Have you ever wondered what the difference between wholesale and dropshipping is? It is a topic that comes up often when people want to become resellers.
Besides the key differences such as stock handling and inventory management, you may be surprised by the other differences between wholesale and dropshipping. And that’s why we decided to write this article.
But before we start with our in-depth comparison of the two different ways of running your own business, it is important to give you a better understanding of how each model works.
What is wholesale and how does it work?
As you probably know, manufacturers can’t sell all of their goods directly to end consumers; thus, they use different channels of distribution to deliver the goods to their target market. And wholesaling plays a vital role in that distribution process.
Namely, buying wholesale is a simple business model, where you are buying your products (often in bulk) from the manufacturers or middlemen suppliers at discounted wholesale prices.
The middlemen in this supply process are called wholesalers, wholesale distributors, or wholesale suppliers. Once you have bought your goods from the manufacturer or the middleman supplier, you can sell them both online and from a traditional brick-and-mortar store at higher prices to make a profit.
To put it simply, in case you are purchasing products in bulk from the manufacturer or the middleman supplier that gets the goods from the manufacturer, you are actually running a wholesale business.
Bulk discounts and higher profit margins
One of the most popular advantages of buying wholesale is that you can get good deals and highly discounted prices. Buying in bulk is usually much cheaper than buying smaller quantities of products.
So, if you buy your products in large quantities, you will receive a price break or discount on your purchase. This allows you to achieve the lowest cost for each unit in your inventory, which translates into higher profit margins.
Greater control over product quality, delivery times and logistics, and customer support
By storing your inventory and handling the shipments yourself, you have greater control over product quality, delivery times and logistics, and customer support.
Also, as a wholesaler, you have large quantities of products that are available for sale. This can be a major advantage for holidays and busy periods when products are selling out fast. This can prevent you from dealing with frustrated and dissatisfied customers.
A more consistent income
Let’s say you are selling branded clothing for women and your customers love the quality and uniqueness of your products.
They will become regular customers and make a profit from your products (if they are retailers). They will keep coming back, which means that you will have a more consistent income.
Setting up a wholesale business can be an exciting process, but it does cost money, so it is important to be realistic when it comes to expenses. You will need some cash to get started. To be more specific, you will have to pay manufacturers for merchandise before you have the orders from your customers confirmed.
Moreover, buying large quantities of goods imposes a need for storage, which means you need to ensure you have plenty of warehouse storage space to store that bulk. And this means that you have to pay for that storage space.
Other common costs include insurance, bills, legal fees, advertising, salaries, etc. In a nutshell, to start a wholesale business, you need significant capital upfront.
Minimum order quantity
Buying wholesale means that you have to buy a certain minimum order quantity (MOQ). MOQ refers to the minimum quantity of goods required to be purchased at one time.
When you deal with manufacturers or wholesale suppliers, the MOQ is the smallest order they are willing to accept so that you can enjoy their wholesale pricing.
For instance, if they have an MOQ of 50 units or $500, you need to purchase at least 50 units or spend $500. Otherwise, they will not want to cooperate with you.
Many successful wholesalers often start small but end up with a wider variety of items and warehouses in multiple locations worldwide. So, it is advisable to start small and once you have built loyalty with your existing customers and gained a foothold in the market, you can begin to expand your product range.
It is important to understand that buying inventory in advance is a kind of gamble; it is impossible to always predict sales trends accurately.
If changes in customer preferences and the market, in general, are neglected, your sales may suffer and you may be stuck with hundreds of dollars worth of slow-moving inventory.
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What is dropshipping and how does it work?
Dropshipping is a popular e-commerce business model, where you do not keep the products you sell in stock. As a dropshipper, you do not keep any stock but earn commission on orders transferred to your dropshipping supplier.
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To explain it more clearly, you create a dropshipping website and partner with a dropshipping supplier that handles the products you want to sell online. You add the products to your dropshipping store and advertise your business.
When a customer places an order on your website, you pass it to the supplier. You can either manually or automatically pass the order to the supplier. Then the supplier packs and ships the order to your customer.
Lower start-up costs
The main reason many new entrepreneurs choose the dropshipping business model is that it requires very little initial investment. Dropshipping eliminates the operational costs of a traditional retail store, like buying inventory and renting storage or retail space.
The only real cost you will have to cover is the expense of building and hosting your website, which’s next to nothing in comparison with opening a brick-and-mortar store.
Also, this business model does not require you to pay for the inventory upfront, which’s good for businesses with a low cash flow.
This business model offers the possibility to test the waters before diving in. It allows you to test different products and niches with limited downside and choose profitable products.
You have the chance to test the appetite customers have for certain product categories, without worrying about any slow-moving or immovable inventory.
You can build and operate a fully functional dropshipping business right from your laptop. You can run your business from anywhere as long as you have a good internet speed for effective communication with your dropshipping suppliers and customers.
Your only physical tie to your business is your laptop. So, if you are interested in working in your cozy pajamas from your home, dropshipping may be perfect for you.
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Since very little initial investment is needed to set up a dropshipping business, many people decide to start such a business. As there are low barriers to entry, you will probably deal with an overwhelming amount of competition. But with an aggressive marketing campaign, you can make your business stand out from competitors.
Lower profit margins
Many new e-commerce entrepreneurs believe that the cost of inventory, storage, and shipment associated with wholesaling can lead to a relatively small income.
Thus, the dropshipping business model seems to be the best option. If you are one of these people, keep in mind that as you do not have to hold or manage inventory, the overhead is low — but so are the returns.
As you do not buy in bulk directly from manufacturers, you would not get discounted prices. And this equates with lower profit margins.
With dropshipping, you have no control over the quality of the products, the appearance of the packaging, or the timeliness of delivery.
However, suppliers can make an error from time to time. When this occurs, you need to take responsibility and apologize to your customers for the inconvenience.
From low-quality packing and missing items to delayed deliveries and return complications, you need to be able to deal with any issues as quickly as possible.
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Choosing between wholesale and dropshipping
Now that you have learned everything you need to know to help you navigate the market and understood the different options available to you, it is important to choose the right approach for your business is.
As you may have noticed, both business models (wholesale or dropshipping) discussed above have certain advantages and disadvantages, so depending on your products, your access to capital, and your business goals, one business model may be more suitable for you.
Now, the crucial decision is whether you should start a wholesale or dropshipping business. You should not take this decision lightly because it will have a huge impact on your operations, profitability, and long-term risks.