Dropshipping offers a low-risk way for entrepreneurs to start a business. However, as many veteran dropshippers will tell you, there is a ceiling for growth that a dropshipping business will hit. While many store-owners might sit with stagnant growth, many others look to bulk ordering as an effective way to transition a dropshipping business to a more traditional enterprise.
In this article, we'll take a close look at dropshipping and the advantages it offers to new business owners. We'll also take a realistic look at the drawbacks and limits of dropshipping, and how transitioning to bulk ordering can open the doorway for sustainable growth.
What is Dropshipping?
Dropshipping is a shipping strategy many online stores use that allows for consistent product fulfillment without needing to order and store large amounts of inventory. When a customer orders a product from a store that uses dropshipping, the store doesn't ship the product from a warehouse. Instead, the store will pass along the order directly to a factory (usually overseas), who will then ship the product directly to the customer.
From the customer perspective, there may be no indication that the store uses dropshipping as a fulfillment method. However, for the business owner, there are several advantages to starting out using dropshipping. Of course, as a business grows, the disadvantages of using dropshipping will become apparent.
The Advantages of Dropshipping
Let's take a look at the specific advantages and disadvantages of using dropshipping.
Advantage #1: Low Start-Up Costs and Monthly Overhead
One of the primary reasons dropshipping has exploded in popularity over the past several years is because it's inexpensive to get started. If you only fulfill orders that are placed by customers, you don't have to make the initial investment of buying inventory. You also won't need to pay for warehouse storage, since you're only ordering products that customers have paid for.
This relatively low level of risk makes dropshipping a great option for new entrepreneurs. It's an opportunity to learn basic marketing and product research without risking a high level of capital. Should the product or branding idea fail, not much is lost, since very little investment is required for basic dropshipping stores.
Advantage #2: Dropshippers Don't Produce, Store, or Ship Products
Not only do dropshippers not need to store products, as we mentioned in the first advantage, they usually don't directly participate in designing, producing, or shipping the products. This lowers the barrier of entry for a dropshipping store even further, since far less business expertise is required to start and operate a dropship store.
It's common for an entrepreneur to start a dropshipping store to take advantage of a product fad (for example, fidget spinners or pop-its). This doesn't require product design, quality control of production, or organizing shipping logistics for a product. Instead, the dropshipper acts as an intermediary between the customer and the supplier, which is common for fad products that are already being produced but haven't been introduced to certain markets yet.
Dropshippers often re-brand products that are already being manufactured, which doesn't require them to produce, store, or ship the products. Many successful dropshippers were simply the first intermediaries to introduce a popular product to the American market, as is often the case with fad products.
Advantage #3: Dropshipping is Great for Testing New Products
Since much of the success of a store that uses dropshipping relies on marketing products other companies or brands haven't caught onto yet, dropshipping is a great way to test new products to a new market. If a business owner thinks that a product is going to be a big hit, dropshipping is a cost-effective way to test the market before making significant investments in inventory and storage.
In fact, many businesses that have already transitioned away from dropshipping as their primary fulfillment strategy will still use dropshipping to test unproven products. If the products prove successful, they'll transition fulfillment from dropshipping to more traditional strategies, like bulk ordering.
The Disadvantages of Dropshipping
While dropshipping offers several unique benefits, there are hard limits to what it can offer businesses looking to reliably scale. The following disadvantages act as ceilings for business growth and are primary reasons a business will transition from dropshipping to bulk ordering.
Disadvantage #1: Low Profit Margins
While only fulfilling orders that are placed by customers may avoid having to make large, initial investments, it comes at a cost. Products that are dropshipped usually have a higher cost per unit, which means the profit margins on those products will be pretty low. Dropshippers can usually expect a 15% - 20% net profit margin on the products they sell.
Disadvantage #2: Brand Building Difficulty
Dropshippers are almost never selling a new or novel product. Afterall, they're operating as intermediaries between suppliers and customers, which means they aren't directly involved in the design or production of whatever product they happen to be selling. It's possible that multiple dropshipping brands are attempting to sell the same product, which can make brand building very difficult.
