Dropship, Wholesale or Manufacture?

Decisions, decisions! Why must we have so many choices? It’s tough enough to pick a good niche, but after that we still need to decide how we want to run our business.

When starting a new e-commerce store we are faced with three options. Three ways of delivering a product to the customer. The ultimate goal is to serve the customer, and from the customer’s point of view it doesn’t matter how the product reaches him as long as it’s on time and undamaged.

However, what goes on in the background varies depending on how we set up our fulfillment. This in turn makes an impact on our profit margins and investments.

Here are the three ways we can run an e-commerce store, and how they stack up against each other –

Dropship

Dropshipping is the easiest way to set up a store. You can have a fully functional dropshipping store in less than a week. A day, even, if you’re ultra-productive. But being easy to setup and being profitable are two different things. Let’s take a closer look at the glorious or nefarious world (depending on your views) of dropshipping.

What is dropshipping? Dropshipping is when a supplier, manufacturer or distributor ships the product directly from their warehouse to the customer without you getting involved. Well, you do get involved in that the customer buys the product on your site, but after that all the logistics are handled by the supplier.

So let’s say you want to sell headphones. It’s not the best niche for dropshipping, but I’m wearing mine right now so this will do as an example. When people visit your site, they’ll see a bunch of headphones. They’ll find one they like and they’ll place an order on your site. You’ll receive the payment for the product, based on the price you set on your store. Cha-ching!

But here’s the cool part. You don’t actually have the product with you! It’s not stored in a warehouse or your room or your father’s basement. When you receive an order online, all you need to do is forward the order, with the customer’s information, to the dropshipper. The dropshipper is the one who has the product, and they pack and ship it to your customers.

Who are these dropshippers? Well, that depends. Sometimes the manufacturers of the product are dropshippers themselves. Sometimes, they don’t like dealing with supply so they have distributors or wholesalers who buy from them in bulk.

Think of wholesalers as massive warehouses that stock different brands and products. They buy in bulk from all the headphone manufacturers around, hike the price up a bit, and then send out the product in smaller quantities to retailers. Sometimes, wholesalers can be dropshippers too, and they’ll ship individual items to your customers.

The last part of the chain are the retailers. The brick-and-mortar stores and many online stores. They are the ones that face the customers, regardless of where the product comes from. You’re a retailer too, even though the product never really passes through you.

So the point is, you simply are the face of the whole show. The customer buys from you, and not from the manufacturer or wholesaler. You, in turn, buy from the dropshipper when you pass on the order to them. Your profit is the difference between what the customer paid for the product on your website, and what the dropshipper charges for the product.

As you can imagine, it would be best to have the manufacturer dropship the product because they have the lowest prices. Wholesalers have a higher price, and finally retailers, who are really your competitors, have the highest prices.

Well, dropshipping sounds jolly good doesn’t it. There are so many benefits –

  • You get paid first – You don’t store the product, so you don’t need to spend money on inventory. You get paid by the customer first, and only after you have an order do you pay for the product.
  • You have no work – Ok, you actually have a lot of work, but it’s mostly related to the website, marketing and customer service. You don’t need to spend time or money storing products, packaging them and then shipping them.
  • You can do it anywhere – Yup, even on a beach in Thailand. You don’t need an actual physical location to run the business, just a website. 
  • It looks like it’s coming from you – From the customer’s point of you, the product is coming straight from you, unless you explicitly mention it’s not. Dropshippers will actually package the product with your logo on it and send it over to the customer.

Of course, there’s no such thing as a free lunch. Hold off on booking that plane ticket because dropshipping has some flaws –

  • Poor margins – You didn’t think you could buy headphones for $50 and sell them for a few hundred did you? You’re selling products that can be found in many other places. You’re not the only retailer around, so you can’t sell it for as much as you want because your competition will be undercutting you on price. Typical dropshipping margins are 20%, and this doesn’t count your website, customer service or marketing costs.
  • Tough competition – As mentioned previously, if you can dropship it, so can others. Apart from competing with retail outlets, your competing with other e-commerce sites. To get traffic and sales you really need to differentiate yourself, and that’s tough work. You see why headphones is a bad niche for dropshipping?
  • You take the flack – If anything goes wrong on the shipping end, you get the flack. The customer will blame you for misplaced or damaged orders even if it’s not your fault. You’ll lose trust and money. This doesn’t happen all the time, but it can happen.

