Drop Shipping Versus WholesaleLast Updated:
Are you thinking about running your own online store? If you have done some research about this kind of business, then you may have already encountered the concepts of drop shipping and buying wholesale. These are the two most common methods in eCommerce, and are actually similar in the sense that you are taking orders online and ensuring the delivery of the items. Despite being fundamentally alike, the differences between the two lie in the intricacies of the business process. Let’s take a closer look.
Drop shipping involves partnering with a supplier who has the products within their own premises. They will be in charge of processing the order and shipping the items to the customer–not you. You won’t need to purchase the items beforehand; you only order them from the drop shipper if you receive an order from a customer. They will then take care of the process from there, up until the order is delivered to the customer. In short, there are three parties in this method: the customer, you, and the drop shipper.
On the other hand, buying wholesale means actually purchasing the goods that you intend to sell in your own store. This means that you have to set aside a sufficient amount of budget to buy items, usually in bulk, so that you can get them at a significantly lower price. All of the items listed as available in your store would be in your possession; and given the quantity and size of your products, you may need to store them in a warehouse for security and easier checking of inventory.
With this method, only two parties are involved in a transaction: you and the customer. Since the items for sale are in your hands, you are responsible for processing the order and shipping the item to the customer. This also means only you have the power to approve or deny any return or refund requests.
The Important Differences
Just going by the short description, you can already see how the two methods are similar but not identical. Here we zero in on the essential points that you should look into before making a decision to pursue either.
The first major difference that sets the two apart is the budget that you need to start the business. In drop shipping, the starting cost is composed only of fees for building and running your website and for the drop shipping partner membership, if any. The expenses are minimal, and so are the risks of losing your initial investment.
Meanwhile, in a wholesale setup, you need to purchase the items that you will be selling; and given that you need to reach a minimum quantity to enjoy lower prices, and stock enough to fulfill multiple orders, you’d have to set aside a fairly significant amount. You also have to factor in the storage space that you may need to acquire in order to keep the items secured and accessible at all times for a quick retrieval for orders. Costs can easily reach hundreds, sometimes even thousands of dollars, depending on the product that you intend to sell. Since your capital is high, the risk is even higher; since you don’t have a guarantee when you will earn back your expenses, or if you break even at all.
One of drop shipping’s disadvantages is that it offers lower margins compared to buying wholesale. This is because your profit relies on the difference between your prices and the prices from your drop ship partner. Profit margins are around 20%, meaning you have to sell a significant volume before making a decent profit.
When buying wholesale, you can haggle for better prices since you will most likely buy in bulk. Typically, profit margins run around 50%, although this varies in some cases. It takes less sales to make a satisfying profit as compared to drop shipping.
Another element of contrast is inventory. In drop shipping, you don’t have the goods with you–the drop shipper takes care of them all. Therefore, you don’t have the responsibility of manually counting and monitoring them. All you have to do is sync the drop shipper’s inventory with your store and it should reflect the latest item count that they have. But mistakes can and will happen; the drop shipper can erroneously tag a certain item as available when in reality, it is not in stock. This is where your customer service skills will be put to test, as customers are not aware of the whole arrangement and only see you as responsible for anything that happens in your store.
You also cannot control which items are offered in their catalog, so you will have to look for another supplier if you want a more varied set of products in your store. Moreover, restocking the products is all in their basket; although you can send them a request to restock sooner and hopefully, they’ll react accordingly.
This is one of the strengths of buying wholesale. The inventory is absolutely in your control–from the varieties of the products that you have chosen to offer, to the stocks you have on hand. While you need to exert more effort in managing the inventory, you are directly monitoring them; chances of errors are slim, since you will surely be more vigilant. You also have control over when the stocks are replenished–you’ll be able to buy them when quantities are low so that you won’t run out. The challenge here is not to under- or overstock, as both can result in profit losses.
In drop shipping, processing the order and shipping the package are both the drop shipper’s responsibility. In instances when there are delays due to the order processing or any other unexpected event, it is absolutely out of your control; but you will have the task of explaining the situation to the customer without putting the blame on your supplier. Moreover, there isn’t much that you can do if an order is being processed and taking longer than usual–you can only do follow-ups with the drop shipper. You also have to wait for the tracking code from the supplier.
When buying wholesale and working with that method, you are responsible for shipping out the items since they are already in your possession; so you are pretty much in control of the timetable for delivery. You also do not need to wait to get the tracking code of the package–you’ll have it ready to send to the customer once you have sent the item to the shipping carrier.
Returns and Exchanges
While returns and exchanges can be a hassle for both the seller and the buyer, it becomes an even more complicated ordeal when you have a drop ship partner. They have the final say on whether an item can be accepted for return or not; the same goes for exchanges. You will also have to wait for their judgment before issuing a refund to the customer. There are some alternatives that you can do to make it easier both for you and the customer–for example, you can just keep the item, order the one that the customer really wants from the drop shipper, and wait for the previous one to be ordered by another buyer.
Meanwhile, this scenario isn’t much of an inconvenience for those who buy wholesale. The process is simpler: the customer returns the item to you, you check if it is good for return or verify any claimed defects and damages, and then issue a refund or exchange if all looks good and valid. Moreover, since you have the items before shipping them, you should have undeniable proof that the products are in good condition before they are shipped; so you can employ better judgment when it comes to claims about defects. Exchanges also won’t have to take long–you can readily send out the new item if the previous one is intact.
The Bottom Line
Choosing between drop shipping and buying wholesale will largely depend on your preferences. If you like a more hands-on approach with greater control over every single detail, larger profits in every sale, and less after-sales service headaches, then buying wholesale might be for you. On the other hand, if you would like to delegate the business operations and focus more on advertising and making strategies to bring in more customers–and you don’t mind waiting for a little while to make a great profit–then drop shipping is a good fit for you.
More importantly, if you have a large income to start your business, then buying wholesale is definitely a better route. Meanwhile, if you are an absolute newbie in eCommerce and have little to spare for your venture, then you can drop ship now; then maybe when you have enough funds, you can expand to buying wholesale, should you want to try it out.
Check out our list of the best drop shipping companies that you can find for your online store.