For merchants that plan on selling their product via either an online marketplace or their own ecommerce store, there are two main options available to you for managing inventory and order fulfillment: dropshipping and wholesale.
When comparing dropshipping and wholesale, there’s one key difference that merchants need to pay attention to – dropshipping allows you to outsource inventory management, order fulfillment, and shipping to external partners, while wholesale requires you to take responsibility for these operations yourself.
Both dropshipping and wholesale come with a list of pros and cons. So, it’s important to weigh up both options carefully to decide which is the best strategy for your business.
Dropshipping has grown hugely in popularity over the past decade because it offers digitally-native retailers fast and easy entry into the marketplace. This is because dropshipping doesn’t require you to own and manage your own inventory; instead, customer orders are passed on directly to the product’s manufacturer, another retailer, or a specialist dropshipping service for them to fulfill and ship on your behalf.
This means that dropshipping cuts out a lot of complex logistics management because the merchant never has to interact with the product themselves – they only need to facilitate the actual sale.
Advantages of dropshipping
Because merchants don’t own their stock when dropshipping, they don’t get caught up in the large upfront costs needed to purchase inventory. It’s only when an order is placed that the merchant has to pay for the items requested – meaning that they are effectively buying one unit at a time.
Furthermore, having a third-party be responsible for handling order fulfillment and shipping massively reduces overheads by eliminating the need to rent warehousing space or hire staff for this purpose.
Because you only pay for items when orders are placed, dropshipping allows merchants to experiment relatively risk-free with diversifying their offerings through new product lines. Put simply, you aren’t saddled with a bunch of excess stock that you need to find a way of getting rid of if it doesn’t take off.
A distinct brand identity, smart marketing, and strong customer retention strategies are crucial to achieving longevity in such a saturated marketplace – yet many businesses simply can’t give these areas the attention they deserve. Because dropshipping takes a lot of internal management off your hands, this gives you increased bandwidth to focus on these all-important business activities that often fall by the wayside.
While not owning stock is cheaper and more convenient, there’s a clear downside – because your dropshipper takes a major cut out of each sale, your profit margins will be considerably lower. This requires you to sell high volumes if you’re going to make a profit – which is easier said than done in the competitive ecommerce sector.
Because the merchant is not involved in the order fulfillment and shipping process, they’re at a significant disadvantage if order errors or shipping delays occur. Why? Because they likely won’t have access to real-time inventory or order information. And as the entity that your customer purchased from, you’re in charge of remedying the situation – and also the one that takes the reputational hit if things don’t go smoothly, not the dropshipper!
While dropshipping might give you more to focus on branding, this doesn’t extend to the delivery experience itself. Dropshippers deliberately use generic packaging styles so that customers aren’t aware that the merchant has outsourced their inventory – but this also removes your brand from the equation, making it difficult to foster brand recognition.
When purchasing wholesale, merchants will approach manufacturers directly and buy items in bulk to get a more favorable price per unit. Because the products are branded and are already established, all the merchant needs to do is list the item on their store and incur sales off their existing reputation.
The biggest advantage of purchasing wholesale stock is that this comes at a generous discount compared with buying units individually. Best of all, the discount you can obtain from the wholesaler improves as your order volumes increase, meaning that your profit margins can rise substantially over time.
Because wholesale gives you direct control over the order fulfillment process, you have a great opportunity to customize the unboxing experience and make a favorable impression on your customers. Immersive brand experiences that speak of your business’s values help to foster customer loyalty, which in turn increases the odds of repeat purchases.
Because wholesale gives you access to products and brands that are already well-established, you can leverage this familiarity to give you more credibility as a vendor. Moreover, it’s a powerful marketing strategy that helps to attract new consumer segments when you expand your product range with a new brand or product offering.
To obtain a wholesale discount, this usually requires merchants to purchase a high volume of stock – often as high as 1000+ units. This is ill-suited to retailers with small order volumes, who are likely to face difficulties with cashflow if they can’t sell these units within a narrow timeframe.
Storing high volumes of inventory requires a lot of warehousing space, and necessitates the need for more high-powered inventory management systems to prevent stock-outs. All of this represents a large investment for merchants, which affects the profitability of their operation and adds a lot of extra complexity.
When you’re buying branded products, you have a limited ability to set the rules of the game. The price that you can sell products for is always going to be controlled to some extent by the wholesaler and competing retailers, which makes it more difficult to use certain promotional and selling strategies. Furthermore, an inventory made up of branded products makes it much harder for you to stand out from the crowd – meaning you will need to find a competitive advantage elsewhere.
It’s possible that the products you’re selling will make this decision for you. The availability and cost of certain items can differ substantially between the two methods, so it’s important to make a comparison before you get started. Your order volumes, growth model, and ability to manage stock independently are also major deciding factors.
If you still aren’t sure which is right for you or would like help in transitioning between models, it’s a good idea to partner with an experienced 3PL provider like Whiplash who can put together a cost-effective fulfillment and shipping strategy based on your business’s unique needs.