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Dropshipping vs. Holding Stock: 5 Pros & Cons Explained

As an eCommerce business owner or operator, one of the issues you’ve undoubtedly thought about is how you handle stock. Depending on what you sell, you need to consider everything from shipping regulations to inventory storage. This is where the major consideration of dropshipping vs holding stock comes in.

On one hand, holding your own stock gives you complete control over your business. But on the flip side, dropshipping, or having your products ship directly from their manufacturer to the end-user, can be cheaper to break into and it allows you to focus on other areas that can stimulate growth, such as marketing, eCommerce SEO, and customer relations.

There are pros and cons to both, and the method that is right for you will depend on a range of factors. To help you weigh these options, here are a few key areas where holding stock differs from dropshipping, and what these differences mean for your business.

Read here for tips on how to effectively deal with sales tax and shipping.


 
1. Access to suppliers 

One of the first considerations when deciding between dropshipping vs. holding stock will be how you source your products. Unfortunately, there may be items you want to sell that can only source from a wholesaler who’s unwilling or unable to process deliveries on your behalf.

In these situations, don’t start questioning your business model if dropshipping seems to be the most appropriate for you. Instead, realize that you may be better off finding different products or, better yet, a different supplier of the same products who can satisfy your need for dropshipping.

While it may close some doors, choosing a dropshipping model also opens up the potential to work with a wide range of talented creators whose products are only available as a result of this new take on eCommerce collaboration. 


 
2. Startup costs

Launching a business can come with a wide range of costs, depending on everything from how you structure your marketing to the format of the business itself. Dropshipping is a particularly popular way for entrepreneurs with minimal startup capital to break into the world of eCommerce. This is largely due to the fact that no physical premises are required and there are no costs associated with acquiring or storing stock.

However, if you have a larger budget to work with or you already have a physical premises, this may be less of a concern. Furthermore, if you are relying on investors for a portion of your startup funds, it may be harder to convince them to commit to your business if you are relying on an external party to manage stock and fulfill orders.

That said, as dropshipping becomes more widespread and well-known, more investors are becoming familiar with the business model and more are willing to support it. Meanwhile, it’s worth keeping in mind that even if you’re not operating on a shoestring budget, the savings made by dropshipping rather than holding stock mean that you will have more to invest in critical areas such as marketing, staffing, and data analysis.


 
3. Inventory management

Naturally, the main advantage of dropshipping when it comes to inventory management is that you don’t need to worry about it. However, while it is certainly advantageous to cut out this particular part of your workload, that’s not to say that there are no advantages to holding stock.

For example, when you have direct access to your stock, you have far more control over what you have in inventory at any given time, This means there is a much lower risk of running short of a particular item, or selling out completely. Furthermore, with good stock management, you will be able to replenish supplies quickly when necessary.

When dropshipping, you are relying on the inventory management skills of a third party. While this saves you time and money, it also means you need to trust in their efficiency and diligence.

In addition, it means that there will always be an extra step in the sales and fulfillment process as you will act as the go-between for the customer and the supplier. This means it can take a little longer to fulfill orders, respond to queries, or process returns.


 
4. Financial implications 

In addition to the pros and cons relating to startup capital, there are also ongoing financial implications to consider:

Holding stock means a portion of your money will always be tied up. This is fine when stock is constantly turning over, but can become a problem if you then struggle to shift that stock.

There is a risk that parts of your inventory will become obsolete, depending on the type of product.

Holding stock requires a premises, which means additional costs to your business, including increased insurance requirements.

In the event of a natural disaster or other unforeseen emergency, you could suffer significant losses. Even if the damage is covered by your insurance, the impact on your ability to trade while the issue is resolved can have long-term implications for the reputation and success of your business.

On the whole, dropshipping is a far lower financial risk than holding stock. Nevertheless, many of the risks described above can be offset by careful business planning, and attention to shifting trends, and the behavior of your customers.

All elements of business involve taking calculated risks, so your decisions regarding what to stock, and how, will not simply be shots in the dark. Do your product research first, and choose items based on the needs of the market and the expectations of your audience.


 
5. Customer expectations

One of the biggest challenges facing dropshippers when it comes to customer relations is that, if something goes wrong with a delivery, you may find yourself processing complaints about something that’s beyond your control.

Of course, you can relay this information to the relevant supplier or manufacturer and work toward a prompt solution, but this interim step can mean that it takes longer to resolve complaints than it would if you had direct control over your stock.

The biggest problem when you have issues with your dropshipper this is that customers see your business as a unified entity. So, when a resolution to their complaint is delayed, it can come off as poor customer service. However, you can still go a long way toward rectifying issues by keeping customers in the loop as you handle their complaints and providing a suitable solution to their problem.

Ultimately, whether you’re dropshipping or holding your own stock, the key to keeping your customers happy is being accountable, doing everything you can to resolve their grievances, and learning from setbacks to improve your customer service in the future. 


 
The bottom line on dropshipping vs holding stock

Remember that whether you opt for dropshipping or holding stock, you can have a highly successful eCommerce enterprise with either business model. Holding stock simply isn’t viable for some people (or certain products, such as handcrafted items that are made to order). But on the other side, dropshipping, with its own set of constraints, isn’t for everyone, either.

Weigh the pros and cons according to your needs and the long-term plan for your business. Ask yourself if you’d prefer to have full control over all stages of the sales process, minimizing risk, and securing a stable foundation to work from, or would you rather trust your suppliers and redistribute that time and money into other areas of your business so you can focus on its growth and expansion?

The implications are different for every business, and there is no definitive “better” choice. In fact, you could even opt for a hybrid model, where you hold a limited amount of stock, and dropship the rest, similar to sellers who rely on a combination of merchant-fulfilled orders for certain products and Amazon FBA for others. You could even take on the role of the supplier and partner up with a dropshipper to handle the other side of the business.

The possibilities are numerous, so be creative and structure your business in a way that best fits your working style and long-term aspirations.


 
Victoria Greene is a branding consultant and freelance writer. On her blog, VictoriaEcommerce, she loves to share her experiences from the digital trenches. She’s a woman with big ideas and a tiny dog, living a digital nomad life out of Chicago.


 

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