When you start an online business, there are myriad aspects that you have to consider, making you feel daunted. Amongst all, one of the biggest challenges you need to address is – how to source the products you want to sell. This is a critical business decision because a lot depends on the quality of the products, suppliers’ credibility, flexibility to operate, and profitability of your online business.📈
Two industry-prevalent methods for acquiring products to sell online are wholesaling and dropshipping. However, it is important to determine which option is suitable for your business plan. Let’s explore the pros and cons of each of these platforms to help you choose the most profitable platform for your online business.
Wholesaling and dropshipping are two unique “supply chain management methods” that allow e-commerce businesses to fulfill orders and reach products to the customers. Both are flexible solutions wherein businesses do not involve in any kind of make and manufacturing, but sell items made by others, mostly with supplier branding intact or as private label products. Despite being similar in several ways, there are certain areas that make one more effective than the other.
In this blog, we will compare Wholesale vs. Dropshipping based on their respective advantages and disadvantages for online businesses. Let’s dive in.💰🔍
Table of Contents
- 1 Wholesale
- 2 Dropshipping
- 2.1 What is Dropshipping?
- 2.2 Dropshipping is Ideal for?
- 2.3 Pros of Dropshipping
- 2.4 Cons of Dropshipping
- 2.5 How to find the right products to sell
- 2.6 Which Model is Right for You – Comparing Wholesale & Dropshipping
- 2.7 Business Type
- 2.8 Product Choices
- 2.9 Margins
- 2.10 Risks
- 2.11 Shopify Dropshipping & Shopify Wholesale
- 2.12 Shopify Wholesale
- 2.13 Shopify Dropshipping
- 2.14 Conclusion
What is Wholesale Buying?
Buying wholesale is termed as the process of purchasing products in bulk quantities with the objective to avail the manufacturer’s discounted price, and sell it at a higher price to the customers. It is a viable choice for new e-commerce businesses because the process is simple and ensures high-profit margins when implemented strategically.
Wholesale is a straight-forward and low-risk business model. This is because you are handling products that are already manufactured, established and validated in the marketplace.
Therefore, you do not run the risk of selling items that no one wants. Additionally, you do not need to maintain a huge inventory as compared to making your own products. The minimum order for wholesale buying depends on the product and manufacturer; however, most often they are reasonable and suitable when dealing with smaller brands.
Wholesale Purchasing is Ideal for?
Buying items wholesale is an ideal option for e-commerce owners who are new into the business and want to kick-start the operations quickly. It is also the preferred model if you consider selling a wide variety of brands and products through your e-store. Wholesaling offers innumerable product choices while acquiring the items is easy and hassle-free.
Wholesale main advantages are that you have full control over the shipping, packaging, tracking and managing of the products you sell. You can often get better prices for the products you want to sell, since you buy in bulk, and have better opportunities to handle returns as well as customising the packaging experience for your customers.
Buying wholesale is still the most popular way of managing inventory for most businesses because of the control over the products, as well as if you have a physical retail store, you probably need some products to show in the store as well. However since we mostly focus on ecommerce based businesses, choosing between wholesale and dropshipping can be a big deal.
Pros of Wholesaling
Discussed here are the advantages of the wholesale model:
- Sell Established Products: When you purchase products wholesale, you are investing in items that are already manufactured and have credibility in the market. The products have a good track record and that is why the wholesaler is carrying the items. This helps reduce the risks associated with buying bulk quantities of products with no idea of whether they will sell or not.
- Position Your Brand: Since you are selling products that are already established in the marketplace, it helps position your brand better. If the customers have bought the products from other merchants, chances are they will buy from your e-commerce site as well. This helps build a strong brand familiarity, which can be rewarding for your online business.
- Numerous Choices: Another key advantage of this model is that there are innumerable wholesale suppliers available in the market, giving you a wide variety of products to buy from and grow your business.
- Higher Profits: In the wholesale model, the profit margins of the e-commerce business owner are higher because the prices of the products do not include the cost of packaging and shipping when purchased in bulk. Furthermore, buying items in large quantities from wholesale suppliers lets you enjoy great discounted prices, and you can resell the same at highly marked up prices to earn better profits.
