Dropshipping or Wholesale: Which Sourcing Method is Better?
Sourcing the right products is one of the most important tasks as a business owner.
If you’re thinking about starting a business, be it an online or a physical store, it’s one key factor that will determine how you run your business.
In researching business models, you may have come across the terms “dropshipping” and “wholesale.”
These are two of the most popular product sourcing methods – both with much to offer.
Before you commit to either, there’s a lot you need to learn about them and questions you need to ask yourself about what you want for your store.
- Do you want to sell exclusively online or will you (also) have a physical storefront?
- Where will you get your products from?
- What sort of relationship do you want to have with your provider(s)?
- How quickly do you want to scale your business?
- How much control do you want to have?
In this post, we’ll talk about the intricacies of both dropshipping and buying wholesale. We’ll also dive into their pros and cons so you can make an informed decision on the type of product sourcing setup you want for your business.
Let’s get straight to it.
- How Does the Wholesale Model Work?
- How Does the Dropshipping Model Work?
- Main Differences Between Wholesale and Dropshipping
- Can You Do Both Wholesale and Dropshipping?
- What Is It Like To Run a Wholesale Buying or Dropshipping Business?
- Questions To Ask Yourself Before Deciding on Wholesale Buying or Dropshipping
How Does the Wholesale Model Work?
When most people think about buying wholesale, they generally relate it to purchasing items in bulk – think anywhere from 500 to 2000 products at a time. Though that can be the case, it isn’t always so, and that certainly isn’t what wholesale buying is all about.
Sourcing products wholesale works by finding suppliers you want to purchase from and acquiring their products at lower, wholesale prices and often – but not always – in larger quantities.
This can be done by reaching out to the suppliers directly (in person or online) or through wholesale marketplaces like Handshake.
You may need to hit a minimum order amount to buy products at wholesale rates. However, this is dependent on the supplier. Some don’t apply a minimum order amount, while others may set it at $100 or $200.
Upon receiving your wholesale stock, you will need a place to store it. This can be your home, a storage facility, or the backroom of a brick-and-mortar store.
You’ll then place these items in your store, maybe market them, and sell them individually to customers at a retail price.
(As a general rule of thumb, this is usually set at around double the wholesale price you paid per unit. But this can vary depending on the product, niche, business, and more.)
If you’re selling online, you will also be responsible for packing and shipping the product to the customer.
How Does the Dropshipping Model Work?
With dropshipping, things work differently.
To start, dropshipping takes place primarily online. From product and supplier sourcing to marketing and selling, everything is done through the digital space. In fact, you don’t even have the option of dropshipping with a brick-and-mortar store.
You find products and suppliers (who are usually based in China) through online marketplaces like AliExpress.
After you find a product you want to sell, instead of placing a bulk order as you would with wholesale, you import it into your online store via a dropshipping app such as Oberlo and list it on your ecommerce store.
When a customer buys the product from your store, you’ll place the order with your supplier on AliExpress and provide them with your customer’s order details (product, quantity, name, shipping address, and so on).
The supplier then packages and ships the item(s) from their warehouse to the customer directly – without you ever seeing or touching it.
Main Differences Between Wholesale and Dropshipping
As you can see, the idea behind wholesale and dropshipping is similar. It all boils down to procuring stock for your store and getting it to the end retail customer.
The operations that make that seemingly simple – yet vital – process happen, however, are vastly different.
Because each model affects business planning and budgeting in different ways, whether you choose wholesale or dropshipping to stock your store depends on the larger picture: your business goal.
Here are some of the biggest differences between dropshipping and wholesale to take note of and the pros and cons of each.
With wholesale, you hold the stock that you sell, which means there’s inventory management to handle.
It also means you need to keep tabs on how much storage you have to work with. For smaller items such as candles, jewelry, and stationery, a cupboard or corner of a room could be more than enough space. For larger items like plant pots and kitchenware, you’ll want a bigger space – perhaps a spare room or garage – to stack and store them appropriately.