Disadvantage #3: Product Quality and Delivery Times
Since dropshippers aren't directly involved in the manufacturing of the product they're selling, quality can be a huge issue. If a business owner didn't happen to find a supplier that's already making a high-quality product, it can be difficult to improve a product that they don't have direct production control over.
Delivery times can also be an issue. For starters, it's possible that demand could suddenly outstrip supply, and a dropshipper won't have the leverage to ask the supplier to produce more. Since products are usually shipped from overseas, supply chain issues can also make shipping times very, very long.
Disadvantage #4: Hard to Scale
When you combine low profit margins, difficulty creating a brand that stands out, quality control issues, and shipping issues, you get a business that is difficult to scale. Once dropshippers realize they've hit a ceiling of growth, they'll start to look to bulk ordering to appropriately scale their businesses.
What is Bulk Ordering?
When dropshippers look to transition to bulk ordering, they're looking to completely change the way they fulfill orders. Bulk ordering involves finding a supplier, having the option to be involved with product design, having more direct control over quality, and investing in products before customers have placed orders.
The Advantages of Bulk Ordering
Let's take a closer look at some of the specific advantages that bulk ordering provides:
Advantage #1: Easier to Brand Your Own Products
When you bulk order, you have the option to either white label or private label your products. You can work with your supplier to apply a specific logo, graphics, as well as unique packaging. If your business is attempting to establish a brand, then bulk ordering is an excellent step to take.
Advantage #2: Work Directly with a Supplier to Improve Products
Bulk ordering means you have direct control over product manufacturing, which means it's much easier to improve products. You can instruct your supplier to make products according to certain dimensions and ask that they use certain raw materials. You can even have a physical presence in the factory to oversee quality control.
This kind of access is available because, unlike dropshipping, you're entering into a business relationship with the factory. Your business becomes a direct client of the supplier, and if the supplier believes you'll be a profitable, long-term customer, they'll make your products how you need them to be made.
Businesses who use bulk ordering can use suppliers to make custom products or even prototypes of products that don't yet exist. This kind of direct access and cooperation with suppliers simply isn't an option with dropshippers.
Advantage #3: More Supplier Options
Not only is dropshipping not as profitable for businesses using it as a fulfillment method, but it’s also not as profitable for suppliers, either. Most suppliers don't offer dropshipping fulfillment, so when businesses begin to look at bulk ordering, they'll find that there are far more options to choose from.
If your business decided not to sell a certain product because you couldn't find a supplier for you, it's possible that you may see more niche options available when you start developing your bulk ordering strategy. Even if you're happy with your dropshipping supplier, it's important to examine other suppliers that may offer higher quality, better prices, or both.
Of course, not all of the supplier options will be the right choice for your business. There's a lot of factors to consider when choosing the right supplier for your business needs, and the choices (and the risks) often overwhelm inexperienced businesses. It's one of the many reasons companies look to using a sourcing agent (like Kanary) when they start moving towards bulk ordering.
Advantage #4: Access to the Best Suppliers
Not only will businesses find a broader selection of suppliers when they move to bulk ordering, but they'll also find the best suppliers. Generally, the highest quality suppliers offering the best prices don't offer dropshipping. They've developed enough business relationships that they can rely on dependable production volume for clients they can trust to manufacture for.
It can be difficult to find the best suppliers, since the savviest businesses often monopolize their time. It's another reason businesses look to sourcing agents, like Kanary, to help find high-quality manufacturers that businesses can form long-term, profitable relationships with.
Advantage #5: Higher Profit Margins
When you combine the ability to appropriately brand products with the ability to directly supervise quality control, on top of partnering with suppliers that offer better per-unit pricing, you end up with much higher profit margins. It's not uncommon for branded products to have 80% or higher gross profit margins.
Quadrupling your profit margins is exactly what businesses need to reliably scale, which is why successful dropshippers almost always turn to bulk ordering in order to grow their business.
