If you’re thinking about starting a business, be it an online store or a physical one, 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—and both have much to offer. Ahead, you’ll learn about the intricacies of both dropshipping and buying wholesale.
Table of contents
- Dropshipping vs. wholesale: the key facts
- How does the wholesale business model work?
- How does the dropshipping business model work?
- Main differences between wholesale and dropshipping
- Pros and cons of wholesale and dropshipping
- Questions to ask yourself before deciding on wholesale buying or dropshipping
- Dropshipping vs. wholesale FAQ
Dropshipping vs. wholesale: the key facts
In dropshipping, the retailer does not keep products in stock but transfers orders to a supplier, who ships them directly to the customer. The wholesale ecommerce model involves purchasing goods in bulk from manufacturers or distributors, storing them, and reselling them to customers.
How does the wholesale business model work?
When most people think about buying wholesale, they generally relate it to purchasing items in bulk. Think anywhere from 500 to 2,000 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 works by finding wholesale suppliers you want to purchase from and acquiring their products at lower wholesale prices and often in larger quantities. This can be done by reaching out to the suppliers directly (in person or online) or through wholesale marketplaces like Faire.
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.
How does the dropshipping business model work?
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 to your online store via a dropshipping app such as DSers and list it on your site.
When a customer buys the product from your store, you’ll place the order with your dropshipping supplier 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 ideas behind wholesale and dropshipping are similar. It all boils down to procuring stock for your store and getting it to the end retail customer.
Here are some of the biggest differences between dropshipping and wholesale.
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, like candles, jewelry, and stationery, a cupboard or corner of a room may be enough. It’s best to stack and store larger items like kitchenware and plant pots in a larger space, such as the garage or spare room.
You can run quality checks with stock in hand, so your buyers get exactly what they ordered. If an item is defective, you can return it to the wholesaler for an exchange, refund, or store credit.
Dropshipping means that you never have to touch the products your customers receive. While this means you don’t have to worry about storage space, it also means that they may receive a product that hasn’t been inspected.
Packing and shipping
Holding stock with wholesale gives you the opportunity to personalize your shipment. You can, for example, use branded packaging and include product samples to encourage cross-selling.
You can also control shipping options, which can be particularly useful during the holiday season or when events like a pandemic throw a wrench in supply chain planning.
A dropshipper ships your products, giving you one less thing to worry about, and freeing you up to focus on other aspects of your online business. Dropshipping products are usually shipped from China, so shipping times can be pretty long with ePacket. Thirty days is 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 are no logistics to deal with.
Wholesale purchasing requires upfront purchases and storage space, so you will need more cash than with dropshipping.
There is no store rental space to pay for with dropshipping, so initial costs are lower. Since you only pay when a customer places an order, there are no upfront costs, which frees up some budget for marketing.
Scaling and white-labeling
Buying wholesale items 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’s easier to make requests like rushed shipping and white-labeling.
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.
With wholesale, you can buy from suppliers/manufacturers in your city or state, or from across the country. It makes it easier to see the wholesalers in person, evaluate their manufacturing process, and validate the quality of their products.
Wholesale marketplaces like Faire let you filter suppliers by location, making it easier to find a brand closer to you.
The majority of dropshippers are from China, which makes it difficult for you to visit them in person, and means long shipping times and language barriers. Thankfully, many US brands offer dropshipping, but the numbers don’t add up.
In dropshipping, it’s hard to find something exclusive, because there are usually several suppliers on AliExpress selling the same item, and other dropshipping stores have access to the same products as you.
You may be able to negotiate area-exclusivity with your supplier with wholesale, even if other businesses have access to the same product. It may be possible to obtain full exclusivity on certain products depending on your product, your business, and your relationship with your supplier.
Returns and refunds
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.
Pros and cons of wholesale and dropshipping
Now you have an idea of the differences between wholesale and dropshipping. Let’s look at the advantages and disadvantages of each ecommerce business model.
- Higher profit margins due to lower per-unit costs when buying in bulk.
- Complete control over inventory, which leads to better stock management and quality control.
- Can establish direct relationships with manufacturers, potentially securing exclusive deals or products.
- More opportunities for branding and packaging customization.
- Immediate access to inventory allows for faster shipping times to customers.
- Significant capital required for initial purchasing and warehousing.
- Risk of overstocking, leading to potential loss if goods remain unsold.
- Additional overhead costs including storage, staff, and logistics management.
- Minimal startup costs since there’s no need to buy and store inventory.
- Lower financial risk because orders are only placed with suppliers after customers have bought the product.
- Wide product selection.
- Flexibility to offer a diverse range of products without additional cost.
- Easier scaling and business growth, as increased orders don’t require expanding operations.
- Lower profit margins as a trade-off for the convenience of not handling stock.
- No control over inventory levels.
- Reliance on third-party suppliers can lead to unpredictable product quality and shipping times.
Questions to ask yourself before deciding on wholesale buying or dropshipping
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 depends 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 complement the two.
- How much control do you want to have? Wholesale gives you more control over products and supplier relationships. Dropshipping gives full control (from quality assurance to shipping) over to the dropshipper.
- How important are returning customers? Wholesale lets you provide better service for customers, which can improve satisfaction. Dropshipping generally offers a less satisfying customer experience.
- How soon do you want to start selling? Dropshipping allows you to get started with selling almost immediately with an online store. With wholesale, you need to buy products and wait for the shipment to arrive. The length of time depends on what you’re selling.
- What’s your starting budget? You can start a dropshipping store with very little cash. Wholesale requires upfront cash and brand building, considering transaction values are much higher.
- Are you selling online or in a physical store? Dropshipping is online-only. Wholesalers can distribute products to your warehouse or a physical store.
Sell better online with Shopify
Choosing between dropshipping and wholesale doesn’t have to be an either/or decision.
With Shopify’s ecommerce platform, you have the freedom to leverage both strategies to maximize your market reach and profitability. Take the first step towards ecommerce success by setting up your Shopify store today, and explore the vast potentials of dropshipping and wholesale under one convenient, user-friendly umbrella.