Choosing a business model is the first thing to do if you want to start an online store.
The two models that most new entrepreneurs feel confused between are dropshipping and inventory.
There are benefits and drawbacks to both options, making a decision about which to choose more complicated.
Understanding what they are and the key differences between them is the first step in making the best choice.
This is why we’ll be contrasting the two models of dropshipping and inventory management in great detail below.
In that case, let’s not waste any more time and dive in!
Overview of Dropshipping Model
When you use dropshipping as your retail fulfillment strategy, you never have to worry about stocking shelves. All orders are handled by the provider themselves, and you get to keep a percentage of the proceeds from each sale.
Dropshipping’s popularity has grown steadily over the years due to the low overhead it incurs.
In sum, it’s a fantastic business model for both seasoned business owners and novices just learning the ropes of the online retail sector.
The Pros of Dropshipping Model
Eliminates the need to keep track of stock.
Low commitment and risk
Scalability and adaptability
Simple gratification with low overhead
Easily programmable
The Cons of Dropshipping Model
Subpar quality assurance.
Competition is fierce.
The possibility of error correction is reduced.
Overview of Inventory Model
The inventory model is a time-tested one in which goods are kept in stock and shipped out as orders come in.
Your options for obtaining the products in question are limited only to the manufacturer or the distributor. In most cases, however, you’ll want to stock up to save money.
The Pros of Inventory Model
Outstanding ability to regulate product quality
Errors are simple to fix.
the possibility of greater profit margins
Lack of availability of a product has less of an effect
It doesn’t take long to fill an order.
The Cons of Inventory Model
Costly setup
Stockpile overruns could occur
Falling product prices
Dropshipping vs. Inventory Model: Side by Side Comparison
Now that you have a foundational understanding of both the dropshipping and inventory models, we can compare and contrast their key components.
Product Sourcing
Because of this reliance on the supplier, dropshippers are at the mercy of the supplier’s availability and speed in fulfilling orders. Any business operations would be halted if your supplier ran out of stock.
However, if you have stock on hand, you still have some bargaining power. A product shortage in the market wouldn’t necessarily prevent you from having some on hand for contingency purposes.
When comparing the two models, the inventory model unquestionably has the upper hand when it comes to securing supplies.
Total Investment
There’s no denying that, in terms of capital outlay, the dropshipping model is far superior to the inventory one.
Launching a generic dropshipping store is the safest option if you’re not in the mood for taking risks or don’t have enough experience in the eCommerce industry to know what you’re doing.
Even if you’re just dropshipping, you still need to put money into advertising.
To get people’s attention, you should definitely use Facebook ads. If not, bringing in organic sales will be an extremely difficult task for you.
Risk Factor
There is no denying that keeping stock is a much riskier business model than dropshipping. You should exercise extreme caution when selecting a product.
One thing you don’t want to do is invest in hundreds of the same product only to find out nobody wants to buy it.
It’s also important that inventory turns over quickly so as not to impede cash flow. Furthermore, you should think about the fact that the product’s value will decrease over time.
Dropshipping, on the other hand, is simple, and you only have to worry about making a profit from the items you actually sell. If a customer files a dispute, however, that would be an exception.
If you’re not comfortable with taking chances or you just want to learn more about the eCommerce market, dropshipping is the way to go.
Order Fulfilment
The simplicity of dropshipping is a big reason why it’s become so popular in recent years.
You need only take the customer’s order, send the relevant information to the supplier, and then pay for the goods or services.
The supplier will handle everything from then on, including shipping and order processing.
The model of inventory, alas, is not as simple. When you’re in charge of your own inventory, you’ll need to devise your own system for moving it around.
You could use a third-party logistics service, but be aware that doing so will incur additional costs.
Long-Term Growth
Drop shipping and physical inventory both have tremendous potential in the long run, but only if you establish your own private label.
Contrarily to a dropshipping store, a business that relies on an inventory to function can be more challenging to private label.
If it is even possible, you will first need to negotiate with the relevant manufacturers and distributors.
Dropshipping businesses that use private labels have it much easier.
Private label services are offered by professionals who can be hired to steer your company in the right direction.
Customer Service
The quality of your customer service has a negative impact on the success of your company.
However, as a dropshipper, it can be difficult to provide satisfactory customer service.
That’s because settling disputes requires talking to the supplier. Because of this, you may have to ask your customers to wait if the supplier is unresponsive.
