The battle of dropshipping vs wholesale is not one with a clear victory. After all, dropshipping is poised to achieve $301 billion in market size this year, while wholesale is clearing more than $665 billion regularly in 2024.
Both are pivotal eCommerce business models, but you only need one. So, which is it going to be, wholesale or dropshipping?
The answer depends on market conditions, resources, and business needs, so no one-size-fits-all model exists.
In this blog post, we’ll explore the key differences between dropshipping and wholesale, their pros and cons, operational dynamics, and a few good examples to differentiate between the two.
Let’s get right into it.
Table of Contents
Key Takeaways
- Dropshipping vs wholesale is a tough battle, as both eCommerce business models have advantages and disadvantages.
- The biggest benefit of dropshipping is saving money on startup costs since you don’t have to take care of order storage, warehousing, shipping, or fulfillment. However, you lose a lot of control.
- Wholesaling gives you more control over your brand, from what you sell to how it’s packaged. That said, it’s more expensive initially and not as fast to change and adapt as dropshipping.
Understanding Dropshipping
You can’t fairly compare dropshipping vs wholesale without understanding how both individual components work. So, let’s start by defining dropshipping and clearly explaining its mechanics.
Dropshipping is an eCommerce model in which a merchant works with a third-party dropshipper. As the merchant, you only handle so much of the responsibility.
You’d have an online store that belongs exclusively to your company. The store should stock everything you’d like to sell.
When a customer sees your products, they can check out like usual. Once you receive an order, you’ll contact your dropshipper. They’d get your order details and then take it from here.
The dropshipper will handle tasks like picking the order, packaging it, and then shipping it out. A dropshipper can be a manufacturer or supplier.
Pros
One of the biggest benefits of dropshipping is how inexpensive it is compared to other eCommerce business models.
If you were to start your own online business, you’d need to pay a lot. Besides your website, there are also marketing and advertising fees, warehousing, materials to make your product, packaging, and shipping.
Dropshipping eliminates most of those costs. The dropshipper will take care of all the order fulfillment steps once a customer orders. You don’t have to pay for warehousing; you’re not stocking extra products.
And packaging? You don’t have to worry about that either. You’re not the one putting your orders into boxes; that’s the dropshipper’s job.
You also don’t have to pay for shipping, whether you use trucks, sea, or air to get an order to a customer. It’s all taken care of by the dropshipper.
Since most of the order fulfillment process is out of your hands, dropshipping is also considered a lower risk. You don’t have to assume all the risk yourself, as you’ll have a business partner to rely on.
Cons
While dropshipping might be the business model your eCommerce brand ultimately chooses, you have to consider the downsides before making up your mind.
For instance, dropshipping is becoming increasingly common, which means it’s always growing more competitive. That makes everything more difficult, especially finding quality partners.
However, this is the biggest and potentially worst downside of dropshipping. You’re giving up a lot of control.
Sure, you don’t have to rent or buy warehouse space. But what kind of warehouse does the dropshipper keep your stock? You’d hope it’s in optimal condition, but there’s no way to be sure unless you go to your dropshipper’s warehouse and check it out.
Oh, and if your orders are late and your customers complain? Yeah, there’s nothing you can directly do about that, either. You can contact your dropshipper to ask what the holdup is, but that’s about it.
Experiencing regular delays in order fulfillment because you choose a low-quality dropshipper can hurt your business. You’ll begin hemorrhaging customers.
Read more: Dropshipping Basics — A 101 Guide for Small Business Success
Understanding Wholesale
Next, there’s wholesaling. This business model requires a merchant to produce the goods for sale in large quantities.
The wholesaler will buy the goods, usually in bulk, at a discounted rate. They then sell the goods to a retailer, who will pay more than the wholesaler did to sell wholesale products. The retailer can turn around and sell the product to consumers.
Wholesaling doesn’t only occur with finished goods. Some wholesalers are also interested in purchasing raw materials.
Also, while many wholesalers will sell their products to a retailer for a higher price and earn a profit, some sell directly to the consumer.
