Choosing a Distribution Model: Drop Shipping vs. Inventory

Smiling workers looking at camera in warehouse

The ecommerce industry is gaining traction as more and more people continue to invest in the sector. You can make different types of commerce investments depending on your preferences, financial capabilities, and management style.

Whatever ecommerce platform you decide to use (check out my post about Shopify vs. WooCommerce), you need to decide on a distribution model.

You want to invest in a business that can give you more returns while spending less on operation costs. Most people often find it challenging to decide whether to invest in drop shipping or inventory.

While both options are lucrative, each has pros and cons. It’d be best to understand the risks and benefits involved to help you make informed decisions.

Benefits of Drop Shipping

Fewer Risks

With drop shipping, you won’t worry about stocking and storing the products. This means that you won’t have money tied up in the stock. You only buy stock from your supplier once you receive an order from your customer. This is a guarantee of some profits.

Low Operation Costs

Unlike the inventory, where you have to set aside a budget to cater to the inventory running costs, you do not need this in drop shipping. You do not need a warehouse to stock your products or employ workers to manage the warehouse. This can save you money in the long run, and you do not have to worry about budgeting for the overhead costs.

Easy to Start-Up

Since you do not need to look for a warehouse store, stock products, and employ workers, you can easily start a drop shipping business. With drop shipping, you can quickly hit the ground without going through the above steps. This can save you money and time in the long run.

Easily Scalable

As you deliver orders to your customers, the demand can increase if you offer satisfactory and timely services. This means that you need to work with a reliable supplier who supplies your products without delay.

The more you serve your customers effectively, the more your business expands. A satisfied customer can get you referrals from family, friends, and colleagues, and this can help you grow your business with ease.

Cons of Drop Shipping

Lower-Profit Margins

Drip shipping is a competitive business. Many people invest in it, and this lowers the chances of making good money. You’ll have to price for a low-profit margin until the business gains traction and expands with a larger customer base.

Highly Competitive

An easy-to-start business attracts more investors. This leads to high competition. Since drop shipping is easy to start with a little capital, it attracts many people no matter how small the profit margin is. To make matters worse, you could be selling the same product with other people, creating stiff competition.

Lots of Supply Chain Issues

You have no control over the inventory in drop shipping. You get products from the supplier and ship them to your customers. If a customer has a complaint about the products, you may not address the issue. You have to wait until when the supplier solves the issues. Meanwhile, you’ll have to find ways to deal with the customer before the issue gets sorted by the supplier.

Benefits of Inventory Management

Customer Datisfaction

Stocking products in your warehouse allows you to attend to customers’ orders without delay. When a customer places an order, you quickly check the inventory to find out its availability. Once you confirm, you can ship the product immediately to the customer. This leads to customer satisfaction and business growth in the long run.

Minimal Risks Involved

When you stock products in the inventory, it reduces the risks of running out of specific items. You never know what product your customer may need at a particular time. When you keep inventory, you have less worry about product availability anytime you get orders from your customers. You can quickly meet your customer’s expectations with ease.

Quick Replenishment

Inventory stock-taking helps you to determine what products are missing in the inventory. You can quickly take measures to stock the inventory immediately. This will avoid customer disappointment in the future, and you can run your business with ease, knowing that you have full-house stock in the inventory.

Cons of Inventory Management

High Overhead Costs

Budgeting for the inventory is a crucial component that contributes to the success of your business. You need to set aside money for running the warehouse. This includes workers’ salaries and overall costs for running the inventory. It can be financially-draining especially when you’re just starting up or if your business is taking longer to gain traction in the market.

Ties Up Cash-Flow

When you stock products in the inventory, it might take time before a customer makes an order. This means that your products will continue staying on shelves for the longest time possible. Without making sales often, you won’t have cash flow, which can stall your business’s growth. You risk closing down your business if the trend continues.

Order Fulfillment

It’s not just about managing your inventory. You also have to have a strategy in place for picking, packing, and shipping out your orders. If you are shipping lots of orders, this in itself can become a full-time job. It’s great that it’s so easy to set up something like a Shopify store, but one thing I forgot about and I think many others do too is the order fulfillment side of things.

All of a sudden I had orders coming in and I quickly realized that I either had to hire staff and start looking at some serious storage space, or I had to look for a partner that could handle Shopify order fulfillment. There are services like that one that can do it.

Not to focus on Shopify. Whatever platform you are using, you might start out fulfilling orders yourself, but make sure you have a plan for how you are going to handle order fulfillment as you grow.

I did not for my first online store and my customer experience suffered for it for a few weeks until I figured things out.

The Bottom Line

From the above list, you can weigh your options when planning to venture into the ecommerce sector, especially when choosing between drop shipping and inventory. It can be challenging to make the right choice, but using the information above can help you make informed decisions before investing money into any business.

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