Are you trying to decide which type of ecommerce store to build? Well, you’re not alone! Lots of people compare dropshipping and private labeling when they’re starting out.
There are good things and bad things about both options, so it’s important to weigh the pros and cons before diving in headfirst.
If you’re totally new to ecommerce and don’t have a lot of experience or money to invest, we suggest starting with dropshipping. This way, you can test out different products without taking on a lot of risk or needing a lot of expertise. Once you have some success and feel confident in your abilities, you can move on to private labeling or even a mix of the two.
Of course, you don’t have to take our advice! In this article, we’ll break down the differences between dropshipping and private labeling so you can make an informed decision that’s right for you.
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Pros and cons of dropshipping
If you’re looking to start a business without having to buy inventory, then dropshipping might just be the perfect fit for you. With dropshipping, you create an online store and list products from other brands, without actually owning them or buying them in bulk.
As a dropshipper, you become an authorized dealer for the brands you want to sell, and when you make a sale, you simply place the order with the manufacturer at the dealer price. The manufacturer then ships the product directly to your customer, and you keep the difference between the retail price you charged and the wholesale price you paid.
In other words, you don’t have to worry about the hassle of handling physical inventory or shipping products to customers. All you need is a website, a reliable supplier, and the ability to market your products effectively. With dropshipping, you can make money with ease and focus on growing your business without the added stress. For more information, check out my dropshipping guide.
- Affordable Initial Investment: One of the most significant advantages of dropshipping is that you don’t need to purchase inventory upfront or invest in creating your own product line. This means your initial investment will be relatively low compared to other business models. You can focus on creating a professional-looking website and marketing your products to potential customers, without worrying about inventory expenses.
- Wide Range of Products: With dropshipping, you have access to a vast range of products from different suppliers. You can browse through the inventory of multiple dropshipping suppliers and choose the products you think will sell the best. This gives you the freedom to experiment with different products and find what works best for your business.
- Flexible Inventory Management: As a dropshipper, you don’t need to worry about stocking up on a massive inventory of products. If some of your items aren’t selling, you can stop selling them without worrying about leftover inventory. This flexibility allows you to try out new products and stop selling the ones that don’t work. Plus, you can quickly add new products to your store without worrying about pre-booking a massive product stock.
- Tough Competition: Since dropshipping is a simple and affordable business model to start with, it’s no surprise that many people are attracted to it. That means you’ll likely find yourself competing with many other entrepreneurs selling the same products as you. This intense competition can make it difficult for you to stand out from the crowd and attract customers.
- Lack of Control Over Branding: When you dropship products, you don’t have control over the branding. Although the products you sell may carry the supplier’s branding, they’re not branded with your own. This can make it challenging to control pricing or build customer loyalty based on your own brand. Your customers may be more loyal to the supplier’s brand than to your store, which can make it difficult to retain customers over the long term.
- Limited Profit Margins: When you sell dropshipped products, the manufacturer determines the margins you make, and these margins are often non-negotiable. Gross margins are typically around 30%, but this can be as low as 10% if you’re selling large and heavy items that require freight shipping. Moreover, payment processing fees can also reduce your profits. Overall, your margins may be too small to sustain your business in the long run.
Pros and cons of private labeling
Private labeling is a popular way for businesses to create their own personal brand. With private labeling, you have control over the final product your customer receives, which is different from dropshipping.
To get started with private labeling, you need to reach out to a factory that produces the products you want to sell. You can place a minimum order of units and the factory will put your branding on them before shipping them to you. Once you have your products, you can sell them through your website, physical store, or both.
Overall, private labeling is a great way to create your own personal brand and have more control over the products you sell. For more information, check out my guide on private labeling.
- Creating Your Own Brand: Private labeling is an excellent way to create your own unique product brand. You can work with the manufacturer to add your business name and logo to the product, as well as any additional branding elements like colors and fonts that you’ve provided. This way, you can make your products stand out from the crowd and establish a recognizable brand identity.
- Dictating the Pricing: When you have control over product branding, you get to set the price of the items. This means you can adjust prices to suit your business goals and objectives. Additionally, you can eliminate the risk of competitors undercutting your prices, as they won’t be able to sell your brand for less than you do.
- Building Customer Loyalty and Recognition: With private labeling, you have the opportunity to build your own unique brand identity. This can help increase customer loyalty and recognition, as customers will be more likely to associate your brand with the exclusive products that you offer. By personalizing the shopping experience and becoming the sole source of your products, you can create a loyal customer base that will continue to shop with you for years to come.
- High Initial Investment: While private labeling has the potential to be profitable, it requires a significant upfront investment. If you’re just starting out and don’t have a lot of capital to work with, the high setup costs of at least $1,000-$1,500 may not be feasible. Dropshipping, on the other hand, has lower startup costs and is generally easier to manage.
- MOQ Requirements: To source your products, you’ll need to meet the minimum order quantity (MOQ) requirements set by the manufacturer. This can be risky, as ordering too much inventory can result in a pile of dead, unsold products if your brand fails to resonate with customers. It’s important to carefully consider your order quantities and assess the market demand before committing to a large order.
- Market Knowledge: Before investing tens of thousands of dollars into a product, it’s crucial to have a deep understanding of both the product and the market. Without this knowledge, you run the risk of creating a product that doesn’t sell, leaving you with a large amount of unsellable inventory. Take the time to research the market, test your product with a small order, and gauge customer demand before placing a large order.
Which business model is for you?
If you’re thinking about starting an ecommerce business, you might be wondering whether to go for dropshipping or private labeling. Both have their pros and cons, so how do you choose?
If you already know a particular market and can see ways to improve an existing product, then starting a white-label brand could be the way to go. However, this can require a significant upfront investment, so it’s important to have the funds to get started. On the other hand, if you’re looking to earn some extra cash without investing too much upfront, then dropshipping might be a better choice.
Both dropshipping and white labeling can be fairly hands-off, but white labeling involves more logistics to manage. However, if you use a third-party logistics provider, you won’t need to see or touch the product yourself.
From my experience in ecommerce, I usually suggest starting with a dropshipping store that sells products you’re familiar with. This allows you to gain valuable insight into what customers are looking for, and what other brands are selling. Once you’ve gained a good understanding of the market, you can then transition into white labeling your own product in the same market.
By starting with dropshipping, you’ll be able to learn what customers really want and what sells well. From there, you can put your own brand on a product that meets those needs, allowing you to make better margins. As you continue to grow and gain traffic, you’ll eventually have an established ecommerce business.
Here’re some resources to help you get started: