Choosing the right sourcing model is one of the most critical steps in your business journey. There are four major sourcing models used in product businesses. They include:
The four models significantly differ from one another, and each bears both advantages and disadvantages.
This article breaks down the major pros and cons of each to enable you to make the best choice for your business.
Factors to consider
Choosing a successful source model depends on a few key factors. These include:
Type of product
High involvement products, delicate products are best for models like dropshipping. These could include jewelry, gifts, ceramics, etc. Limited contact with the inventory reduces your risks in the form of damages, unsold products, etc.
Similarly, large products are better dropshipped or manufactured than sold wholesale. These products require a large storage space and massive investment to purchase the goods.
However, low involvement and average-sized goods are better for wholesale or Manufacturing than dropshipping. These are typically goods that do not take up much space and do not require a substantial initial investment to purchase the inventory.
Before deciding on a model, consider the capital available to you. If you need to start a business with less cash available, dropshipping and making products is the way. However, if you have more resources available to invest, then wholesaling or Manufacturing may bring you more significant profits.
What type of business do you want to run? Do you want to create a new brand or unique products? Or do you want to sell a product with as little risk as possible? The entrepreneurial approach you wish to take will determine which business model is suitable for you.
Manufacturing is a business model worth considering. You find a manufacturer to produce the product for you, either locally or overseas.
Local suppliers are considerably cheaper and easier to monitor.
Quality control. When you manufacture goods from scratch, you can exercise more control over the final products’ quality.
Low cost per unit. Manufacturing provides you the products at the lowest price per unit. The low costs allow you to gain more significant margins on your products.
Price control. Manufacturing your products gives you the freedom to set prices for your products. You can, therefore, determine your profit margins.
Brand control. Manufacturing your own products allows you to build a brand around your products. A unique branding reduces competition for you.
Minimum order quantities. To manufacture your products, you require large monetary investments for initial orders. Manufacturers usually place a minimum order requirement.
Potential for fraud. Fraud is quite common, especially when dealing with overseas manufacturers. Since you cannot physically inspect the goods or production facilities, someone can easily scam you.
Long time frame. Manufacturing the goods usually takes the longest time to market. It involves long processes of sampling, prototypes, production, etc. And if you have an overseas supplier, this can be longer and more complicated.
In some cases, making the products yourself is a feasible approach. It is quite common with jewelry, beauty products, etc. The costs of making products include purchasing raw materials, time spent on production, and storing the end products.
Quality control. Making your products gives you full control over the overall quality. You choose the materials, styles, etc. that best appeal to your customers. You are free to adjust features and quality whenever the need arises.
Low startup costs. Making products yourself is cheap, primarily because you do not have to produce in bulk upfront. Labor and storage costs also reduce, which brings down the overall production costs.
Price control. Making the products yourself allows you to set any price you deem appropriate.
Brand control. When you make your products, you have full control over your brand’s look and feel.
High time input: Making products yourself can be time-consuming, depending on your product choice—too much time spent on production limits investment in other activities like sales, marketing, etc.
It is challenging to scale up production when your business increases. You may not manage to produce high quantities, yet it may also not be a great idea to outsource it.
Limited product choices. There is a limit to what products you can make yourself. Your skills and the resources available determine which items you can produce.
Buying wholesale involves sourcing products directly from the manufacturers or other suppliers at factory prices. You then resell them at a higher price.
Reduced risk: A product sold by a manufacturer often already has a proven market. It reduces the risk of product failure. You can be sure of the demand for the goods you purchase.
Brand familiarity. Selling an established brand influences your brand as well. If the brand is well known and popular, selling their products can also create the same result for your brand.
Competition with other suppliers: There are often other suppliers of the same product, which drives up the competition. You will need to differentiate yourself to give customers a reason to buy from you and not your competitor.
Limited control over price: Selling another company’s products means you must play by their rules. Manufacturers sometimes place price controls, which limits you from adjusting prices. You may not even be able to give discounts when needed.
Challenging to deal with multiple suppliers: Sometimes, you may source products from various companies. It becomes difficult to keep track of all suppliers, each bearing different requirements.
Handle inventory: When buying wholesale, you must handle inventory. This function would require you to have ample storage space and bear any costs of damages.
