3.    Are You Selling Online or in a Physical Store?

This last question could very well be a deal-breaker when choosing  whether to go wholesale or dropshipping. Since you will be holding stock with wholesale, this model is ideal for a brick-and-mortar store.  Wholesaling may also be carried out on an online storefront.

You could also do it online as well as in your brick-and-mortar store to optimize your revenue. However, dropshipping can only be done through an online store.

Conclusion

Wholesale and drop shipping are some of the most popular business models you can use today. With wholesaling, you need to hold an inventory which is not the case when dropshipping. Of the two, dropshipping is the cheapest and fastest way to start a business.

Wholesaling requires a considerable amount of capital to start, but offers better profit margins as compared to drop shipping. Regardless of the one you choose, you need to partner with the best suppliers to guarantee a sustainable supply chain for your business.

You could also hire the leading sourcing and fulfillment agents to help you find the best product(s) quality at the best market prices. 

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