However, having the stock in hand makes it easy to run quality checks. This way, you can guarantee that your buyers receive exactly what they order. Any defective items can also (usually) be sent back to the wholesaler for an exchange, refund, or store credit (more on this later).
With dropshipping, you never touch the products your customers receive. While that means you don’t have to worry about storage space, it does make it possible for them to receive a product that hasn’t been inspected or is of a lower quality than marketed.
Packing and Shipping
Since you’re holding stock with wholesale, you’re also in charge of packing and shipping, giving you the possibility to personalize your shipment. You can do things like use branded packaging and include product samples to encourage cross-selling.
It also gives you control over shipping options, which can come in particularly handy over the year-end holiday season or when events like the coronavirus pandemic throw a wrench in supply chain operations.
With dropshipping, someone else ships the products. It’s one less job for you and frees you up to attend to other aspects of your business. But it also means relinquishing control over packaging and shipping.
One downside to this is that because dropshipping products are usually sent from China, shipping times can be pretty long – shipping times of 30 days are not uncommon.
With wholesale, because you need to have the stock in hand first, you can’t start selling right off the bat.
You need to go through the process of purchasing, waiting for the shipment to arrive, and placing the products in-store.
With dropshipping, if you know your niche, you can start selling as soon as you have your online infrastructure set up as there’s no logistics to deal with.
This ties in with the previous point.
Because wholesale purchasing requires you to buy the product upfront and to have storage space, this means you will need more starting cash than you’d need with dropshipping.
That said, many wholesale platforms like Handshake offer net terms, which covers the cost of your purchase and gives you a time frame (of usually 60 days) before you need to pay anything. This gives you enough time to receive the goods and start selling before you need to make repayments.
As dropshipping takes place online with no store rental space to pay for, initial costs tend to be much lower.
And since you only pay for the products when a customer places an order, there’s no upfront spend, which frees up some budget for other aspects of the business like marketing.
Reseller vs Manufacturer
With wholesale buying, your supplier can either be a reseller or a manufacturer. Whether it’s one or another can depend on the wholesale marketplace you use to source for suppliers.
On Handshake, for instance, wholesalers are fully vetted and no resellers are allowed. Suppliers are frequently small and medium business owners who are often also the manufacturers, which means you’re in direct contact with the person making the products.
Dropshippers usually source their products from resellers, especially when using AliExpress. Oftentimes, unless you’re working with a trusted supplier to dropship, there’s also a slight risk of other issues.
Shady suppliers – or resellers, in this case – could end up shipping defective items or items that are of a lower quality than what’s advertised to your buyer in an attempt to offload bad stock.
They could also lie to you about having stock when they don’t to lock in the sale. Your customer may end up waiting too long to receive their item and request a refund instead. In this case, not only would you refund the sale, but you would also lose any marketing spend that went into securing that sale.
Though these occurrences are few and far between, they certainly can happen – and have happened – to many dropshipping businesses.
Scaling and White-labeling
Buying wholesale products allows you to start developing one-to-one relationships with your suppliers immediately.
Since your supplier is also likely to be the manufacturer, one of the biggest benefits of this is that it makes it easier to make requests like rushed shipping and white-labeling. You can also learn about their personal story, which helps you sell the products to customers.
If and when you decide to scale with wholesale buying, the process will also be a lot more seamless as you’ll already know everything there is to know about working with your supplier.
With dropshipping, on the other hand, you’re most likely to be dealing with a reseller with no input on manufacturing nor the ability to provide feedback to the manufacturer.
Additionally, scaling your business will require you to find an agent who will be the middleman between you and your supplier (or manufacturer). This also applies to requests for custom packaging or white-labeling.
With wholesale, you can buy from suppliers/manufacturers who are based in your city or state, or from across the USA.
This makes it easier to visit the suppliers in person, vet their manufacturing process, validate their products’ quality, and basically evaluate for yourself if it’s a wholesaler you want to work with.