Dropshipping is where a seller fulfills orders from a third party and ships them directly to the customer. In this model, you do not carry any inventory.
You take orders from customers, which you then pass on to your suppliers or dropshipping partners. Your suppliers ship directly to customers. Your profit is the difference between what your supplier charges you and what price you set for the customer.
You can choose to deal directly with manufacturers, or you can work with a dropshipping company. Companies like Wholesale2B work with hundreds of manufacturers, making the process easier and widening your product options. You also do not need to create relationships with many suppliers.
No inventory is required: Dropshipping does not require you to hold any stock. The model thus eliminates expenses like production, procurement, warehousing, etc.
Price flexibility: In the dropshipping model, you have control over the prices. You can adjust your prices anytime, depending on your desired profits and competitor prices. This flexibility increases your profit potential.
Low startup costs: It is an easy process to get into dropshipping. With the right products, suppliers, and management platform, you can start a business today and start selling. There is also no need to purchase products beforehand.
Low risks. There is no need to buy goods beforehand, so the risk of losses from the unbought stock is low. You also don’t have to deal with damaged goods.
Less product control: Since you do not handle inventory yourself, there is less control over your buyer’s orders as a dropshipper. When issues like low-quality products, shipment delays, and damages occur, you have almost no control over it.
High competition: Most dropshipping niches already have hundreds or even thousands of players. Therefore, it becomes difficult to break into the market, get recognized, and attract many buyers. The high competition also instigates price wars that can quickly eat into your profits.
Low-profit margins: Dropshipping is widely associated with razor-thin profits. It thus becomes difficult to advertise effectively, which is the primary source of traffic and sales. You will, therefore, need a large volume of sales to make decent profits.
Points of difference
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With wholesaling, profit margins are significantly higher than dropshipping, Hand make, and Manufacturing. As a wholesaler, you can get low prices from the manufacturer, enabling you to charge decent mark-ups and earn higher profits. Wholesalers can reportedly make over 50% in profit.
Your profit is the difference between what the supplier charges and what you charge the buyer in dropshipping. This margin can be very low, about 20%. Profit margins can only increase with an increase in sales volume.
When making your products, you control your costs and pricing, which significantly increases your potential margins. However, making the items yourself can be very time-consuming, which affects your profitability over time.
In Manufacturing, your margins depend on the supplier’s order quantity and pricing policies.
Wholesaling is, therefore, more profitable than dropshipping, Handmake, and Manufacturing.
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Dropshipping carries fewer potential risks than Wholesaling and Manufacturing. With dropshipping, you never buy any inventory. So, you do not worry about financial loss from holding excess products, incurring damages, or even shipping.
Wholesale, on the other hand, requires you to buy product upfront. This initial investment increases your financial risk.
Making your products carries the least financial risk primarily because you do not need to produce large quantities to start. You can choose to make products on-order, which rules out any losses arising from unsold products.
Manufacturing also requires you to purchase inventory upfront with no sales guarantee. There are also high risks of fraud if the supplier is a fake.
For Wholesaling, dropshipping, and Manufacturing, you must find a way to differentiate yourself from other businesses.
Dropshipping and Handmaking products pose the least business risks of the four models.
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Dropshipping is the cheapest to start. There is no physical inventory to handle on your end. You can quickly adopt a wide range of goods in your store at no cost.
Wholesaling requires you to purchase goods beforehand. It is also more time consuming because you must handle inventory, store activities, shipping, etc. Additionally, dealing with multiple suppliers, imposes additional burdens.
Making products requires little startup investment. With basic resources and time, you can start production.
In Manufacturing, several processes are involved. For example, selecting manufacturers, testing products, shipments, etc. These make the startup process more costly.
Therefore, the Dropshipping model incurs the least costs to startup, making it the best option for cash strapped entrepreneurs.
Dropshipping, Wholesaling, Handmaking products, and Manufacturing are all profitable business models worth considering.
However, the dropshipping model appears to provide the best value for the beginner entrepreneur. It requires less investment and poses fewer risks than the other three models, which can make up for the smaller margins.
Nonetheless, much of the decision on which business model to use depends on the type of product you want to sell. It is thus essential to understand the pros and cons of each type in your chosen product niche. That way, you can make the best decision.