Dropshipping vs inventory: Which is a better choice for your business?

With the global eCommerce market set to hit $5.4 trillion USD in 2022, it’s no surprise that more people than ever are looking to run an eCommerce store. If you’re thinking about launching online, you are likely considering different methods for your business to be efficient, low cost and long-living, writes Allen Fu, cofounder of million-dollar Australian beauty brand, Cheeky Glo.

One of the most common considerations new online business owners have is whether they should use dropshipping or inventoried eCommerce stock for their store.

And I always say: it depends. There are many variables to consider when deciding how to manage your stock.

I recommend looking at each method in detail and then asking yourself which one is right for your business.

What is dropshipping?

Dropshipping is the newest eCommerce craze and is highly popularised on social media. Dropshipping is a business that sells a product or service that they don’t own or manufacture. Instead, the business pays a supplier to manufacture and ship directly to your customer, without the business owner ever needing to hold any stock.

It’s a great business model and it can be highly successful. The beauty behind this model is that you can get started extremely quickly and it’s very cost effective.

Dropshipping pros and cons:

Pros:

• You don’t need to hold any inventory
• You can get started quickly
• The cost to establish your business is low
• It’s great for testing out multiple different products at low risk
• There are many supporting apps you can use to plug, play and build a business in 24 hours
• It’s easy to build systems and processes

Cons:

• You may not be in control of your branding or quality if you don’t sell a high volume
• You can’t control shipping speeds, and the COVID pandemic has made international logistics very inconsistent
• Profit margins are significantly lower as you can’t negotiate best terms with suppliers such as price, shipping speed and payment terms
• Dropshipping is becoming more difficult as there are multiple businesses selling the same product
• Advertising platforms make it harder to maintain or turn a profit due to the rising cost of advertising and the tight margins you may already be subject to

What is inventoried eCommerce?

Inventoried eCommerce is a more traditional eCommerce business model. Stock is either stored on site, at a warehouse, or manufactured by the business owner and sold to customers directly.

Inventoried eCommerce is not for the weak of heart. From face value there is a lot more work to put in, but the rewards are often in proportion to those initial efforts.

We launched CheekyGlo in the corner of my house with our first batch of inventory, now it’s a million-dollar business with its own head office.

Inventoried eCommerce pros and cons:

Pros:

• You have control of your brand and the quality of your products
• A well-built brand demands higher multiples at exit
• You can build unique selling points and adjust your brand positioning as needed
• You have control over your supply chain and logistics
• It can be more difficult for other businesses to compete as it’s the brand that sells, rather than the product

Cons:

• You need space to hold your inventory
• Dealing with suppliers, manufacturers and global logistics may be a headache if you’re inexperienced
• Startup costs are significantly higher as you’re trying to meet minimum order quantities
• Systems and processes become increasingly more complex as the operation scales

 Which model is right for your business?

Everyone’s circumstances and risk appetites are unique. Therefore, when deciding which model to use, you should ask yourself three simple questions:

1. How strong is my risk adversity? Consider how much risk you are willing to take, whether it’s money, time or even physical space.
2. What is my start up capital? Figure out how much money you’re willing and able to invest. Perhaps it’s $1,000 or perhaps it’s $10,000. Consider if you have extra funding available to invest.
3. How much space do I have to operate? Consider the physical space you have to operate in. Whether you plan to run your business from your bedroom or from a warehouse can affect your business model.

Ultimately, regardless of which model you choose, the best thing to do is just start. The main thing is understanding your own parameters and trying to expand them.

I recommend setting your budget first and then working backwards. If you are starting with a small budget or don’t have experience in eCommerce, dropshipping can help you start an online store at a low cost. On the other hand, if you have more resources available you may wish to find a product you like, build a brand around it, and order a minimum stock quantity to get started.

Regardless of the model, always remember the fundamentals of business – provide a product or service to meet the need of your customer and have enough uniqueness to outlast the competition.

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