With dropshipping, you mostly work with sellers who are based in China. Not only does this make it more difficult to check them out in person, but there are also long shipping times and very possibly language barriers to deal with. Thankfully, many USA brands have begun to offer dropshipping, but the numbers still do not add up.
There’s also the issue of communicating across different time zones to contend with. Just so you have an idea, at the time of writing, there’s a 12-hour difference between the US East Coast and Beijing, the Chinese capital. This extends to 15 hours for the US West Coast.
Dropshipping can be super competitive. Because there’s often more than one supplier on AliExpress selling the same item, and the fact that all other dropshipping stores have access to the exact same products as you, it’s really hard to find something exclusive to your store.
Unfortunately, product and niche stealing are extremely common.
When someone else sees your business taking off and realizes they can get their hands on the same product, it won’t be long before they start selling it too, taking your target market and business with them.
With wholesale, even though other businesses have access to the same product, you might be able to negotiate area-exclusivity with your supplier.
Depending on the product, how well your business is doing, and the working relationship you have with your supplier (and possibly other factors), you could even try to obtain full exclusivity on certain products.
Returns and Refunds
In terms of returns and refunds, a lot of it comes down to individual store policies.
That said, dropshippers will usually only offer returns or refunds for broken or defective products.
When this happens, businesses generally tell customers they need to send the item to the dropshipper’s address. If it’s a low-value product, many will simply offer a refund or send another item and tell the customer they can keep the broken product.
Retailers selling actual stock that was acquired wholesale tend to be more flexible with returns and refunds.
Often, they’ll inform customers that if they do not like the product, they’re free to send it back undamaged for a refund, store credit, or exchange. They’ll also have a refund or store credit policy for broken products.
At the end of the day, as a store owner, you can set your own policy on returns and refunds. Just note that businesses that buy wholesale tend to have a more generous policy – something you’ll need to factor in when deciding between dropshipping and buying wholesale.
Can You Do Both Wholesale and Dropshipping?
If you’re still on the fence about whether to go for wholesale buying or dropshipping, we’ve got good news – it’s not an either-or situation and you can very well do both at the same time.
In fact, depending on how you set them up, it may even be complementary.
For instance, you can take advantage of dropshipping’s lower starting costs to test the waters and confirm that a product or niche is popular. Once you’ve decided to commit, you can move towards purchasing stock wholesale.
Alternatively, you can combine the two models and work with them concurrently: purchase stock for your best-selling items wholesale and use dropshipping for slower-selling products that you can afford to have longer shipping times on.
This is also a great solution if storage space is an issue as you won’t have slow-selling products sitting in your store and taking up space.
In short, doing both can be a good way to start out when you don’t have as much starting capital. It allows you to buy some products wholesale and dropship others until your store generates more sales and enough money to buy the rest of the stock wholesale.
What Is It Like To Run a Wholesale Buying or Dropshipping Business?
So you’ve made your choice. What would the process of wholesale buying or dropshipping look like for your business?
Here’s an overview of both.
- Decide on what you want to sell.
- Use a wholesale marketplace such as Handshake to find suppliers and source products that fit your niche. You can search local manufacturers in your state or from across the country – whatever fits your store’s values.
- After finding a supplier, you can correspond with them, learn more about them, start building a relationship, and place your order.
- Wait for the products to arrive.
- Start selling the products either in a brick-and-mortar store or online (or both).
- When a customer purchases a product, fulfill the order by packing it and shipping it out. You can customize your shipping with branded materials and add extras like handwritten thank-you notes or other promotional material to foster better customer satisfaction.
- Decide on what you want to sell.
- Find suppliers on marketplaces like AliExpress and use an app like Oberlo to connect your store and import the product from AliExpress.
- Be thorough about selecting a reputable seller with good reviews, prices, and shipping options.
- Start selling online immediately.
- Once a customer places an order with you, purchase the product from the AliExpress supplier and get it delivered to the customer’s address.