- Better Control: With the wholesale purchase, the control of your inventory lies entirely in your hands. This helps you fulfill customer orders better and faster, right from packaging to shipping and delivery, without having to depend on third party suppliers for the same.
Cons of Wholesaling
Now let’s check out the disadvantages of the wholesale model:
- Selling Established Products: Selling items that are already well-known in the market can work in favor as well as in opposition to you. Since the products have a good reputation, it is likely that multiple retailers sell the goods via their e-stores. Therefore, it can be challenging for a newbie to differentiate with the same products and induce the customers to buy from you.
- Stocking and Managing Product Inventory: A big disadvantage of buying wholesale and probably the main disadvantage is that you have to order products in bulk quantities and stock them safely until they are sold. This means you have to make hefty investments in buying or renting a business premise or warehouse that is big enough to stock your inventory and ship in a hassle-free manner. This can be a costly affair, especially for those who have started new. Depending on the product you have created or manufactured, or the product you chosen to manufacture by your desired partner company, can have a big influence on how big this upfront investment will be, and can be anything from 1.000$ to 500.000$. Keep this in mind for your research.
In addition to this, you will be responsible for shipping the products against each order, either on your own or through your staff members. This is yet another cost to the company.
- Prevailing Risks: The wholesale model is relatively risk-free since you typically invest in established brands. However, a certain level of uncertainty still prevails from the fact that the whole inventory might not sell completely; irrespective of how popular the product was when you purchased it in wholesale. A common reason for this is it can be challenging to convince the buyers to purchase from you amidst today’s cut-throat competition, especially where giant marketplaces like Amazon steal the show.
- Poor Price Control: Selling branded, manufactured products give you lesser flexibility in terms of price control. It is likely that you have to follow their pricing regulations to some extent, and this can affect your profitability. Some manufacturers may impose price control to prohibit you from offering discounts on their brands. This prevents you from boosting your sales with attractive price offers and discounts.
- Handling Multiple Wholesale Suppliers: If your e-commerce store carries a wide variety of products, you need to acquire from different wholesale suppliers. In this scenario, it can be stressful handling multiple partners as the requirements, regulations, and contracts will vary from one to another.
What is Dropshipping?
Dropshipping is a one-of-a-kind retail fulfillment model in which you buy products from third party suppliers, which are then shipped to the customers directly. Unlike wholesale, you do not need to stock inventory or ship the products to the customers on your own. All you have to do is choose a trustworthy dropshipping platform, find products you want to sell, and once a customer places an order, communicate the same to the respective supplier, and they will ship the item directly to the consumer.
The key to profitability is the difference between the prices that your dropshipping partner charges and what you charge your customers. This means the dropshippers resell the products at a marked-up price to maintain a profit margin of around 15-35% again depending on the product and niche in your industry.
The biggest advantage is the option to offer a vast selection of products on sale without having to purchase them upfront or managing the inventory. It is also a great platform to seek diversification in your product inventory and test different goods. After all, it is just about adding new products to the store; no hassle of stocking inventory, no startup costs.
When choosing a dropshipping model, you can either partner with direct manufacturers who provide dropshipping, or work with a reliable dropship platform. A dropship platform is one that aggregates numerous manufacturers and suppliers, making it simpler and hassle-free to sell any quantity of products without having to maintain direct relationships with individual suppliers.
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Dropshipping is Ideal for?
Dropshipping is the cheapest and hands-off option to start your business online. It is the most preferred choice for business owners who want to keep the startup costs at the lowest, and do not care much about profit margins. It is also a suitable option for any online reseller who does not want to stock and manage inventory. Dropshipping is a fantastic way to start your journey in the field of e-commerce and online marketing.
Pros of Dropshipping
The primary advantages of dropshipping are discussed herewith:
- Low Upfront Costs: One of the biggest advantages of dropshipping is its low upfront investment. The unique nature of the model suggests that you never purchase or stock any product inventory, which means lower costs to start up your online business.
