Dropshipping vs Holding Stock: Risks and Trade-offs

Dropshipping vs holding stock in one table

Both models put products in front of shoppers. They differ in who owns the goods and where the risk sits when something goes wrong.

Dropshipping means a supplier stores the goods and sends each order straight to your customer, so you hold no stock. Holding stock means you buy goods in advance, store them and ship them yourself. Dropshipping needs less money at the start but gives you less control over quality, delivery and margin. Holding stock costs more at the start and gives you that control.

Dropshipping vs holding stock is a choice about who carries the goods and the risk. In both models the shopper deals with your store and pays your store, so your store is the one they expect to put things right. The table sets the two side by side.

What dropshipping is

In dropshipping, you list products on your store but you do not buy them until a customer orders. The customer pays you. You pass the order to a supplier, you pay the supplier its price, and the supplier packs the parcel and sends it to the customer. You keep the difference. Some suppliers make the item to order, which is how print-on-demand works.

Dropshipping is a way of fulfilling orders, not a different kind of store. You still need a website, product pages, payments, tax handling, policies, marketing and customer service. What you skip is buying, storing and packing the goods.

The risks of dropshipping

The risks come from one fact: the shopper blames you for everything the supplier does. Common problems are these:

• The supplier runs out of an item after your store has taken the payment, so you cancel and refund an order you advertised as available.
• Delivery takes longer than your page says, especially when the supplier ships from another country. Google's Merchant Center help asks stores to keep shipping times and costs on their website in line with what they submit, so an optimistic estimate is a policy problem as well as a customer problem.
• Quality varies, and you have not handled the goods.
• The supplier's return terms are stricter than yours, but your shopper only reads your policy.
• Other stores can list the same product from the same supplier, so competition tends to push prices down.
• Your supplier changes terms, raises prices or stops trading, and your range disappears.
• Parcels arrive with the supplier's paperwork or packaging, which can confuse the buyer.

There are legal and tax duties too. In many countries you count as the seller, so consumer-protection rules, product safety and labelling rules, and sales tax or VAT may fall on your store even though you never touch the goods. Rules differ by country and change, so ask an accountant or lawyer in each country you sell to.

The costs and risks of holding stock

Holding stock turns the risk around. You carry it before a sale, not after. Cash is spent on goods that may sell slowly. Storage needs space, and goods can be damaged, lost, go out of date or go out of fashion. Suppliers may set a minimum order quantity, and a bad forecast leaves you with a shelf of unsold goods that you must mark down to clear.

In return you control the things shoppers notice. You can inspect goods before dispatch, pack them well, ship the same day and use your own packaging. You know what you hold, so the website can show honest availability. Returned goods come to you, and you can check and resell them. You can also bundle products into sets, which a supplier-shipped model makes hard.

A third route sits between the two. You own the stock, but a fulfilment company stores it and ships orders for a fee. You keep control of quality and range while someone else handles the warehouse. Look at the contract and the fees carefully, because they become part of your cost per order.

What each model does to your margin

Do not compare the two models by the price on a supplier's list. Work out what one order leaves you under each model. Write down every line and mark who pays it:

• The cost of the product, which is usually higher per unit when a supplier handles the order and lower when you buy in volume.
• Packaging and the time spent packing.
• Postage, and who sets the rate.
• Payment provider fees on the sale and on any refund.
• Returns: postage, inspection, the loss on goods that cannot be resold.
• Sales tax or VAT treatment, which depends on your country and the buyer's.
• Advertising or other costs of finding the customer.
• Storage, insurance and the cost of money tied up in unsold goods, if you hold stock.

If the dropshipped margin is too thin to pay for advertising and returns, the model does not work for that product, however easy it is to start. If the holding-stock margin only works at a volume you have not reached, buy a small batch first.

Questions to ask a dropshipping supplier

Ask before you list a single product, and put the answers in writing.

• Where do you ship from, and to which countries? Your policy can only promise what the supplier delivers.
• What is your handling time, and what transit time do carriers usually achieve for each destination?
• How do you send me stock levels, and how often? Is there a feed, an app or only a spreadsheet?
• How do I pass you an order: by email, a portal or a connection to my store?
• Can I order a sample, to check the product and the packaging myself?
• Do you pack without your own branding, and does the parcel carry any price?
• Who handles returns, who pays for them and what do you do with faulty goods?
• What happens if a parcel is lost or damaged?
• Can you supply the safety, labelling and import documents the countries I sell to require?
• Do you sell the same goods to other stores, or directly to the public at a lower price?