- Wait for the AliExpress supplier to fulfill the order. The speed of this will depend on several factors such as reliability and time of year.
Note that because most AliExpress suppliers are based in China, any shipments during the Chinese New Year holiday period are very likely to face delays as the country shuts down for festivities.
It’s also worthy to mention that throughout the coronavirus pandemic, lots of shipments have also been delayed due to less aircraft flying, which means less room for cargo. It may take up to six weeks before your customers receive their products, and AliExpress tracking can also often be unreliable with infrequent updates.
If you decide to dropship, make sure shipping times are clearly stated on your website and you’ll also want to reiterate that in your communication with your customers.
Questions To Ask Yourself Before Deciding on Wholesale Buying or Dropshipping
As we touched on earlier, dropshipping and wholesale aren’t mutually exclusive and you can definitely do both at the same time.
If you’re wondering which you should start with, it would depend on what you value in your business.
To help you decide, here are five questions to think about before opting for either wholesale buying or dropshipping – or how you’d like to compliment the two.
1. How Much Control Do You Want To Have?
Wholesale buying gives you more hands-on control over your products and the ability to quickly form relationships with suppliers who may be able to assist your business as it grows.
Wholesale also means you can check the quality of each product as it leaves your possession to ensure your customers receive exactly what you’ve promised them.
And unlike dropshipping, you needn’t worry about 30+ day shipping times from China-based sellers and can have products packed and shipped within hours or a day or two.
Conversely, dropshipping means relinquishing control on everything from quality control to shipping.
2. How Important Are Returning Customers?
As wholesale buying grants you more control, it gives you the ability to provide better service and, in turn, ensure greater customer satisfaction.
This drives returning customers, brand loyalty, and even word-of-mouth marketing.
The result of having less control in dropshipping, on the other hand, means a lower returning customer rate and customer satisfaction rate compared to businesses that hold stock.
3. How Soon Do You Want To Start Selling?
Dropshipping allows you to get started with selling almost immediately. All you need to get set up is your online storefront, for which there are many templates available.
Depending on the number of products you want to start with and how personalized you want your ecommerce website to be, getting your store live and up and running can take as short as a matter of hours.
With wholesale, you need to purchase products and wait for them to arrive. There’s also inventory management to handle and in-store product placement, both of which add time.
If you’re selling products online as opposed to a physical store, you could potentially list them first before you get the stock, and then ship them out when they arrive.
However, given the complexities of logistics, there’s a chance your shipment may arrive later than expected. Unless you’ve given your customers a heads-up and they’re willing to endure the uncertainties, this isn’t an option we’d recommend.
4. What’s Your Starting Budget?
Dropshipping stores can be started with very little start-up cash. Often, all you’ll need is a little something to allow you to market your product online and pay for an ecommerce platform.
Even then, there are workarounds for these. Instead of paying for online ads, you can market your product organically using gateways like social media or a business blog to drive traffic to your online store. Ecommerce platforms like Shopify also offer a free 14-day trial.
When it comes to wholesale, you’ll need upfront cash to buy your first products and rent a physical store space if not selling exclusively online.
That said, you could be eligible for net terms on wholesale sites which would give you a buffer to receive products and start selling before you need to make payments.
5. Are You Selling Online or in a Physical Store?
This last question could very well be a deal-breaker for your decision to go wholesale or dropshipping.
Because you’ll be holding stock with wholesale, you have the option to sell products in a brick-and-mortar store, sell online, or do both. This gives your business options when you start to scale.
Dropshipping, however, is online-only. The nature of the business model is for your supplier to handle the packaging and shipping of the product. So although you might have an office space for yourself (and other employees) to work out of and handle things like marketing and customer service, your items are sold online.
We hope this extensive article has helped to provide you a clear picture of how dropshipping and wholesale differ, and, more importantly, given you clarity on what type of store to start.
Do you have any questions about dropshipping or wholesale you’d like answered? Leave them below.