As time passes, new and innovative types of businesses take place and start up. There are existing traditional models as well as new business models. Each business model has its own pros and cons. Two popular business models are Distribution and Drop-Shipping. In this article we discuss what distribution and drop-shipping is + the pros & cons of each…
What is Distribution?
Distribution is simply spreading around a product in a market to make it available for people to purchase as after a product is manufactured and made you need to get it to different places so that it can be sold. In basic, a `distributor` purchases products from the supplying company directly and tries to sell this product at a higher price than they bought it for, either to retailers or other targeted customers.
This is how it works, the distributors take orders from customers they find such as retailers (shops) and then the retailers sell the product to their own customers that visit their shops. For example Pepsi Co manufacture and make Pepsi the drink. Then they send high quantities of Pepsi bottles for cheap to a specific distributor that is assigned a specific country they can sell in. The distributor of each country receives the products and then they take orders from smaller distributors and wholesalers who also buy it for cheaper than it is sold. Then the smaller distributors and wholesalers sell to shops and companies they find like Tesco but at a higher price than they had bought it at from the main national distributors. Then Tesco sells the Pepsi to normal store customers. There are multiple pros and cons of distribution.
Pros of Distribution:
Consistent Profits: Once you have maintained a good relationship with retailers and buyers they will most likely become repeat customers as long as your product sells which means a consistent inflow of cash and happy customers. Typically they are repeat customers because retailers do not want to keep switching from one distributor to the other as they will have to fit them into the supply chain and go through the long phase of negotiation again. It takes time and effort to meet with buyers, negotiate a deal and establish a healthy long-lasting business relationship.
Easy to Persuade: Once you have a good and trusted number of customers (retailers), it will make the process of finding new customers way easier as you are seen as an established business with a reputation as a trusted supplier. This is because new potential customers buy from suppliers who are already supplying to large, well known businesses. More customers means faster growth which means you will control a large portion of your market.
If you think you have what it takes to do this then perhaps you can go down the route of distribution.
Cons of Distribution:
High Start-up Cost: In the distribution business you need to hold physical stock which not only requires space but also the purchase of products in high amounts which can be costly. This is just one type of expense among the many other expenses which come with distribution such as marketing, shipping, storage space, etc. You need to hold a large amount of inventory as this is the only way you can get the product for cheap and when supplying to places such as retailers you will need a steady flow of inventory of your product to be ready for any sudden order you may receive.
Less Control over Prices: When you are a distributor, you do not manufacture your own product but you are buying it in bulk quantity from the supplying company. This company (generally) sets the prices and policies you will have to stick to. This is done so that other companies in the same area selling the same product aren`t constantly brought down losing clients because of competitor distributors with the same product. Also if everyone keeps reducing the price of the product that will eventually result in the product being undervalued which means tighter margins for everyone and essentially everyone, but the buyer, loses out.
Below is a little info-graphic to give you a basic idea of how distribution works!
What is Drop-Shipping?
Finally you made it, Hooray! After analyzing distribution as a business model it is time to learn more about a different model called drop-shipping. Drop-shipping is the business model in which the seller does not actually own the products they sell and do not store the product physically on site. Yes, you read that correctly because with this model you just get the orders via e-commerce stores or other buyers, then you place an order with the actual supplier by providing the order details and addresses. Obviously when you sell the product to your customer you sell it at a higher price than you buy from the supplier.
Once the supplier receives the order from you they send it directly to the customer that originally bought from you in white label form. White label means that they don`t put their own company details down on the packaging and it`s just blank packaging. Drop Shipping is the best option for people who can`t afford to invest heavy amounts in a buying and selling business. With Drop Shipping there is practically no start-up cost other than the promotion of products and finding buyers, this is a very attractive feature of this business model. If you think that this model suits you, here are the pros and cons you should know before going for it.
Pros of Drop-Shipping:
Lower Start-up Costs: With drop-shipping the seller does not hold any inventory and does not need to store anything. As their only job is to find buyers and then place orders it can all be done online without ever touching the physical product.
Easy to Start: Drop shipping businesses are very easy to start. This is because there are so many vendors and suppliers looking to find drop-shippers to sell on their products so their business also grows. You will have to find sales channels in which you can receive orders such as your own E-commerce website, Social Media or selling platforms such as Ebay or the now popular Amazon FBA.
Wide Range of Products: You have hundreds of different types of products out there that you can sell on and nobody said you had to sell only 1 type of product! You could place hundreds on different platforms though it is usually best to focus on one niche/industry.
Cons of Drop-Shipping:
No Control over Quality: With drop-shipping you may not be able to physically see and check out each and every product you sell unless you purchase them for yourself but you would need to go through many products to pick out the best supplier. Also you don`t see every individual product that is shipped out to your customers which means you cannot see the quality of what is shipped out and if it is damaged in some way.
Multiple Competitors: As there is a low entry cost in this business, every day new drop shippers enter the market. It is suggested to enter only if you find a unique product which is not available already in the market which is extremely rare as there are usually hundreds of sellers of the same product.
No Control on Inventory: You are not the one who owns and manages the inventory. You rely on someone else who produces and ships out the product. It is possible that you receive an order but stock is not available with the supplier as there is no stock control on your side of the business. In this situation, you can lose customers.