eCommerce businesses are built on product sales, but where do you get your products? Entrepreneurs have a variety of options for supply, but unless you plan on making all the products yourself, your two best bets are either wholesaling or dropshipping, both of which offer a distinct business model with advantages and disadvantages.
So what’s the difference between these two supply-side ecommerce solutions?
Drop shipping and Wholesaling in a Nutshell
Drop shipping allows you to sell products you don’t physically possess. In this arrangement, you’ll sell “virtual” goods, and when a customer places an order, you’ll arrange for your supplier to “drop ship” the order directly to that customer (usually white labeled or re-branded so the customer isn’t aware another party is involved).
Wholesaling, on the other hand, allows you to purchase bulk inventory in advance to keep on hand, enabling you to ship the products yourself when a customer places an order. Long-term arrangements can be negotiated with most wholesale partners, but price, inventory, and terms will vary depending on your industry and specific partners.
The front-end process will look the same to your customers and they’ll still get the same product when it arrives. The key differences here are who physically possesses the products before an order is shipped.
Advantages and Disadvantages
Each of these eCommerce solutions has advantages and disadvantages, so there’s no single obvious choice here:
- Wholesaling costs less long-term
Generally, buying inventory in bulk means you’ll pay less money per item. Over the long run, assuming you’re charging the same price, wholesaling will lead you to greater profitability.
- Wholesaling gives you more control
Keeping inventory in-house and handling the shipments yourself gives you more control, which means greater oversight on quality, timing, and other customer experience factors.
- Drop shipping bears less risk
Purchasing inventory in advance is a bit of a gamble; you can predict market trends, but not always accurately. With one wrong prediction, you could be stuck with thousands of dollars’ worth of immovable inventory.
- Drop shipping demands less overhead
Remember, to be cost-efficient, the wholesale approach demands products be bought in bulk. That usually means you’ll need significant capital upfront. If you’re a small-time operation or a startup, you may not have access to that kind of cash.
- Drop shipping requires less management
There’s an advantage in having greater control over things, but that also means you’ll need more staff members (or a lot more time) to oversee operations. Dropshipping will require less ongoing management, and therefore fewer ongoing costs and headaches.
How to Make a Choice Between Wholesaling and Drop Shipping
Ultimately, your choice of drop shipping or wholesaling will come down to your individual brand, your business goals, and your access to capital. It’s an important decision that will dictate your operations, long-term risks, and profitability, so don’t take it lightly.
eCommerce consulting services can help you explore the costs, risks, and benefits associated with each model for your specific business, so if you’re wondering which approach is right for you, be sure to contact us at FreeeUp—we can help you build your eCommerce business and find the right employees for your emerging brand.
Connor Gillivan is the author of Free Up Your Business: 50 Secrets to Bootstrap Million Dollar Companies, a serial entrepreneur, and the CMO and co-founder of FreeeUp.com. When he’s not bringing together hundreds of freelancers and business owners, he’s mentoring entrepreneurs through his site, ConnorGillivan.com. He currently lives in Denver, Colorado.