- No Need to Purchase Products in Bulk: Another key benefit is that you do not need to buy products in large quantities or maintain a stock. Instead, you can buy the items only when a customer places an order. This ensures hassle-free transactions.
- Lower Risks: In the dropshipping business, you do not have to stock your products in actual. The items are only listed on your e-store, and when someone places an order for the item, it is fulfilled directly by the wholesale supplier. Therefore, dropshipping reduces the risk of losing your money on inventory that remains unsold.
- No Headache of Storing Your Products: This is one of the top benefits of using the dropshipping model – you do not require investing in a business premise or warehouse to stock inventory because there are no products to sell. The orders are fulfilled and shipped straight from the supplier’s end. This minimizes your headache of storing and managing a bulk inventory.
- Manage Your Dropshipping Business from Anywhere and Anytime: Dropshipping is not just about retail shipping on your behalf, but also retail fulfillment from the merchant’s end. All you need is Internet access to your e-store and you can easily manage it from anywhere and anytime.
- Quick Return on Investment: Dropshippers only buy products from respective merchants after the customers have placed the order. This ensures a faster return on investment.
Cons of Dropshipping
Despite being a convenient and quick order fulfillment and shipping method for many small-scale e-store owners, there are several disadvantages of dropshipping.
- High Competition: Dropshipping has a low entry barrier, which means you have to face tremendous competition, even in your niche. In this scenario, it may be extremely difficult to penetrate and establish your business. Many of these competitors often take the approach to lowest-price selling, affecting your profit margins.
- Low-Profit Margins: Another disadvantage of this model is that the returns are low. It is true that dropshipping involves lesser upfront investments because you do not have to stock or manage your inventory, which means lower overhead costs. But so is your profit margin!
“Think about it this way: every sale you make, most of that money goes to the supplier. What you earn is basically skimmed off the top.” And this is even not sufficient to cover your business expenses, leave aside earning good profits. The margins are typically lower because often the business owners fail to get good discounts on products. Either they have to buy in large quantities to get at lower prices or have to mark-up the prices higher to maintain a suitable profit margin.
However, this can cause losing your customers who would prefer to buy from other e-stores offering lower prices than you. Additionally, your profit from dropshipping also depends on your traffic. So if you are new to the business, you need to struggle hard to build a strong client base and see profits coming in.
- Poor Control over Supply Chain: In traditional e-commerce business approach, where the control of product inventory and shipping lies entirely with the business owner, they are in a better position to address customer complaints about the quality of products, shipping speed, and return policies. In fact, they can provide higher customer satisfaction by ensuring good quality products, speedier delivery, and seamless returns.
However, in dropshipping, the business owner has to rely upon the supplier for product quality, shipping, and returns. This results in customer complaints and grievances due to several reasons. Firstly, if the supplier belongs to some other region, it may take over 15-30 days (and even more) to get the products shipped to the customers. Moreover, choosing a not-so-reliable supplier can result in poor quality of products and ineffective communication.
“In e-commerce, customer service is paramount. Even the slightest transgression – such as delay in communication – pushes your customers right into the hands of your competitors.” Getting bad reviews from the customers could finish your dropshipping business even before you could establish it well.
- High Shipping Cost: In dropshipping, shipping can be expensive, especially when you acquire products from multiple suppliers. Take, for example, you dropship clothing and use four different suppliers for the product inventory. If a customer places an order from all four of these suppliers, you will need to pay for all the four shipments individually rather than grouping the goods together and paying a single shipment cost.
This can cause your shipping expenses to be extremely high. The only option is to pass along the cost to your customers. But this can result in cart abandonment because the customers may not be willing to pay such high shipping charges, especially for a single item. A good solution is to charge shipping cost from your customers when they buy in small quantities and make it free on purchase of a minimum order amount.
How to find the right products to sell
This is a big question, and was discussed in another post here on the website, however I have created a short checklist for you to keep track of when you are researching products to sell, for your ecommerce store.