In the inventory model, however, you handle order fulfillment on your own. You are customer service savvy and can handle difficult situations with grace and tact.
Profit Margin
Now we get to the juicy part: comparing the profit margins of inventory-based stores and dropshipping stores, the former clearly wins, but only on paper.
It stands to reason that you’ll save money by purchasing in larger quantities. So, in theory, you’re all set to make a healthy profit from your inventory-based store if you manage to sell all of your products without any hitches.
However, this is rarely the case, and you stand to lose the shipping costs associated with any returns or refunds your customers initiate.
The average profit margin for a dropshipping business is 20 percent.
In this case, you’ll keep $2 of a product’s $10 price tag, which, as you well know, isn’t all that impressive. However, you can make a sizable profit from each sale of high-priced items.
If you’re selling a product for $500, for instance, you’d make $100 per transaction. If you can make just one sale every other day, you will still have a profitable month.
Naturally, high-ticket dropshipping isn’t child’s play, or else everyone would be doing it.
Both of these business models have the potential to earn money, but you must choose one to focus your efforts on.
Storage Space
One reason we believe the inventory model to be riskier than the dropshipping model is the need for storage space.
You will have to pay a lot of money to warehouses if you don’t run a very small business and keep all of your inventory in your home.
We also advise against keeping stock at home if your business is located in a different city. For the most part, this is due to the fact that warehousing products allows for quicker order fulfillment.
Businesses carefully select the locations of their warehouses to ensure the quickest possible delivery of customer orders. You can see how this could become a problem, though, if all your stock is sitting in one place at your house.
Dropshipping eliminates the need for you to maintain a stockpile of products because they are shipped directly to customers from the warehouses of your suppliers.
Even so, before committing to a supplier, it is prudent to research their track record to ensure they can provide on-time deliveries.
Return and Refunds
In the unfortunate event that you ship a defective product to a customer, you can easily initiate returns and refunds with an inventory-based store.
When dropshipping, however, you can either issue a refund yourself or wait for the supplier to do so.
Furthermore, you are essentially helpless if your supplier is uncooperative.
A full refund must be offered in such a situation, or else the customer will leave a negative review.
This is why we have placed a premium on locating a trustworthy dropshipping partner.
Ease of Operation
As a final question, which of the two businesses is simpler to run? The solution is straightforward, and it’s called dropshipping.
Why? Fortunately, the supplier will handle the bulk of the work. Having placed the order with the supplier, all that remains is for the supplier to deliver the product to the customer.
Even more conveniently, you can use an automated dropshipping service to do this for you.
Now that you know the best business model for people with limited free time, you can get started on your side hustle.
But remember that simple operation does not guarantee successful outcome. It would still require effort on your part to see any kind of progress.
FAQs about Dropshipping and Inventory Model
Should Beginners Go with Dropshipping or Inventory Model?
Dropshipping is the best option for new business owners because it has a low entry barrier and high return on investment. If you want to avoid committing to a single product, a general dropshipping store is the way to go.
Play around with different options and see what works best for you. Contrarily, if you go to a brick-and-mortar store that deals in stock, you run the risk of losing money if you are unable to sell your items.
How to Choose Between Dropshipping and Inventory Model?
Whether you decide to use dropshipping or keep inventory on hand depends heavily on your business’s long-term objectives, available funds, and personal preferences. The inventory model is an option if you’re comfortable with uncertainty.
In contrast, dropshipping is the way to go if you have a limited budget and don’t want to deal with the stress of shipping and warehousing.
Dropshipping vs. Inventory Model – What’s More Profitable?
The inventory model is preferred over dropshipping due to the cost savings that come with purchasing products in larger quantities.
This affords you more room for negotiation, increasing the likelihood of securing a price that allows you to turn a profit.
However, if you are unable to sell all of your inventory, the inventory model can lead to significant financial losses.
Dropshipping vs. Inventory – The Final Verdict
In some respects, the dropshipping and inventory models are complementary, while in others, they are mutually exclusive.
Having inventory on hand, for instance, can unquestionably increase your earnings.
However, it involves a greater financial investment and carries a greater degree of risk than drop shipping.
Which one is “better” depends entirely on individual priorities and long-term goals?
The ultimate goal of any dropshipping operation should be the creation of a recognizable brand.
