Dropshipping vs Marketplace vs Wholesale
Many people have been asking this question,
“What’s the difference between Dropshipping, Marketplace, and Wholesale?”
If you don’t already know, dropshipping is a business model where the eCommerce store owner and the retailer does not own any inventory. The entire inventory is outsourced to a third party seller who does the fulfillment, warehousing as well as shipping.
Basically, as a dropshipper, you will have absolutely zero inventory risk. You might think, then why don’t my customers go directly to the supplier then? In dropshipping, the shipping method typically uses white labels so customers do not actually know that the dropshipper exist in the market. They would think the products and fulfilling is done completely by you.
It’s a very innovative business model that’s been around for the past 10 years which is quite old. Right now technology has grown so much within the society and has enabled dropshipping with so much more possibilities.
I’ve started my eCommerce journey through dropshipping. I used to dropship Korean female clothing, gadgets, as well as healing crystals. However, there was an issue where my system is not very integrated with my dropshipper. There were a lot of overselling and underselling issues because the inventory levels were not synced.
My products could have been sold on my store, but the supplier does not have the product in stock. Thankfully, nowadays there are tons of apps that help you automatically sync inventory with your dropshipper as well as your eCommerce store.
Let’s start with the strengths of dropshipping.
The strength is obviously in inventory where your capital to startup is low. You can start a drop website for roughly less than 300 US dollar. Another strength is that you wouldn’t need to learn so much about shipping methods. This frees up a lot of your time that you’d be able to focus on growing your business.
You don’t have to do the operational work that can be quite heavy and time-consuming when you are starting this business. This is why Dropshipping is among the favorite for those starting a new business and can even make you your first Million in sales.
Next, we’ll move on to the weaknesses.
Since dropshipping is being handled by a third party, you don’t get full control over shipping and packing processes. So in the fulfillment process, you lose a lot of control there. You wouldn’t be able to customize your invoice. For example, you wouldn’t be able to put in a thank you card inside your parcel. But that’s pretty much the only weakness about dropshipping.
When you want to sell more products, you will need to source multiple dropshippers. If a customer buys a single product fulfilled by each and every one of these dropshippers, the customer will be receiving three different shipments for example. You would have to pay three times the shipping while your customer only has to pay one.
It’s always good to check up on your dropshipper’s items and reliability to be able to plan ahead for the future of your store as you grow.
Many people are tempted to start their eCommerce business in huge marketplaces such as Alibaba, Amazon, Lazada, eBay, etc.
Personally, I’m not a big fan of starting at a marketplace and I’m pretty sure a lot of you know about the Toys”R” Us incident in the US. They had to shut their stores down because eCommerce companies like Amazon are severely undercutting them for the same product. Many people didn’t notice, but Toys”R”Us actually outsourced the entire eCommerce operations to Amazon since day one.
Basically, what they’ve done by doing this is training people to purchase toys on Amazon rather than their own store. If you plan to do this in the long run, you’re actually training your customers to purchase your products from a marketplace. You want your own company or brand site which affects your profit.
Besides, anyone can start selling on a marketplace at any time, the competition will always get stiffer and you would end up losing a lot of revenue and market share in the long run. This is why I would never suggest people to rely solely on marketplaces.
What Makes A Marketplace Good or Bad?
However, marketplaces do have their strengths too. For starters, marketplaces cost almost nothing to start, just like dropshipping. You wouldn’t have to do any marketing because marketplaces usually consist of the traffic already. Marketplaces also tend to have a very easy to use dashboard which means anyone who is just starting up can use these marketplaces right away with ease.
Due to their large scale of marketplaces, these companies usually have training and support for sellers but with it comes another downfall. When selling on the marketplace, you won’t have complete control over your branding. For your customer’s eyes, they are purchasing the product from Amazon/eBay, etc. You also wouldn’t be able to do custom promotions for your products because you would have to follow their policies. You are to follow their promotion timing such as Black Friday or Amazon Prime Day, depending on the marketplace of your choice.
Not only that, Marketplaces like these are known to “eat up” your business. For example, if you have a product that sells extremely well and that certain Marketplace has all of that data, they’re going to buy over that company and produce something similar and being under their own brand.
There are a few ways we can leverage marketplaces to steal traffic from them instead of just relying on them. Never rely only on them because that will make your business extremely unsustainable and you would have less control over your profit margins.
This business model is also known as self-warehousing. Similar to dropshipping, you will have your own storefront and handle marketing by yourself. The catch here is between dropshipping and self-warehousing, you will be holding the stocks yourself. You will have your own warehouse for storage as well as a team working on operations.
If you’re trying to build a long term business, this will be the preferred option because you will have complete control over your eCommerce business. You would be able to control the packaging that you use, include thank you cards and future discount coupons in your shipments to increase customer retention and a lot more things.
This method, however, would have a higher start-up cost because you would need to stock up on your own inventory. Budgeting for warehousing is very important and you will also need to hire a team to handle operations to help you out because you don’t want to have your plate too full. There are more costs involved in self-warehousing but at the end of the day, the margins will outweigh the time saved from dropshipping.
Choosing The Right Processes
Automating the fulfilling process will be key and you will need your own inventory management system to make it very efficient. Self-warehousing is typically more profitable but of course at a higher start-up cost. Not only that, some of your capital might get stuck in your inventory if some products don’t sell as well.
This can be solved by having negotiations with your suppliers and consignment is a good way to reduce excess stocks even though you might earn lower margins as a part of the risk will be taken on by the supplier. Payment terms and refunds are typically the best ways to control your risk when it comes to the self-warehousing eCommerce model.
A recommended program to use would be Tradegecko, a simple to use inventory software that integrates inventory management for both B2B and B2C sales and syncs with major eCommerce sites such as Shopify, Amazon, and WooCommerce. With its added tools, it will give you a helping hand in automating and monitoring your store.
Jeremy has been running several online businesses behind his laptop for the past 5 years and he has worked as a freelance web developer previously. A trained marketer by profession, he also has Ruby on Rails and web development knowledge. His forte lies in eCommerce, SEO and content marketing. He’s been featured on Vice, Thrive Global, YFS Magazine, Forbes and several other publications. He prefers to connect with people on LinkedIn.