The Disadvantages of Bulk Ordering
While the advantages of bulk ordering are clear, there are significant risks that go along with it. Some of these risks are the reasons why businesses may choose to dropship to begin with, while some of the other risks will be less obvious to less experienced businesses:
Disadvantage #1: Higher Upfront Investment on Inventory
This is the obvious disadvantage, and the primary reason that many businesses start with dropshipping. When you order products in bulk, you are paying for them upfront. This means you need to have the capital available to make a large order, and there's no guarantee that you'll sell your products (since you're ordering them without buyers already lined up).
Even businesses that have firm bulk ordering logistics in place may test products through dropshipping fulfillment before they make the upfront investment on inventory.
Disadvantage #2: Higher MOQs Increase Risk of Using Bad Supplier
Most suppliers that take bulk orders have high minimum order quantities (or MOQs). That's the primary reason they may offer a better per unit price (since they can sell several hundred or thousand units at a time). If you choose a bad supplier, you could end up with several thousand units of product you can't sell.
There are ways to mitigate this risk, like managing quality control, which we'll discuss later in this article. However, inexperienced businesses often fail to do their due diligence in making sure that their products meet their quality standards, which costs time and money.
Disadvantage #3: Too Much Inventory and High Warehouse Costs
Finally, even if you make a bulk order and the products are up to your quality expectations, that doesn't mean you're guaranteed to sell them. Filling up a warehouse with inventory you can move means you're going to rack up storage fees. This is another primary reason that many businesses start with something like dropshipping for unproven products.
Bulk Ordering: Pros Often Outweigh the Cons
For businesses who have a proven product and are ready to scale, the advantages of bulk ordering far outweigh the cons. It's the only way to profitably scale, but businesses need to be aware of the risks of bulk ordering before they make a large financial investment in doing so.
The financial risks of not having a solid bulk ordering strategy are one of the many reasons that businesses will turn to a sourcing specialist, like Kanary, to help develop and execute bulk ordering logistics. Regardless of whether you choose to use a sourcing agent or not, your business needs to be sure it invests the time and resources required to reap the benefits of bulk ordering.
Bulk Ordering: How to Handle Quality Control
We mentioned that bulk ordering allows businesses to have a more hands-on experience with the manufacturing of their products. This also means that businesses have the opportunity to more directly execute a quality control plan to make sure that their products are made to set expectations.
Of course, this is often easier said than done, but there are a few proven tips that can help businesses make sure that their bulk order products are manufactured and delivered to set expectations.
Sampling is one of the most important things you can do to vet suppliers. It's a good idea to sample several times in the manufacturing process, including:
● When you are shopping for suppliers
● When you customize a product
● When you create a new product
Sampling is concrete proof that the supplier has the capacity to follow your instructions to make your product to your specifications. Businesses often skip this step when they are choosing a supplier in China, which usually leads to terrible results. Keep in mind that sampling is important for even proven manufacturers, since honest misunderstandings or mistakes can occur.
The sampling process should be thorough. Your business should look for every imperfection possible, and you should also note how your potential supplier interacts with you during the sampling period. If they are slow to respond to communication, have a hard time understanding what you want done, or if you experience other barriers in communication, then you may need to move to a different supplier, even if the sample product meets your expectations.
Do not skip or rush the sampling phase.
After a thorough sampling process and manufacturing begins, you'll have the opportunity for strict production oversight. Ask your supplier for a production schedule, since this will help you plan shipments to either a China-based or domestic warehouse. You should also press for the defect rate from the supplier (knowing this can help businesses get free replacements or better negotiating terms).
Ideally, you're able to be physically present at the factory (and if for some reason your supplier doesn't allow this, this is a huge red flag). Many businesses, especially businesses looking to bulk ordering for the first time (or smaller businesses that simply don't have the resources), can also ask for regular videos and pictures of the production process.
This is also another reason many businesses choose to partner with a sourcing specialist. Many, like Kanary, already have a physical presence in China and provide on-site supervision of the production process.
