Stock or drop-ship? The working-capital maths

Drop-shipping looks free because nothing is paid for until it is sold. It is not free — it is rented, and the rent is the margin you give up on every unit. Whether that rent is worth paying depends on how fast you sell and how much cash you are trying not to tie up.

The two costs, side by side

• Stocking it yourself — you pay the deepest wholesale tier, in advance, and you carry the unit until it sells. Your cost is the tier discount you missed plus whatever else that cash could have done.
• Drop-shipping — you pay a per-unit premium, usually somewhere between ten and twenty-five percent above the stock price, and you carry no stock at all. Your cost is that premium on every order.

The break-even nobody calculates

Take a piece with a landed stock cost of $38 and a drop-ship cost of $46. The premium is $8 a unit. Now imagine holding forty units — roughly $1,520 of cash. If you turn that stock three times a year you sell 120 units, so drop-shipping the same volume costs $960 in premiums. That is more than half of the capital you were protecting, spent every year, permanently.

The same arithmetic run the other way tells you what stock is really costing: if you only sell 20 units a year, the premium is $160 annually and the stock would have sat for two years. In that case the drop-shipper is genuinely cheaper, and it is not close.

The hybrid that most partners settle on

1. Stock your proven sellers. These are the lines where you know the turn rate, so the maths above is reliable.
2. Drop-ship the tail — the experimental designs and the oversized 70 × 100 formats that are expensive to hold.
3. Never drop-ship a piece you also stock. Splitting one line across two channels confuses customers and blurs your real margin.

“We held stock on eleven SKUs and drop-shipped nine. Within a year the eleven had paid for a second shelf and we had dropped three of the nine entirely. We should have done the split two years earlier.”

— [Buyer name], online art retailer, [Toronto, CA]