Dropshipping versus e-commerce: which works for you?
Are you thinking about starting an online store?
Well, there’s no better time to do it. Since the start of the global pandemic in 2020, online sales have boomed worldwide.
According to a study by Tideo, e-commerce now accounts for around 15% of total US retail sales.
One of the first big decisions you need to make as a store owner is which business model you want to use.
There are two main options: original e-commerce fulfillment and dropshipping.
While there are some similarities, there are significant differences in how these business models work and who they are best suited for.
In this guide, we’ll explain how they work and dive into the pros and cons so you can decide which is best for you.
Let’s get started.
What is the difference between dropshipping and e-commerce?
E-commerce is an umbrella term that covers a range of business models, including dropshipping. The main difference between a standard e-commerce business and a dropshipping business is the fulfillment process.
With a standard e-commerce store, you need to buy and store products before you make any sales. You also need to take care of packing and shipping products to customers.
With dropshipping, you can sell products you don’t hold as inventory. Instead of buying stock to sell, you place an order with a third-party supplier every time you make a sale. The dropshipping supplier handles the fulfillment process for you.
How does e-commerce fulfillment work?
E-commerce fulfillment is the most common online business model for e-commerce stores. Here’s how the process usually works:
You bulk buy products and list them on your store.
A customer places an order.
You pack and ship the product.
The product is delivered to the customer.
Most e-commerce stores start with a small team. If you’re a solopreneur, you’ll have to handle the packing and shipping of goods and marketing and store management.
You can hire employees to handle these tasks as you grow or work with a third-party logistics (3PL) company. These companies offer storage and fulfillment services for retailers. Amazon FBA is one of the most well-known fulfillment center companies.
In recent years, 3PL has become an increasingly popular way for e-commerce companies to scale.
According to a recent Global Market Insights Inc report, the 3PL market is set to be worth $3 trillion by 2032, more than doubling in size within 10 years.
If you plan to use Amazon FBA and sell on the Amazon marketplace, you need to be aware of the risk of account bans. E-commerce platforms like Amazon have strict rules and seller guidelines merchants need to follow.
One of the best ways to overcome this issue is to run multiple seller accounts using a tool like Multilogin. Then, if anything happens to your account, you’ll have a backup you can use to avoid sales dropping off a cliff.
How does dropshipping work?
The dropshipping alternative works similarly to traditional e-commerce but with the introduction of a third-party supplier. Here’s how the typical dropshipping business model works:
You find a dropshipping supplier that offers the product you want to sell before adding it to your store.
A customer places an order.
You place an order with the dropshipping supplier.
The supplier ships the product directly to the customer.
You can use a bunch of tools to automate your dropshipping store, including placing orders with suppliers.
Dropshipping is one of the fastest-growing online business models. By 2026, Statista estimates that dropshipping sales will generate $476.10 billion globally.
One of the most significant benefits of dropshipping is that you don’t need to invest in inventory before generating sales. That’s one of the reasons it’s a good option for beginners.
But there are also disadvantages. So let’s take a closer look at the pros and cons of both business models.
Pros and cons of traditional e-commerce
The majority of online stores use traditional e-commerce fulfillment. With this model, you can earn more per sale, but it’s also riskier and more time-consuming.
Pros of traditional e-commerce
Control over the fulfillment process
Being able to control the fulfillment process offers a host of advantages. For example, you can use custom-branded packaging, include gifts and branded packing slips, and make sure the product is high quality and undamaged before you send it to your customer.
If you’re selling to customers in your country or region, delivery times are generally faster than dropshipping. For example, many dropshipping suppliers on platforms like Aliexpress are based in China, with delivery times typically taking up to 10-14 days.
Wholesale pricing
You can negotiate a lower price per unit if you buy inventory in bulk. Most wholesalers offer significant discounts for large orders. This means you can increase your profit margins and make more money on each sale.
Brand your products
Many manufacturers offer custom-branded products. You can add your logo, tags, and custom design to the products you sell.
This offers several advantages.
First, custom branding can increase the perceived value of a product. Customers are generally willing to spend more on a branded product than a generic one.
Second, it makes your online store more memorable. When your products are branded with your logo, customers are more likely to remember your store and return to buy from you again.
Cons of traditional e-commerce
High initial investment
The upfront cost of starting a traditional e-commerce store is typically larger than starting a dropshipping store. You need to buy inventory before making any sales, and you’ll need to rent a space or use an area of your home to store and pack the products you sell.
Ongoing financial risks
It’s not just the initial startup phase that costs more. As your business grows, you may need to hire employees to handle fulfillment. Alternatively, you could use a 3PL company, but you’ll usually be charged a fee for the ongoing storage and shipping of your products.
If you buy a slow-selling product, you could find all your investment tied up in inventory.