A supplier that answers slowly or vaguely before it has your money will not improve afterwards.

When holding stock is the better choice

Holding stock tends to suit a store that:

• has already seen steady demand and wants better margins through buying in volume;
• promises fast dispatch as a selling point;
• sells fragile, regulated or high-value goods where inspection matters;
• makes its own products or has a close supplier relationship;
• depends on its packaging and presentation for repeat custom;
• wants to sell bundles, subscriptions or refills.

Dropshipping tends to suit a store that wants to test a new range before spending on goods, sells items too large or varied to store, or adds a long tail of occasional products to a core range it holds. It also suits a seller who has little capital and is prepared to accept thinner margins and less control in return.

Many stores mix the two. They hold the fast sellers, which are predictable and benefit from good margins and quick delivery, and dropship the slower lines. The test is simple. Order a sample of each supplier's goods, time the delivery, and compare the experience with what your product pages promise.

What each model means for your website

Both models need accurate product pages. Dropshipping adds a few extra pressures.

• Supplier descriptions are shared by every store that sells the item. Write your own from the facts, and use your own photographs where you have a sample. The ecommerce product page checklist shows what each page should answer, and the ecommerce SEO audit guide explains why duplicated descriptions are a search problem.
• Stock status must follow the supplier's data. If the store cannot receive updates automatically, plan how you will check them.
• Delivery times differ by product when different suppliers ship them. The product page should show the right one.
• Your shipping and returns policy must describe how orders travel, including the supplier's part in it.
• A new store with thin pages, no links and a catalogue copied from a supplier starts a long way back. The ecommerce SEO for beginners guide covers what to fix first.

If the store has to connect to a supplier's stock feed or pass orders on automatically, that is development work. The ecommerce solutions page describes the online stores Liftup builds.

How to decide between dropshipping and holding stock

Answer these in order. If your answers point both ways, use a mix.

1. How much money can you put into goods before the first sale, and how much can you afford to lose on unsold stock?
2. Have you seen real demand for the product, or are you still testing?
3. What delivery time are you promising, and can a supplier meet it?
4. Does your margin survive supplier pricing, returns and advertising?
5. How much does quality control matter to the buyer and to your reputation?
6. Who will pack, count and reorder if you hold stock, and do you have the time?

A cautious start is to dropship a small range for a short period, order samples yourself and record delivery times, returns and complaints. Those records show which products deserve a stock purchase and which suppliers you should drop.

Questions and answers

What is dropshipping?

Dropshipping is a way of selling in which you list products but a supplier stores them and sends each order directly to your customer. You take the payment, pay the supplier its price and keep the difference. You never handle the goods yourself.

What are the risks of dropshipping?

The main risks are stock that runs out after you have taken payment, slow or variable delivery, quality you cannot check and returns terms you do not control. Margins are often thin because other stores can sell the same item. You are also still the seller in the buyer's eyes, so complaints and legal duties come to you.

When is holding stock better?

Holding stock suits stores with proven demand, goods where inspection or presentation matters, a promise of fast dispatch or a margin that depends on buying in volume. It also suits sellers who make their own products. The price is cash tied up in goods and the risk of unsold items.

Who handles returns in dropshipping?

Your store should, as far as the customer is concerned. The supplier has its own return terms, which may be stricter than yours, so agree in advance who accepts returned goods, who pays for them and how refunds are matched. Then write your policy to reflect what happens.

Do I need to register a business to dropship?

In most countries, selling regularly for profit means you need to handle business registration, income tax and sales tax or VAT in some form. The rules differ by country and by what you sell, and they change. Ask an accountant or the tax authority in your country before you trade.

Can I use the supplier's photos and descriptions?

Check the supplier's terms first, because images and text may be protected by copyright or limited to certain uses. Even where allowed, identical text appears on every store selling the item and gives shoppers and search engines little reason to prefer yours. Write your own descriptions and photograph a sample where you can.

Can I start with dropshipping and move to holding stock later?

Yes, and it is a common path. Use dropshipping to learn which products sell and how customers behave, then buy stock for the proven lines. Keep the same product pages and policies, and update delivery times and stock handling when the arrangement changes.