Pros
Wholesaling has plenty of benefits. For one, it minimizes the parties involved in the ordering and fulfillment process, especially when a wholesaler buys directly from a manufacturer and then sells to consumers.
Using a distribution network for wholesaling means a wholesaler doesn’t have to distribute the orders themselves, which saves time. After all, there’s no need to pay for packaging or shipping. All the fulfillment costs are handled by a distribution network, saving money.
The last advantage of wholesaling is the chance to reach a newer, broader audience. When working with a large wholesaler, you can expose your products to tens of thousands, if not millions of people.
Cons
While all that is great, I’d be remiss not to mention the downsides of dropshipping vs wholesale. For instance, wholesaling also means a loss of control. It’s not as much as dropshipping, but it is there. Additionally, the rate of profits is often lower unless you sell directly to consumers.
The initial investments are higher in wholesaling, and inventory management can get difficult as you accumulate a larger product roster.
Read also: How to Handle Dropshipping Returns and Refunds
Comparing Operational Dynamics
Okay, now it’s time for some fun. Let’s test dropshipping vs wholesale head-to-head to determine which suits your business. To begin, I want to look at their operational dynamics.
Inventory management
Managing inventory doesn’t exactly come easily to many businesses. Most companies struggle. Up to 34% of businesses have issues with shipping delays and unavailable stock. That’s no small number!
Besides that, modern eCommerce businesses also wrestle with these issues, as illustrated by asset finance provider Myos.
As the graphic shows, inventory discrepancies are another substantial issue, followed by raw material delay deliveries, underproduction, stockouts, and overproduction. Your eCommerce business can’t afford to fall into these traps, so which business model is better for inventory? Is it wholesale or dropshipping?
It’s dropshipping!
In a dropshipping arrangement, you, as the vendor, do not have to worry about warehousing. That means the inventory is taken care of.
Of course, you would hope your dropshipper uses top-of-the-line inventory software to manage what’s available and what isn’t. If they don’t, stockouts can still occur, as can issues with overproduction and underproduction.
That said, these issues are more likely to afflict wholesalers. You need a long-term oversight of your inventory. Using inventory management tools is nonoptional in your case.
Besides that, you also have to study trends and your competitors regularly. This information will help you determine what kinds of products might sell more in the future. You can avoid overproduction and underproduction issues this way.
Since the inventory management onus falls on you in a wholesaling business model, so does the expense. Besides the warehousing space, you’ll also have to pay for inventory management tools.
Packing and shipping
Two of the most important parts of order fulfillment are packing and shipping. Having control over these areas is advantageous for several reasons.
For one, you can choose cost-effective solutions. That’s especially valuable if you’re a small business or eCommerce startup with low capital.
Additionally, you can customize your packaging to reflect your brand. For instance, you can print your brand name on the box and use unique-colored packing tape. Your orders will stand out not only for what’s in the box.
Wholesaling is the only business model of the two that allows for such a high degree of customization. You can directly handle orders, which means you can customize the packing and shipping processes.
Granted, this will be more expensive, at least initially. However, if you can find cost-effective fulfillment, you will ultimately recoup your spending. Personalizing your packaging will strengthen your brand and could increase orders, which will also help you financially in the long term.
Although convenient and cost-effective, dropshipping means relying on suppliers for order fulfillment. You get no say over the packing and shipping process nor what kind of packaging the dropshipper uses for shipping orders.
Read more: How To Build a Dropshipping Brand That Clicks
Financial Implications
You can’t possibly proceed with a confident decision on which business model to use without considering the financial implications of both. That includes what you’d spend to execute either model and the ROI.
Ahead, I’ll compare the startup costs for dropshipping vs wholesale, their rate of scalability, and their potential profits.
Start-up costs comparison
Let’s begin with dropshipping startup costs. Although I’ve mentioned this is a lower-cost solution between dropshipping and wholesale, it’s not free. It would be nice if it were, but that’s not how it works!
The startup costs associated with a dropshipping business are creating an online store, marketing and advertising, business licenses and tax ID, return costs, and supplier fees.