- ✅ Check Google Trends in the niche you research
- ✅ Research Facebook for hot selling products (look at engagement and views)
- ✅ Check both Amazon and AliExpress reviews of the product
- ✅ If you sell on Amazon use JungleScout to find hot products
- ✅ Choose product which could retail price between 12$ – 60$
- ✅ Choose product which could get minimum 300% markup (Ex: 10$ cost and 30$ retail)
Which Model is Right for You – Comparing Wholesale & Dropshipping
Now that you know the pros and cons of both the order fulfillment models – wholesale and dropshipping – it is crucial to determine which one is ideal for your online business. Let’s compare both the methods on the basis of the following parameters:
Since there is less risk involved in dropshipping, it is the ideal option for business owners who are starting new. On the other hand, wholesaling is recommended for experienced sellers who are ready to take risks, deal with thousands of products, and have good money to play with.
Buying from wholesalers gives you innumerable products to choose from and across various categories. This is ideal if you run a big e-commerce store with hundreds and thousands of products. Dropshipping also provides good product choices, but the process to source the goods is complex than the wholesale process.
Many dropshipping platforms such as AliExpress require the business owners to contact the suppliers on their own, which makes it hassle-prone to deal with multiple vendors.
The profit margin from wholesale is generally better than dropshipping. This is because the business owners buy in bulk quantities, which helps them get the products at heavily discounted prices. They can then mark up the prices at their own will and resell the items with higher profit margins. Typically, an online business owner can earn a 50% margin by strategically reselling wholesale products at retail pricing.
On the other hand, margins with dropshipping business are typically lower. This is because often they are subject to supplier’s pricing policies or buy products at a higher price themselves. For example, dropshipping aggregators such as AliExpress carry products with higher prices, which leave little room for the dropshippers to markup the retail prices so as to earn higher profits. With dropshipping, the profit margins can be anything from 15-20%.
Purchasing wholesale is at a higher risk than dropshipping because the e-commerce businesses have to stock inventory in bulk quantities, without the assurance that they will be able to sell all the items. The major risk comes from differentiating your business from other established retailers selling the products, and having a better client base and credibility in the market.
In this regard, dropshipping stands at much lower risk as there are no upfront costs involved. Moreover, they do not have to bear the jeopardy of carrying unsold inventory.
To sum up, if you are new into the online business and want to keep it simple and straightforward with lower risks, dropshipping is the ideal choice for you; though it can take time to see good profits coming from your dropshipping business. On the other hand, wholesale is the right order fulfillment method if you are planning to carry products in bulk, manage your own inventory, and go for bigger profits. It is crucial to have good money in hand before you start your e-commerce business based on this platform.
Shopify Dropshipping & Shopify Wholesale
Shopify is one of the leading e-commerce solutions that is suitable for both wholesale and dropshipping.
You can use the platform to sell your own products or products from other manufacturers to other businesses, i.e. B2B selling. Shopify provides a wide range of options to sell products through a wholesale model, including creating a unique storefront in addition to your e-commerce website or using discount codes. Select the right option that is ideal for your business size and complexity.
Here are some great examples of Shopify wholesale clients:
- Using Shopify Plus’ wholesale platform, The Elephant Pants has doubled its sale in just two months.
- Within one year of switching from Magento, the wholesale e-commerce sale of Beard & Blade’s doubled.
- The wholesale sales of Laird Superfood grew 550% year-on-year and will account for 75% of its total sales in the future.
Shopify also supports dropshipping, providing one of the largest directories of suppliers, high-quality products, and ease of use. You can easily create a dropshipping store using Shopify, find products on Oberlo, select Oberlo Verified Suppliers, and earn higher profit margins.
Both wholesale buying and dropshipping has their own advantages and disadvantages for online business owners. It is crucial to first determine the type of business you have, and then choose the right model that is suitable for you. And you can even use both the methods together to harness the potentials of both. Start small-scale by dropshipping products and if you get a hot-seller, buy it in bulk, store it in a fulfillment warehouse, and make bigger profits.