There are two main options for fulfilling your online orders: dropshipping or third-party fulfillment. Both have pros and cons, so how do you decide which is right for your business? In this post, we'll break down the differences between dropshipping and third-party fulfillment, so you can decide which option is best for you.
What is Dropshipping?
While it may initially seem confusing, dropshipping is pretty simple to understand. In this fulfillment process, the online seller puts their merchandise on sale, which has neither been bought by the seller nor put into inventory, and partners up with a manufacturer who will deliver these products directly to customers. In other words, they outsource while simultaneously cutting out all the usual intermediaries.
Outsourcing can be beneficial for budgets upfront as business owners don’t have to funnel money into holding inventory. Still, manufacturers benefit in the long run from this arrangement as they charge the seller a higher wholesale cost for the merchandise in exchange for filling orders rather than shipping to the wholesale seller. The eCommerce seller then handles the marketing and provides customer service rather than product warehousing or distribution.
This method might be an excellent logistics for those who lack enough assets to purchase their inventory or do not want to invest and get into the hassle of storage and fulfillment. This often translates into high efficiency, although it isn’t the best route for all businesses. Like any other option, it has several pros and cons. For example:
Helps start and run a business with less capital: Dropshipping requires less investment to get started compared to a traditional eCommerce business, which might require you to purchase inventory upfront.
No need for warehousing space: Since you don't need to carry inventory yourself, you won't need to worry about storage space. It is beneficial if you're starting and don't have a lot of extra space in your home or office.
Easy to get started: Dropshipping is relatively easy to set up, making it an excellent option for those just starting their eCommerce journey. All you need is a supplier, such as Shopify, and a platform to sell on.
It grants you further freedom to test products: You can quickly and easily test out products without having to commit to an extensive inventory order. This way, if a product doesn't sell well, you're not stuck with a bunch of unsold merchandise.
You can expand SKU breadth: Offering more products can help you attract more customers and increase sales. Dropshipping gives you the ability to expand your product offerings without having to raise your inventory.
It allows for higher risk and a higher payoff on untested products: Dropshipping is a low-risk way to test new products. If the product is a flop, you're not stuck with a bunch of unsold inventory. But if it's a hit, you can make a lot of money without having to make a significant up-front investment.
You have less control over the quality of products: When you dropship, you rely on your supplier to provide high-quality products. If they don't, it reflects poorly on your business. It can be frustrating and lead to negative reviews and customer churn.
It can be challenging to build a brand: When you don't carry your inventory, creating a solid brand identity can be challenging. Customers might not consider your business a go-to source for specific products if you're constantly changing your offerings.
You might have longer shipping times: Dropshippers often work with suppliers who are located overseas. It can lead to longer shipping times, which can frustrate customers and lead to negative reviews.
You might have to deal with more customer service issues: If something goes wrong with an order, it's up to you to deal with the customer service issue. It can be time-consuming and frustrating, especially when dealing with difficult or angry customers.
Pros and Cons of Dropshipping and Third-Party Fulfillment
What is Third-Party Fulfillment?
Third-party fulfillment is kind of what you’d expect from the name. Essentially an outsourced fulfillment plan where you engage a service company to store goods, collect and pack orders, and tackle the logistics of shipping to customers on your behalf, 3PL allows for less stress and in-house involvement while lowering shipping costs and improving delivery efficiency. Still confused? Well, practically, this looks like the seller purchasing inventory in bulk and making an agreement with a warehouse to tackle the hassle of all other aspects of order fulfillment.
Related article: Third-Party Fulfillment for eBay Sellers
It makes it a preferable option for sellers not to want to lose inventory even when they don’t have their warehouses. All the e-Commerce seller has to do is display the products online and contact the fulfillment company to finish order processing once customers click “buy.” The 3PL provider will do all the rest of the work collecting, packaging, and delivering the product, making it a good choice for those who have the funds for inventory maintenance but don’t want to do everything in-house. As with drop shipping, though, it works for some and not for others. Some of the pros and cons include:
Allows for direct involvement in your inventory: As with dropshipping, you don’t have to worry about the quality of products since you can inspect them before they ever reach your customers.
You can offer custom packaging: This is a big one for many luxury brands. Showing you care about the unboxing experience by presenting products in high-quality packaging helps to increase customer loyalty and order value.
Reduces concerns over product quality: Again, because you have control over what goes into storage, there are fewer issues with damaged or poor-quality items reaching your customers.
It offers shorter shipping times: Using a fulfillment company near your target market can provide shorter shipping times and improve the customer experience. It is especially important for businesses that sell perishable goods or time-sensitive items.
Storage expenses are variable, potentially offering significant savings in the long term: Unlike drop shipping, where you’re charged for storage whether you use it or not, 3PL providers typically charge only for the space your products occupy. It can offer significant savings over time, especially for businesses that experience seasonal fluctuations in inventory levels.
Can sometimes limit available product lines: Since you have to purchase inventory in bulk, you might not be able to offer as many products as you’d like. It can limit your ability to capitalize on new trends or seasonal fluctuations in customer demand.
Directly ties your capital to your inventory: If your products don’t sell, you’re stuck with the list and the associated storage costs. It can be a severe financial drain on your business, especially if you have to liquidate slow-moving items at a steep discount.
3PL takes care of fulfillment but still leaves all the inventory responsibility to you: While this can be seen as a pro or a con, depending on how you look at it, it’s worth mentioning that you’re still responsible for maintaining your inventory levels. It includes ensuring that items are properly stored and rotated to avoid damage and spoilage and monitoring stock levels to avoid overselling.
Which is the Best Option for Your Business
It must be made clear that both drop shipping and third-party fulfillment have the capability to enhance your business but in different ways. They each have positives and negatives that you need to consider before deciding either way. Every business is other so every logistics option will work differently for you. What might work for one will work terribly for another. Take a good, hard look at your business needs and outsourcing preferences, and you’re sure to make the right choice.
Dropshipping and third-party fulfillment are two great options for those looking to outsource their order fulfillment. They each come with their own set of pros and cons that you should consider before making a decision. Ultimately, your best option will depend on your specific business needs.
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