Again, if your supplier is unwilling to provide regular videos or pictures, this should serve as a warning that they are being dishonest about their manufacturing process.
Bulk Ordering: Shipping Methods
Unlike dropshipping, businesses that use bulk ordering have access to a variety of different shipping methods. There's not a universal "right" answer, so consider which option is the best fit for your business.
Use a China-Based Fulfillment Center
Companies that partner with China-based suppliers can also use China-based fulfillment centers. Instead of producing products, shipping those products via sea freight, and then storing them in a domestic warehouse, all you have to do is ship products from your supplier directly to the China-based warehouse.
Once products are there, you can ship directly from that fulfillment center to any customer in the world. This cuts out the need to plan the logistics for bulk sea-freight shipments, and it cuts down on the shipping time your customers experience. If your business exclusively ships products to customers, it's worth considering partnering with a China-based fulfillment center.
A Hybrid Approach - Fulfillment in China and Warehousing in the U.S.
If your business has a variety of sales channels, a hybrid approach to shipping might be an efficient solution. You can use China fulfillment centers to ship products to international customers (or to ship new products that are not yet proven), and then you can use domestic warehouses for products that are sold consistently in the U.S.
Air Freight From China to Your Warehouse
Your business may not have a need for a China-based fulfillment center. If that's the case, you'll consider two primary shipping methods: air freight and sea freight (which we'll discuss below). Air freight is ideal for products that are lightweight, smaller bulk orders, or high-margin products that you need quickly.
Common air freight companies include DHL, FedEx, or UPS, and tracking those shipments is similar to typical shipment tracking, like using a tracking number to determine where your shipment is. You can choose 3rd party airlines, since sometimes the shipping rate will be less expensive, though this is very product dependent.
Most large, bulk orders are too cost-prohibitive to use air freight. For the majority of those orders, businesses turn to sea freight as their shipping option.
Sea Freight From China to Your Warehouse
Sea freight is easily the cheapest way to ship large, heavy, bulk orders from China to your domestic warehouses. However, it's also the most labor intensive, and if your business doesn't invest the appropriate amount of time to plan and execute sea freight logistics, you'll end up with unnecessary delays and customs headaches.
The biggest hurdle businesses will face with sea freight is making sure they have all the appropriate paperwork for customs. You'll need documentation like the:
● Commercial invoice
● Packing List
● Bill of Lading
In addition to this documentation, your tax codes need to be accurate. Your HTS codes (or harmonized tariff codes) are what U.S. customs will use to determine what import tax you need to pay on your goods. It is imperative that you find and confirm the codes yourself. Your supplier may offer HTS codes, but if they're wrong, the financial consequences fall on you and your business.
If your HTS codes cause you to pay a higher tax than you should, your business ends up with a needless, expensive cost. If your HTS codes causes you to pay a lower tax than you should, U.S. Customs will penalize you. Not only will you be required to pay the difference, but you'll have to pay fines (since it looks like you're trying to cheat the tax system).
Not having the right documentation can cause delays at customs, and if it takes you too long to resolve the issue, then you may be fined for storage. Always make sure your shipping documentation and customs paperwork is in order, and if you aren't sure, consult with a customs broker or a sourcing specialist to help.
Bulk Ordering: Importing Products (From China)
Dropshippers transitioning to bulk ordering face a huge hurdle of learning how to navigate customs. How your products work through customs is different with bulk ordering, so it's important to anticipate the change (and to be sure you create a plan to clear customs successfully).
Let's take a look at how importing products with dropshipping and importing products with bulk ordering differ.
Dropshipping: Fulfillment Provider Handles Customs
When dropshipping, your fulfillment provider will handle all aspects of clear customs. When shipping to the U.S., this is a straightforward process. However, if you are selling to European customers, the process will involve you, the seller, more.
In particular, you'll need to handle paying the VAT. If you don't follow these steps, the burden of paying the VAT tax will fall to your customers, which will create a terrible customer experience.