Let’s break down some of those expenses individually:
- Operational expenses like payment processing fees, site maintenance, and customer service can be $100 to $200+ monthly.
- Advertising and marketing can start at $200 to $500 monthly and easily get into the thousands of dollars.
- Product sourcing can cost at least $500, possibly $1,000 or more.
- Building an online store is the least expensive, usually around $50 or $100, but can cost up to $500 or more.
As a wholesaler, all the above business expenses apply. You also have additional expenses to contend with. For instance, there are IT systems, warehousing, insurance, inventory purchasing, equipment, and staff to hire.
Just as I did with dropshipping, here’s a breakdown of all those expenses associated with wholesaling:
- Legal fees as you establish your eCommerce business can cost between $500 and $2,500.
- Insurance, if needed, is $200 to $1,000 with ongoing fees.
- Marketing and advertising prices are still the same, between $500 and $5,000 a month.
- Although a one-time expense, installing IT systems is costly at $2,000 to $20,000.
- Logistics can add between $500 and $2,500 to your bill.
- Inventory purchasing costs vary between $5,000 and $50,000 per bulk buy.
- Don’t forget to add $1,000 to $20,000 for equipment!
- Hiring staff is going to cost at least $500 but up to $2,500 per person, not to mention ongoing payments
- Renting or leasing a warehouse can cost $2,000 to $20,000 a month
Profit potential
For all the money you’re putting forth in the initial investment, the profit should be worth it. The only way to be sure is to look at the numbers. These are estimates and by no means set in stone.
BlueCart says dropshippers can pull in $50 to $5,000 daily if successful. The latter figure is going to be especially lucrative to small businesses. Shop Theme Detector says the average amount is $1,000 to $5,000.
Okay, so what about wholesaling? Well, like dropshipping, the potential profits vary. A deal could make $2,000 to $5,000 on the moderate end and up to $20,000 or $30,000 (and up) for bigger, more profitable transactions.
Scalability
In the battle of dropshipping vs wholesale, both provide scalability opportunities. But how easy is it?
It’s easier with dropshipping. You can expand your dropshipping partners to offer more order fulfillment options, such as internationally. You still don’t have to worry about warehousing but must track inventory across more partners. That can be tricky.
Scaling up with a wholesale model is all out of your pocket. You’d have to rent or buy more warehousing space, hire more employees, and lease or own more equipment.
Of course, by the time you reach this point in your business, you should have generated enough profits that these expenses are feasible.
Read more: How to Choose Dropshipping Products to Sell Online
Strategic Considerations
Strategizing is a natural part of eCommerce business growth, whether you choose dropshipping or wholesale for your company. The following considerations should be considered as you proceed with your business plans.
Response to trends
eCommerce trends come and go. Many of the biggest ones affecting the industry in 2024 are AI and machine learning, social commerce, mobile commerce, sustainability, and voice search.
As an eCommerce business owner, you must identify which trends are dominant. You should then adjust your business accordingly.
The former offers easy adaptation in the great fight of dropshipping vs wholesale. It’s a lot faster to change your dropshipping model so you can be on-trend, offering your customers everything today’s consumers expect in 2024.
That’s not to say you can’t adapt if you’re a wholesaler. It just takes longer, so you should only jump on those trends that have already proven they have staying power.
Market flexibility
Both dropshipping vs wholesale have a give-and-take system. For instance, while you can more easily implement trends in a dropshipping model, wholesaling adapts better to the market.
When exploring a wholesale model, you get more reliability and stability, especially in the demand-supply chain. Once you have that stability, it’s far easier to control your inventory and thus incur more profit.
Additionally, you can introduce exclusive product offerings. You’ll have a leg up on your competitors.
Supplier relationships
This is one area where it doesn’t make sense to compare dropshipping vs wholesale. Both are relationship-based business models that thrive on strong partnerships.
Here are some of my best practices for forging and maintaining those professional bonds:
- Be picky when you initially select a supplier or partner. Research your options, look into certifications, and compare features and prices. Interview a few prospects and meet in person if you can so you can see their warehouses.