So dropshipping was looking good until those cons came along. Tough competition and poor margins are not a recipe for a million dollar business. At least not in the first few years. You can make money, but in the start it’s not going to be a lot, and it will take time to grow to a point where you can call it a full-time income.

If that doesn’t appeal to you then have a look at the next option.

Wholesale

As the name suggests, with this option, you buy products in bulk at wholesale prices and then sell them to customers at a markup. Again, you’d make the best profits if you bought directly from the manufacturer. Many manufacturers have authorized dealers, and you can sign up to become one. That means when customers head to the manufacturer’s website, they’ll be redirected to a dealer’s site of which yours will be one.

As with dropshipping, the customer makes the purchase on your site, except this time around you already have the product with you so you won’t be forwarding your orders to the manufacturer. If you have rented out warehouse space, you’ll forward the order to them instead and they’ll package and ship the goods to your customer.

If you’re just starting out, you’ll probably use your garage or basement to store products instead of a warehouse. In this case you’ll have to package and ship the product yourself. When you’re ready to scale up, you can move to a warehouse.

Wholesale seems like a lot of work but there are some interesting pros to this method –

  • More control – The process of packaging and shipping is in your hands, so you control the whole experience. This allows you to customize the packaging to give the customer a better experience. You also have more control over shipping.
  • Decent margins – The margins in wholesale are not amazing but they are better than dropshipping. If you’re selling generic brands you’ll still have an upper limit to your sales price, but because you control everything you can cut down on costs and improve your profit margins.
  • Easier inventory tracking – With dropshipping it’s tough to keep track of inventory, especially if you have multiple dropshippers. You don’t want to take someone’s money only to find out that the product is not in stock. With wholesale, you know exactly how much stock is left.
  • Flexible terms – As you become a trusted retailer, manufacturers will agree to cut you favorable payment terms. This means you don’t have to pay for the product up front. You can buy on credit instead and pay them later.

On the other hand, it has its fair share of cons –

  • Lots of work – Yeah, all that packaging and shipping will take some time, especially when you’re starting out. If you do well, you can eventually scale and hire people to do it for you.
  • Additional costs – You’ll have to bear the cost of storage, packaging and shipping. Sure, you can pass it on to the customer but that will inflate your price.
  • Inventory risk – How much inventory should you keep? The more you keep, the higher the storage costs. However, if you understock, you’ll lost out on potential sales. Operations is not easy. You’ll need to try and forecast sales, and buy enough stock to meet your forecasts. It will take some trial and error, and a lot of learning, before you get this right.
  • Up front costs – At the start, you’ll have to buy inventory up-front. This means you pay before getting paid. Once you start making sales and you build a partnership with the manufacturer, you can cut credit terms.
  • Tough competition – You’re still in the same competition pool as you would be if you dropshipped because you’re selling brands that are available to everyone else.

Wholesale seems like a bad idea, but it’s actually still preferable to dropshipping because of the better margins and more control. As you grow, you can scale your operations, cut payment terms with manufacturers, and outsource and automate the entire storage, packaging and shipping process. Yup, when you reach that stage you can still do the whole Thai beach thing!

The ideal wholesale scenario looks like this. You order a month’s worth of inventory from the manufacturer. It arrives at your warehouse without you needing to pay until the end of the month. You make sales on your site and get paid up front. Orders automatically get routed to the warehouse where the product gets packaged and shipped as per your instructions. At the end of the month you pay the warehouse and the manufacturer, and you keep the difference. Your job is fully online and you don’t need to be on the ground.

Now it definitely looks better than dropshipping, but there’s still one more option left, and it’s the best in my books.

Manufacture

Manufacturing means creating your own products under your own brand. You’re not selling anything that another company has created. This is your product, your brand and your show. It’s unique, it’s new, and because of that, you can set your own prices.

Obviously, manufacturing is a little more complicated than dropshipping and wholesale. In fact, the whole process merits its own set of posts, so for now I’ll limit it to a quick overview and then get into the pros and cons. In short, it’s like wholesale, with the added step of manufacturing the product yourself instead of buying existing ones from other brands.

The basic concept goes like this. You think of a product to manufacture. It could really be anything, even the commonplace iphone case. But your cases are different, they have a unique quality that no other case has. A unique design, or a new material. This allows you to set yourself apart from other cases and charge a higher price. 