● First, register for OSS or IOSS. This will allow you to handle the VAT instead of shifting that responsibility to customers once the product has been imported.
● From there, your business will be responsible for collecting, reporting, and paying the VAT.
● Finally, make sure to pay the VAT to a single tax authority.
Bulk Ordering: Your Business Handles Everything
Your business is going to have to be far more hands on with the importation process when you move to bulk ordering. We mentioned this earlier when discussing sea freight shipping, but we'll go more into detail about the kind of preparation you need to prepare, as well as the different kinds of paperwork you need to have in order to clear customs.
Required Customs Paperwork
The specific paperwork you need is going to be product dependent. For example, if you're importing food goods, then additional paperwork required by the FDA will need to be submitted. However, the following is a sampling of some of the paperwork you should expect to have ready for customs:
● Commercial invoice
● Packing list (which should match your commercial invoice)
● FDA registration number (for food items)
● Pre-departure notice
● Certificate of origins
● Fumigation certificates
This is not an all-inclusive list, so be sure to check what specific paperwork you'll need that relates to your product.
Who Do I Coordinate With?
In addition to needing documents to clear customs, there are several parties your business needs to coordinate with during, and after, the customs process. First, a customs broker is an excellent resource if you suspect you'll need guidance on clearing customs. A sourcing specialist (like Kanary) usually has established relationships with high-quality customs brokers to make clearing customs as efficient and quick as possible.
A freight forwarder is an entity that helps plan and execute the logistics of shipping your bulk order. They make sure that your products get from the factory, onto sea freight, and unloaded to your domestic shipping partner after customs has been cleared.
Finally, you'll be in contact with a domestic transportation partner (either truck freight, train, or both), that will take your products from the unloading port and will deliver them to your final destination (usually your warehouse and/or fulfillment center).
Ideally, all three of these entities are working together to prevent unnecessary delays at the port. As a sourcing specialist, Kanary coordinates between all three of these entities on behalf of clients.
Scaling from Dropshipping to Bulk Ordering Summary
There's a lot of information in this article to digest, so let's take a look at the key takeaways:
● Bulk ordering is a natural transition for dropshippers who are looking to reliably scale their business.
● Bulk ordering allows for brand development and much more attractive gross profit margins (80% and upwards).
● Bulk ordering gives you access to the best suppliers (since the best suppliers generally do not work with dropshippers).
● Combining bulk ordering from China with China-based fulfillment is an easy next step to gain more control over your manufacturing process.
● If you use sea freight or air freight, you'll have more avenues to decrease costs and increase profit margins
If your dropshipping business is ready to scale, bulk ordering is the most reliable way to profitably grow.
Should I Use a Sourcing Agent?
We've mentioned using a sourcing agent throughout this article, and many businesses that use bulk ordering make use of a sourcing agent (or sourcing specialist) to manage the necessary logistics. Of course, the benefits of having a sourcing agent only exist if you find a good sourcing agent, so make sure your choice can:
● Problem solve production issues between your business and your supplier.
● Understand the shipping climate and have a proven track-record of planning and executing shipping logistics.
● Monitor quality control during production, preferably through an on-the-ground presence at the factory.
● Easily and consistently communicate, as near-constant communication is often necessary for the shipment of bulk orders.
You also need to make sure that your sourcing agent is not getting a kickback from the supplier. Some less-than-reputable suppliers and sourcing specialists coordinate in this way, and it means you'll end up getting gouged on the price.
Kanary As Your Sourcing Specialist
If you believe that your business would benefit from using a sourcing specialist, we would love to talk to you to see if Kanary would be a good fit for your business needs. Kanary has:
● 40 years of combined experience with helping business with bulk orders
● Sourcing and manufacturing experts fluent in English and Mandarin.
● Has a physical presence in China while being based out of the United States
● Logistics specialists for bulk ordering and scaling businesses
● Expertise with executing shipping logistics, including consolidated shipping.
Click the link below to reach out to us, and we'll offer a free consultation to determine if Kanary would provide added value to your business