- Discuss in advance what the communication cadence will look like. Will you two only communicate if something goes wrong? Can you have weekly check-ins? Monthly meetings?
- Be forthright to build trust. It’s difficult to admit you made a mistake or underperformed, but it happens. Honesty and transparency will build a stronger business relationship.
- Use emotional intelligence. Things will go bad, but having emotional intelligence means keeping your frustrations under wraps and maintaining professionalism.
- Always show your supplier or business partner respect if you expect them to do the same to you.
- Be appreciative when something goes right. Celebrating the little things feels good for both parties.
- Practice active listening. It’s hard to listen to someone without thinking what you want to say. Well, it’s tough at first. Like any skill, practice makes perfect.
- Ask for feedback regularly, then implement it as you’re able.
Read more: How to Find Reliable Dropshipping Suppliers — A Quick Guide
Examples in Action
Dropshipping vs wholesale doesn’t have to be a great battle. Either way, you can experience success with your chosen business model. Just take a look at these examples to see what I mean.
Tze Hing Chan
Imagine making almost $20,000 in two months.
Tze Hing Chan didn’t have to imagine it. His store, Subtle Asian Treats, raked in that much money in a very short time. The eCommerce store, all about cutesy things, opened amid COVID-19 when everyone was forced to shop online.
While Tze’s is an inspiring success story, it took him many eCommerce attempts to figure out what worked. Before finding his niche, he had sold martial arts products, kitchenware, and phone cases.
Sysco
You can’t talk about wholesale without mentioning Sysco, the largest wholesaler in the United States. With over 600,000 clients, Sysco distributes all sorts of goods, from food products to kitchen equipment and tabletop items.
In 2019, the company raked in $60,114 million in revenue with 69,000 employees.
Andreas Koenig and Alexander Pecka
The duo of Alexander Pecka and Andreas Koenig didn’t have a Cinderella story in dropshipping. They wanted their turnover rate in eCommerce to be $1,000 per day. However, it took them at least a year to reach that point.
They finally found the right niche, which for them was pet products. In 2019, they earned $500,000 per month in sales; since then, they’ve surpassed $10 million in revenue a year.
Sumitomo
The integrated trading company Sumitomo was established in 1615. Yes, you read that right – 1615! The Japanese group of companies has spanned industries over its 400+ years in business, including information technology, chemicals, glass, automobiles, and insurance.
In 2019, its revenue was a healthy $48,746 million with 72,642 employees.
Read more: B2B eCommerce Trends — These Strategies Can Boost Your Business
Conclusion
In the great fight of dropshipping vs wholesale, the right solution varies depending on your eCommerce business structure. If you don’t have a lot of upfront capital, dropshipping is good, as long as you don’t mind that much of this business model is hands-off.
If you’re more concerned with branding and have money to dedicate toward upfront costs, you should consider wholesaling. The best way to choose is to evaluate your business goals and market conditions and then decide.
EngageBay is an all-in-one marketing, sales, and customer support software for small businesses, startups, and solopreneurs. You get email marketing, marketing automation, landing page and email templates, segmentation and personalization, sales pipelines, live chat, and more.
Sign up for free with EngageBay or book a demo with our experts.
Frequently Asked Questions (FAQ)
1. What is the main difference between dropshipping and wholesale?
The primary difference between wholesale and dropshipping is the responsibilities and degree of control.
As a dropshipping vendor, you only have to list your products for sale and handle the sales. The dropshipper does the rest. Wholesalers have far more order fulfillment responsibilities, including packing and shipping.
2. How do startup costs compare between dropshipping and wholesale?
Both require a website, marketing and advertising, inventory management tools, and miscellaneous business expenses.
However, wholesaling has more business costs than dropshipping doesn’t. They include hiring and paying staff, warehousing, and equipment.
3. Which business model is better for controlling product quality?
That’s wholesaling. You get to interject your brand into more of the order fulfillment process, including the packaging since you aren’t relegating these tasks to a third party.
4. Can you switch from one model to another after starting a business?
You sure can. Many dropshippers later become wholesalers by working with wholesale suppliers. It’s an excellent way to scale up business.
