When you are a business that sells products online on a marketplace like Amazon, ebay, Alibaba or have your own ecommerce store, you would have to choose between a dropshipping or a wholesale distribution model.
What is dropshipping and how does the model work?
Dropshipping or DTC (direct-to-consumer) is a fulfillment method that enables retailers to deliver products directly to their customers without having to stock them in their warehouses. They can purchase the products from a third-party manufacturer and have them shipped directly to the customers. This model works well in a scenario where a merchant wants to maintain a lean business model, has low-start-up costs and chooses not to manage inventory, logistics and warehousing. Most small businesses like to operate on this model because can purchase the products from the manufacturer/suppliers and have them deliver the products directly to the customer. All the front-end is still maintained by the business and all they need to do is market the products by driving traffic to their online store, social media engagement and attract the target audience.
What are the advantages of dropshipping?
- Sell faster with low upfront costs
Small businesses that just starting out with limited budgets can make use of this distribution model because there is no need to stock up inventory in a warehouse. It is easy to start out in a garage with two or three personnel in-house with minimum raw-material. Usually, once an online business establishes a product-market fit and have initial interest that is generated for their products, they push for pre-orders. Based on that estimate, they buy products from the manufacturer/supplier. This means they don’t overspend on the products they want to buy. The manufacturer/supplier takes full responsibility of delivering the products to their customers based on that pre-order. This is how businesses eliminate any extra cost associated with fulfillment, hiring labor, logistics and real estate. Apart from small businesses, big-box retailers are also using this method of fulfillment to reduce costs.
- Focus on front-end and scaling up your business in new markets
Businesses don’t have to worry about the major part of the supply chain of their product in a dropshipping model and that’s why it becomes easy for them to focus on the customer service and building their brand identity through marketing. Their cost centers are limited with marketing being the major spending. This helps a business to focus on revenue generating activities, diversify their portfolio of products and explore new markets.
- Leverage the right resources to save time and effort and increase efficiency.
Using supplier’s or a 3PL’s existing resources to get the product delivered to your customer is great cost, time and effort saver. It is a smart business decision compared to setting up everything from scratch in-house and having to oversee and integrate all processes to get to a level of being productive, efficient and most importantly profitable.
What are the disadvantages of dropshipping?
- Need for more volume of transactions
Businesses need to be prepared to sell more volume of products because the margins are lower compared to that of a wholesale model. This is because the price at which you are buying the product from your manufacturer or supplier and the cost involved in shipping of the product to the customer doesn’t leave you with large profit margins. You need to sell more to make more.
- Risk involved in using a third-party dropshipper
If you are using a third-party dropshipper and if there is a delay in delivering your product, you are risking your reputation. Also, if you are looking to customize your packaging styles and give them an unboxing experience, it is almost impossible to do so because you don’t have a control on your products. The dropshipper (supplier/manufacturer/3PL) will most likely use a generic packaging because they tend to provide these services to many businesses and using a branded packaging for every client is cumbersome.
- Dependence on the dropshipper for visibility
When a business outsources their inventory and logistics to a third party dropshipper or their supplier, then there is no control over it. They need to depend on the information given by the dropshipper to communicate the status of the shipment to the customer. Businesses need to have a system in place to receive automate updates based on the product movement.
What is wholesale distribution and how does it work?
If you are taking a wholesale distribution approach, you take full responsibility of the inventory. You buy in bulk from the manufacturer at a discounted price and sell at a premium price. You’ll need a warehouse and logistics planned out from scratch and need to put the right system integrations in place for a smooth, lean and an efficient process from receiving the products from your supplier to storing and managing the inventory, packaging and shipping the products to the customers. This model works great in a situation where there are bulk orders on high demand of your products and you are willing to invest upfront considering you have an established brand and your profit margins will increase with time.
What are the advantages of wholesale distribution?
- Buying in bulk at discounted prices
Buying in bulk gives you a leverage to negotiate the discounts on products that you buy from a wholesale manufacturer/supplier. These discounts keep getting better as your volume increases which in turn increases your profit margins.
- Complete control over inventory
When you have a complete control over your inventory, it is up to you to determine the kind of customer experience you want to give to your customers. It also gives you full visibility into your overall process from packaging to delivery so that you can update the status of your product to your customers accordingly.
- Selling branded products with an established reputation
Wholesale model lets you buy products that are already established in the market and so there is less money spent on actually trying to market the products and making the product known. If the product is good (could be based on quality, price, sustainability, preventing carbon emissions, etc.), there is always be a market for it.
What are the disadvantages of wholesale distribution?
- Takes time, money and effort to establish operations
Businesses need initial start-up funds or money to support setting up and managing large operations that includes real estate rents for warehouses, hiring labor, buying inventory, marketing, logistics and shipping etc. You will need to first invest to reap benefits over a period of time which could mean years.
- Burden to sell all the stock in a limited amount of time
Depending on the products you are stocking up in bulk, it is critical for you to take into consideration the shelf-life of the product (if any). Wholesale model makes sense for those with quite a high volume of orders that can be bought at a discounted price. Now, discounted price does not mean that you can stock up the products in your warehouse forever. In order to prevent issues with cash flow, you will have to sell the products in a certain period of time.
Is dropshipping better than wholesale?
It actually depends on the type of your business model and investment you are able to put in your business. In normal circumstances, dropshipping usually works better than wholesale if you have small order volumes, low-startup funds, less space and are looking to sell faster after establishing a product-market fit. Wholesale on the other hand usually works in situations where you have large order volumes, an established brand and high demand for your products.
Dropshipping has become a side hustle and a means to earn passive income on Amazon, ebay or any marketplace for many who lost their jobs or wanted to explore different career options during the pandemic. It is that easy to find the products in trend/ high demand on the marketplace, create an account, source and buy them from suppliers and have them shipped to the customers. One thing to keep in mind is to follow the rules of each marketplace as described, otherwise there is a risk of getting suspended on the platform.
How to decide which one to choose for your business?
Now since you know the basic concepts of both dropshipping and wholesale model, go through the video below and let’s discuss the things to keep in mind while deciding on which one to choose.
- How much is your overall budget?
- Evaluate the nature of the product you are selling, what is your order volume, availability and overall cost of setting up the operations. Which model makes sense?
- Evaluate your technology infrastructure and resources:
- Which systems do need to have in place in order to be digitally-relevant and efficient, if you are just starting out?
- Which systems can you add to your existing technology stack and the cost involved, if you are a small business?
- What is the skillset of your internal staff?
- Choose the right model for your business.
- How to choose the right partners?
Once you have chosen the model you want to go with, thorough research on the kind of partners you want to work with based on what they can bring to the table, make your processes more efficient, complement your existing workflows is very important. Also, consider their overall experience and ask questions around their timelines, error handling process and customer service.
- Set the right expectations
Once you have determined the partners and technology you need to set the right expectations for all the parties involved regarding collaboration, maintaining transparency and communication.
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Know everything about dropshipping and EDI, how they are related and how EDI can help streamline your dropshipping business.