Time-consuming
A lot goes into running a successful e-commerce store. One of the main downsides of traditional e-commerce fulfillment is that you can find yourself spending most of your time packing and shipping products rather than the tasks like marketing that contribute to growth.
Pros and cons of dropshipping
Dropshipping is an easier business model for beginners. But there are also limitations. Many entrepreneurs start with dropshipping before transitioning to traditional e-commerce because of these downsides.
Pros of dropshipping
No need to buy and ship inventory
Dropshipping is low-risk and less time-consuming than traditional e-commerce. With your supplier handling the fulfillment process, you can focus on product research, marketing, and customer service.
Low upfront costs
Without having to invest in inventory, the startup costs for a dropshipping business are minimal. Once you’ve paid for your domain and hosting, marketing is the only cost you need to cover.
You can start to make sales and earn profit without making a sizable upfront investment.
Test more products
Dropshipping allows for much more experimentation with your product range. If you think a product could sell well, you can add it to your store in just a few clicks. You can test new products and see what works without incurring high costs.
Cons of dropshipping
Less control over the fulfillment process
This is one of the biggest disadvantages of dropshipping. With your supplier handling the fulfillment process, you can’t control delivery speeds or product quality.
Even though your supplier is responsible, customers will hold you accountable for any problems. That’s why finding reliable suppliers is so important for a dropshipping business.
Reliance on third-party inventory
If you don’t carry your products, there’s always a risk that your supplier will run out of stock or discontinue a line you sell.
It’s important to keep in touch with suppliers and avoid any miscommunication that could result in a customer ordering a product you can’t provide.
Lower profit margins
Dropshipping businesses typically run on a lower profit margin than a traditional e-commerce store. You don’t have to buy inventory in bulk, but the tradeoff is that you make less profit per sale.
Dropshipping vs. e-commerce
We’ve explored the pros and cons of both business models. Now let’s look at the main factors you should consider when deciding which option is right for you.
Your experience level
Dropshipping is more beginner-friendly.
You can launch a store with little upfront investment. It’s also more forgiving if you make mistakes. For example, if you add a product to your store and it fails to generate sales, you won’t have a ton of money tied up in inventory.
This is not the case when it comes to traditional e-commerce. You need to stock inventory and deal with a logistics company to deliver your products. If you bulk buy a slow-selling product, your money could be tied up for a long time.
Upfront costs
You can start a dropshipping business with minimal capital. Even if you don’t have much cash to hand, you can launch a dropshipping store, find suppliers, and start making sales.
With traditional ecommerce, you need startup funds to purchase inventory.
Profit margins
A traditional e-commerce model is typically more profitable than a dropshipping business. Your margins will be higher as you can negotiate wholesale pricing and shop around to find the best deal on shipping.
With dropshipping, your profit per sale will be lower. The dropshipping supplier is taking on more of the risk, so they take a larger chunk of the profits. In most cases, you’re also stuck with the shipping options that your supplier provides.
Business operations
Dropshipping is a more straightforward business model. Your dropshipping partner handles fulfillment. You also don’t have as many costs to manage, so cash flow isn’t a big problem.
You have more bases to cover if you run a traditional e-commerce business. Alongside marketing and customer service, you must keep on top of inventory management, including storing, packing, and shipping your products. As your business grows, you may need to hire employees to help.
Branding
For many dropshipping products, you won’t be able to use any custom branding or packaging. Some manufacturers and print-on-demand companies offer dropshipping branding services, but the cost is much higher per unit.
With traditional e-commerce, you can buy directly from the manufacturer and add logos and custom branding. You can also add custom labels and use custom packaging to strengthen your brand.
Risk
There is much less risk involved with dropshipping. While some risk is involved when using a third party to handle the fulfillment process, it doesn’t compare to the risk involved with traditional e-commerce.
If your traditional e-commerce business struggles to generate sales, you can lose money.
Which business model is right for you?
There’s no right or wrong answer to this question. It depends on the factors above.
Dropshipping is more suitable if you are new to online sales and want to launch a store quickly. It’s also a better option if you don’t have much startup capital and are concerned about the risk of bulk-buying products.
If you have enough startup capital and some experience with online sales, a traditional e-commerce fulfillment model might be more beneficial. You can make more money per sale and grow a strong brand with custom products and packaging.
Scaling a successful e-commerce store
You can make money with both business models. The key to e-commerce success is choosing the right products and getting them in front of as many potential customers as possible.
But that can be challenging as platforms like Facebook Ads, eBay, and Amazon all have strict rules. If you unwittingly break the guidelines, you can face an account ban and lose a big chunk of your sales.
That’s where a tool like Multilogin can help. You can create multiple storefronts and ad accounts to scale your store while minimizing the risk of account bans.
Check out our ecommerce and dropshipping explainer page to learn how Multilogin can help you grow your online business.
