The UK’s e-commerce market is the third largest in the world, with 87% of retail purchases made online by 2018. Couple that with the growing use of e-cigarettes in the country, and it’s no surprise that plenty of entrepreneurs enter the online vaping business.
However, knowing your product is just one part of running a business. You also have to decide how you can source your supplies.
Two of the most commonly used supply chain management methods in online selling is wholesaling and drop shipping. In this article, we’ll examine the pros and cons of each.
Wholesaling requires purchasing your inventory in bulk orders from a manufacturer or a middleman supplier at a discounted rate. You can then sell these products at a higher price point.
With this method, profit margins can typically go up to 50%. You, however, will need to purchase a minimum number of products as set by the manufacturer.
- Higher profit margins — Since you are going to get your products at a bulk discounted rate, you can then raise your price points up to where it will give you more profit (without, of course, scaring your customers off).
- More choices — There are more wholesale suppliers compared to drop shippers, which means you will have plenty of choices as to which products to sell and which supplier to trust.
- More control over the process — You won’t have to rely on a third-party vendor to do the shipping for you since you can do this from your own storage facility (e.g. warehouse, your garage, etc.). You will also have more control over your own inventory and stock up as many as you need, so you can better fulfil your customers’ orders.
- Sell market-validated products — Wholesaling presents fewer risks for you since you’ll be purchasing (and selling) products that have already been successful in the market. You won’t have to invest in testing market fit nor would you need to be worried that no one will buy the items from you.
- Brand/product familiarity — Coming from the previous point, market-validated products means customers are already buying the same items from other merchants. This has a cascading effect on your business, as your own customers can easily recognise (and trust) these products in your store.
- Higher risk — Purchasing inventory in bulk comes with the risk of those items not flying off the digital shelves; in which case, you’ll have products in storage that will not give you any profit (or worse, put you on a deficit).
- Need upfront capital — Manufacturers require a minimum amount of orders from merchants, often in large quantities that budding business owners may not have the immediate cash for. And if you don’t have enough capital, you won’t have any products to sell.
- You need to do the shipping — You need to handle the shipping process yourself. Once your business gets more traction, you need to hire more staff to help you with fulfilling orders, which all translate to more business expenses on your end.
- You need space for supplies — Since you’ll be ordering in bulk, you need an area large enough to house all your products securely. This requires business permits (in case of warehouses), as well as scouting for storage facilities or building one. Again, this requires upfront investment on top of purchasing inventory and hiring staff.
- Compete with plenty of retailers — Selling established products is both an advantage and disadvantage for wholesalers. Since the items you will sell are available in several other online stores, you need to come up with a way to set yourself apart from the competition (e.g. lower price points, better marketing, discounts/sales); otherwise, customers will flock other retailers instead of you.
- Deal with price controls — Some brands impose certain rules when presenting and/or selling their products, which in some cases include how much you can sell each item. If they control the price, you would not have a lot of room to offer discounts or sales to your own customers.
- Dealing with various suppliers — Of course, you wouldn’t limit your e-commerce site to selling just one product. When you start with one or two product lines, you’ll only be dealing with one supplier. However, as the demand grows, you’ll need to invest in growing your inventory. Dealing with multiple suppliers comes with its own set of challenges, mainly because each supplier will have their own requirements that you all need to meet.
Drop shipping is another retail fulfilment method that plenty of business owners jump into, as it allows them to operate their e-commerce sites without needing to purchase any inventory.
When a customer places an order, the merchant (you) will purchase that item from a third-party supplier (usually a wholesaler, manufacturer, or a drop ship aggregator). Your supplier will then ship the product directly to the customer. You will never get to handle the product itself nor worry about the entire shipping process.
As opposed to wholesaling, you will only purchase products on an as-needed basis. Amazon and Zappos are two prime examples of successful drop shippers. For this business model, profit margins are typically at 20%.
- Low capital needed — The biggest allure to this business model is its low startup costs. You only need to buy an item once a customer places an order for it, saving you plenty of money that would otherwise go to maintaining inventory.
