Dropshipping or e-commerce with its own stock: What is more profitable?
For seasonal products and evergreens, you need to keep your own stock if you want to make a good margin. So you can buy in bulk and deliver faster, but it does depend on what you want to offer. That is the first thing an ecommerce retailer should consider before they look at stock or purchase.
The trade-off focuses on evergreen products with fast delivery times or hype products. It is a question of risk versus return. Recognizing products in the inflexion stage (when a product becomes hype) is essential. As a counterargument, it can be argued that as a dropshipper, you only buy in stock when it has already been sold. This is more lucrative because you run less risk. After all, as soon as a product is no longer trending, you change the effect on your webshop and look for a better one.
When you start your product research, you can use software, or do it by hand via, for example, the winkelwagentjes method (Grocery cart method). The more diversity in your portfolio, the better. In the ideal scenario, you have about 20 products that are evergreen, supplemented by seasonal products, so that you generate sales throughout the year. After sourcing, you can put your products away online on various marketplaces. Even Tiktok is currently working hard on a shop in the app.
Unfortunately, in this time of high inflation, we see vacancies slowly return to physical shops. Nowadays, a product comes directly from the wholesaler or fulfilment centre to the consumer via a parcel carrier. The number of suppliers and fulfilment centres is mushrooming. Indeed, the growth and profitability of e-commerce are not going unnoticed, but even as an e-commerce retailer, you need to stay innovative.
Advantages of dropshipping
The business model and value chain are slightly different for a dropshipper. Often, a product is shipped directly from suppliers to consumers. This is a step faster for the turnover rate of products, but it does not mean that a product reaches consumers more quickly. An order on a dropshipping website is usually passed on to a supplier. This secondary transaction only takes place once the product has been bought in the primary transaction. Therefore, for dropshippers, the risk is lower than with their own stock. You do need your own website for this. Bol.com, for instance, is not a big fan of dropshipping because the delivery promises are longer or less accurate, which is not in line with the service levels we are used to from Bol.com.
Unless you are exceptionally talented and can code and sell, you probably won't want to build your webshop yourself. That's where companies like Ecwid, WooCommerce and Shopify have cleverly stepped in. Companies like these offer unparalleled service for the e-commerce world, just as fulfilment and brand agencies also want to take as much work off the hands of sellers as possible. As the saying goes, convenience serves man.
No harm, no foul
More and more young entrepreneurs are finding dropshipping an excellent substitute for a minimum wage in the catering or supermarket sector. There is an increase in demand for additional services such as forwarding agencies.
The number of hours a dropshipping entrepreneur spends on his webshop can be an important reason to start dropshipping. Sometimes it only takes a few hours a day to create new ads (or take over from a competitor) and accept orders. This leaves you more time for an extra side job, study or just a lot of free time. Bali, for example, has been full of successful e-commerce dropshippers for years, as a final benefit of dropshipping is the freedom to travel and work from a laptop anywhere in the world.
Benefits of stock-based e-commerce
On the other side is stock-based e-commerce. There are plenty of stories of tight-lipped e-commercialists who, by offering a few good products on Amazon, make exceptionally high sales. One of these, a guy who made $1.7 million in sales, was mentioned in the Wall Street Journal.
Managing your own stock makes your deployment in the company more laborious. So you pack packages yourself and take them to the nearest delivery point. The advantage of this is control over every step of the process. Every action you take contributes directly to your profits.
In many cases, outsourcing inventory management is a good choice once you sell more than 200 products per month and if the volume and weight lend themselves to it. Still, it would be best if you kept stock in-house for as long as possible, mainly because of the importance of being able to deliver quickly. Marketplaces welcome quick deliveries from sales partners because consumers like to be at their beck and call. Moreover, competing on own competence is more interesting than competing on price. There are also excellent fulfilment centres that can easily take the packing and shipping process off your hands and for relatively competitive prices.