You then search for a factory that can manufacture the product according to your specifications. The factory creates a sample for you, there’s a bit of back and forth as you modify the designs, and finally you have a finished product.

You order an initial batch of the product, no lower than the factory’s MOQ (Minimum Order Quantity), and have it shipped to your garage or warehouse. From this point on it’s just like wholesale. Customers order from your site and you package and ship the product from your warehouse.

It sounds like a long process, and it is, but there are pros –

  • You control everything – The entire process, from product design, to manufacture, to storage, packaging and shipping is under your control. You decide the look and feel of the product, you decide how it is presented to the customer, and how it gets there.
  • Huge margins – Because you control everything, you can minimise your costs and set higher prices to increase revenue. When you dropship or wholesale, the manufacturer hikes up the price before selling it to you, thus cutting your margins down. In this case you are the manufacturer, so you get access to those margins as well. Typical manufacturing profit margins are 80-90%.
  • Unique brand – Really, the thought of owning your own brand is exciting enough. Even Apple started from a garage. It will take a long time and a lot of hardwork, but you could become big. Eventually, other e-commerce owners will becoming to you, asking if they could become retailers or distributors.
  • Differentiation – Because you’re creating your own product and brand, you can differentiate yourself from the competition. Take that example of iphone cases. Were you to dropship or wholesale them, it would be hard for you to stand out from the competition. However, if you created something unique, like DODOcase, you’re essentially carving out your own niche and you don’t have to compete on price anymore.

While creating something you can call your own is the ultimate entrepreneurial dream, there are still cons to it –

  • More work – In addition to the packing and shipping you had to do in wholesale, you also have to design the product and then work with a factory to manufacture it. Getting product design right, searching for the right factory, and then creating prototypes is a lot of work and takes a lot of time. If you’re going the manufacturing route, don’t expect to have a ready product within the month.
  • Inventory risk – Depending on what you’re manufacturing, there could be a long lead time between when you ask for a new batch of products to be manufactured and when it finally reaches you or your warehouse. You’ll have to take this into account when you stock your warehouse, so it’s a little more complicated than it was in wholesale.
  • Additional costs – As with wholesale, there’s the cost of storage, packaging and shipping involved. However, there’s also the cost of manufacturing the product. You can reduce the unit cost by manufacturing in bulk, but you’ll increase your inventory risk by producing so many items in one go.
  • Up-front costs – When you’re manufacturing your first batches, you’ll have to pay the factory up-front. Only when you become a trusted customer will they start cutting credit deals with you.

Manufacturing seems like a winner in terms of profit potential, but it’s not for the faint of heart. There’s a lot of upfront investment in terms of time and money, and this can be daunting for someone new. It could take months for you to find the right factory, nail the product design, and produce your first batch. However, if you get it right, you could make millions. Retiring on a Thai beach? How about buying one!

Which option?

So those are the three methods of selling online. You can see how each method has its own set of pros and cons and how they stack up against each other. For some people it can be quite confusing. Which method should you go with? Obviously you want to make money, and manufacturing makes the most, but what if you don’t have the capital to handle the upfront costs? On the other hand, it’s easy to get into dropshipping but you’ve heard of the profits being whittled to nothing. Where do you start?

Don’t let this stop you from starting your own store. I used to spend time thinking about this, time which I could have used just starting my store. The more you think about it and weigh options, the more confused you’ll get and the more you’ll put off starting on your idea. So to make it simple for you, here are my suggestions.

If you’ve never started an e-commerce site before, then start with dropshipping. This is what I suggest in my ‘Launch In A Week‘ course. Dropshipping is simple and you can be up and running pretty quickly with minimal investment. As you get better, learn more, and start making profits, you can move to a wholesale model.

If you’ve started e-commerce stores before but never manufactured anything, go with the wholesale model. Test out your product niche, grow your brand, and build an e-mail list. While you’re doing this, start creating your own product designs for the same niche and contact potential factories to manufacture them. Then, when you’re ready, start selling your own brands and let your followers know about it.

Finally, if you’re a pro at this, then just go straight to manufacture. You could hedge your bets by starting off with the wholesale model but you’ll take longer. Instead, focus on your new product and shorten the time it takes to get the design right and the first batch out.

So which method have you gone with?

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