- Easier to start — Since you don’t need to manage the physical products, you will not need to find/build your own storage facility and manage any inventory. You also won’t have to worry about the entire shipping process, including tracking inventory and handling returns and shipments.
- Low overhead costs — Plenty of drop shippers get to run their business from the comfort of their own homes. Without a storage facility, you won’t have to pay for operating expenses. Your expenses will, of course, grow as your business does, but it still will not be as much as wholesalers.
- No storage issues — When wholesale businesses grow, they also need to increase the size of their storage facilities. With drop shipping, you won’t need to worry about the limitations of your storage capacity as you’ll have none.
- Flexibility — You won’t need an office, so you can operate your business anywhere in the world, as long as you have a good internet connection to communicate with suppliers and customers.
- Greater product variety — Without the need to stock up on inventory, you have the freedom to offer a wide variety of products to your customers as long as there is a third-party supplier who has them available. If your supplier has a new item in stock, you can also offer them on your site.
- Increase customer lifetime value — With more products to expand your current selection, customers will keep coming back to see what new items you have.
- Less financial risk — No inventory means you won’t be stuck with items you couldn’t sell at any given point in time.
- No shipping — You won’t have to wrap your products in bubble wrap, place them in boxes, and take regular trips to the post office. Your supplier will take care of the entire shipping process for you from start to finish.
- Low margins — Drop shipping is notorious for low returns, as you’re only purchasing a product one at a time (as opposed to a bulk order discount). With lower margins, it would take you slower to be at a profitable level.
- Too dependent on the supplier — Since you don’t manage the products, you’ll be dependent on third-party suppliers who may or may not be doing well with their own business management. If they mess up an order or if they suddenly go out of stock without mentioning it to you, your reputation may suffer. Also, if communication with your supplier is slow, communication with your own customers grinds to a halt. Customer service is paramount in online selling; remember that bad reviews can make or break your business, especially in the online world where word travels around faster.
- Unreliable/scam suppliers — Without the ability to inspect the products firsthand, your customers may end up with low-quality items or not receive their orders at all. You have to assess your supplier properly before doing business with them, as what they do ultimately affects you.
- Legal issues — Coming from the previous point, if you encounter a dubious supplier, you’re automatically complicit. For instance, if they use a trademarked logo or image illegally and you use it with your own products, you’ll also face the same legal issues.
- Backorders — Without knowing how many products are left for a particular line, you won’t be able to assure your customers that you’ll have the products they need all the time. Your supplier may run out and take a long time to restock, which means you’ll end up with a customer who will cancel their order or wait a long time to get it. Either way, backorders will hurt your customer relations.
- Cutthroat competition — Since drop shipping is easier to start and scale, you’re going to compete with beginner and established entrepreneurs alike. If a competitor drops their prices, you’ll be pressured to do the same, which does not bode well for your already too low-profit margins.
- Difficult branding — If a product gets a lot of demand from your store, it’s the product’s brand that will get recognition (not necessarily your e-commerce site). Remember that it’s not your logo that will be displayed on the packaging. Without branding, unknown e-commerce sites will have a hard time competing in their niche and making a name for themselves.
Which One Is For You?
Buying wholesale would best fit business owners who want to hit the ground running. It’s a high risk, high return situation. While this model requires hefty upfront costs (for inventory, staff, and storage), you’ll get a higher profit margin. You’ll also sell a range of products that already have market validation.
Drop shipping, on the other hand, is best suited for those who have little capital to work with as you won’t need to have a large stock of inventory to be in business. This, however, comes with the disadvantage of having a much lower profit margin and several supplier issues to deal with.
As with any business decision, you need to do extensive research. Assess which option will give you the best returns for your vape store considering where you are in your entrepreneur journey and the current state of your e-commerce site.
Check out our advanced drop shipping service, we've tried to eliminate most of the problems with the traditional way of dropshipping and give complete control to the customer.
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