A final advantage of in-stock e-commerce is that you often get the most competitive price from the supplier. You can compare suppliers based on price, minimum order quantity and additional options like adding your own brand to the product or packaging. You qualify for volume advantage if you buy multiple products at once, like economies of scale. Bundle freight is cheaper than shipping items individually, adding to your profits.
Disadvantages of dropshipping
Besides the positives of both business strategies, there are also negatives. For instance, dropship stores more often have extended delivery times because items are shipped from far away. Despite the high demand for shipping containers and limited air travel in recent years, these delivery times have become much shorter. Products used to take months to ship, but today it is usually 6 to 10 days, depending on the shipment location and receipt. Dropship products are often hype, so demand determines the price. Hence, dropshipping is not about economies of scale but economies of scope.
Social media like Instagram and TikTok are also part of the economies of scope. Very entertaining to see videos and images passing by daily on your timeline, but it is primarily a jackpot for the owners of these media channels who earn from it.
The disadvantage of dropshipping is the blocking on these social media channels if an ad is not approved. A large part of the sales funnel depends on SEA. Payment systems can throw a spanner in the works by not keeping delivery promises on time or by many returns. This can cause companies like Stripe and PayPal to end partnerships temporarily. This is where U-Send can help because it has a trusted network of suppliers that reduce the chance of non-arrivals by more than 50%. As a result, payment systems are less jolting.
Another disadvantage of dropshipping (and e-commerce more broadly) is the herroepingsrecht en garantierecht (right of withdrawal and warranty) of the consumer. This means that a consumer has the right to return a product. A supplier may not accept returns, but that does not take away the consumer's right to withdraw. The consequence is that suppliers will not accept returns, so the dropshipper will suddenly have products in stock. Moreover, the dropshipper has to reimburse a recovery (both transport and product costs) where you cannot offer the product for sale again.
There are also quality issues that affect liability with products sold through dropshipment. This article refers to dropshipment as a translation of 'middleman'. There is little truth in this, and it is essential to reflect the nuance better. A dropship company often uses a brand and its own quality standards, which are also adhered to by the agency they work with. This ensures some quality, despite the dropshippers not having products physically in their own stock.
Disadvantages of stock-based e-commerce
A significant disadvantage for stock-based e-commerce is the financial risk of unsold stock. For dropshipping, you only pay once the customer has placed an order with you, a consignment sale. Although, as a dropshipper, you retain ownership of the product and thus bear the responsibility of both quality and delivery, you run a more negligible financial risk. In addition, you can control how much you spend on SEA, such as Facebook ads, Tiktok & Pinterest ads, making this cost an easily controllable variable.
As a seller on Bol.com or Amazon, you do have the advantage of their brand name that you can hitch a ride on, but at the same time, you are among thousands of other sellers, including Bol.com or Amazon themselves. They often claim a preferred position. Now, if you build your brand on socials and set up a slick sales funnel simultaneously, dropshipping becomes a serious business. Of course, this doesn't have to be too complicated or expensive. However, it is interesting to see how every euro or hour you spend on your business results in sales and profits.
Which suits you better?
An e-commerce shop hinges on researching your market. A hype product works better in the dropshipping world, but an evergreen again does very well with its own stock management. It's almost a trade-off between stocks and bonds, but in this case, you control what happens to the stock market. So once you have found a good selling product, you will see that you are clear.
Dropshipping is the answer for anyone who is up for an actual competitive field—making it as difficult as possible for each other while everyone searches for the best trending products. Above all, not too high an upfront cost. Stock-based e-commerce is a better option for anyone who wants more control over both the supply chain and product quality and quality of delivery.
Ultimately, both businesses can easily set up with a budget as small as €300. Both business models have demonstrated that by now. So whether you choose lower risk in investment with a higher risk in the supply chain or higher risk on your investment with lower risk in your supply chain, you will need an excellent entrepreneurial mindset. As any entrepreneur can attest: not everything succeeds the first time as long as you keep working and believe in your own ability.
In case this article sparked you interests, check out e-pickr.com for more blogs, or try out our product research tools for free!
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