If you sell online (or are looking to get started) you’ve heard the debate on dropshipping vs. order fulfillment. What’s the difference between the two? Which one is better for your business? A side-by-side comparison of dropshipping to order fulfillment is what you need.
First of all, let’s explain the difference. Order fulfillment is the way you get your products to your customers. This includes any method you use. There are several forms.
- Merchant Fulfillment. You keep your inventory in your own warehouse, storage space, or even your own home, and then ship it to your customers yourself. Billy keeps boxes of hats in his attic, sells them on eBay, and mails them to buyers. Billy is using merchant fulfillment.
- Third-party Fulfillment. You outsource the storage and shipping of your products to another company, and then forward that company the orders for fulfillment. Billy sends his boxes of hats to Fulfillment by Amazon or Shipwire and they ship to his customers. Billy is using third-party fulfillment.
- Dropshipping. The product is created and stored by its manufacturer. You find buyers, pay wholesale for the product, forward the sales to the manufacturer, and keep the profits while the manufacturer fulfills the order. Billy has never touched a box of hats, but lists the hats on his website and/or other marketplaces for the manufacturer who handles everything else. Billy is using a dropshipping model.
NOTE: Dropshipping is a form of third-party fulfillment, and all three methods are forms of order fulfillment. It’s not a question of order fulfillment vs. dropshipping, but of which form of order fulfillment is best for you.
As a retailer, you need to decide which process will work best for your business. We’ve sourced the pros and cons of each, to help you better determine which is best for you.
- More control. You are responsible for your own product and know for sure if you’re running low.
- Easier to resolve shipping errors. Instead of having to communicate with a third party, you can resolve any fulfillment errors without having to play middleman.
- Establishes buyer trust. Buyers want to feel as if someone is taking personal responsibility for their order. Fulfilling orders yourself helps establish this.
- Requires larger initial investment. You will have to buy wholesale inventory upfront as well as create an infrastructure for storage and shipping.
- Not scalable. Unless you want to invest in a warehouse of your own, merchant fulfillment is not a scalable model. As orders grow, it will become increasingly difficult to manage merchant fulfillment.
- Calls for a separate area of expertise. You have to be good at selling, promotion, supply chain management, inventory management, shipping solutions, and customer service. Ecommerce management systems like ours can streamline and simplify the process, but without software, it’s pretty challenging.
- Huge infrastructure. Services like Fulfillment by Amazon have huge infrastructures set up to handle shipping and storage that an individual business simply can’t match, unless you happen to own Walmart.
- Trusted experts. It’s better to let the experts handle fulfillment for you so you can focus on what you’re best at: selling.
- Volume. Third-party fulfillment services can house a lot more inventory than you can. This allows you to sell more without space becoming a ceiling. Third-party fulfillment is more scalable than merchant fulfillment.
- Products in transit. What happens as you’re shipping your products to your third-party warehouse? What if they get sold while in transit and the order can’t be fulfilled? All this product movement can prevent you from selling freely.
- High fees. In some cases, it’s actually cheaper to ship your product on your own than to pay FBA fees. The issue is, of course, volume.
- Middleman. If there are any errors in fulfillment, you become a middleman between your customer and the fulfillment service. The resulting delays in resolving the issue can lead to lower seller ratings.
- Low initial investment. Listing fees for marketplaces and hosting fees for your website are basically the only initial costs you’ll pay to potentially start selling dozens or even hundreds of items.
- Fully hands-off with software. If you were to use ecomdash’s software to manage your dropshipping, orders are automatically routed from your sales channels to your supplier, making dropshipping completely automated. All you do is keep your site updated and collect the profit.
- Product diversity. Anything can be dropshipped. Since volume is no problem, you can sell a diverse catalog of products.
- Thin profit margin. Because the dropshipper handles so much of the overhead, profit margins are very thin. For some products like phone chargers and headphones, profits can be less than 1 cent per sale.
- Competition. Your dropshipper is working with lots of sellers. You’re competing for sales against people selling the exact same item as you at the exact same cost. It’s tough to stand out.
- Middleman. Again, you end up as the middleman when you’re trying to resolve customer service issues. When a customer emails you with concerns, they expect you to be able to help them. Frustration rises when you’re not able to.
We hope this helps you navigate how you’ll provide items for your online stores and sales channels. Using some combination of all three methods might be the best idea for some businesses. Use a software system that supports multiwarehouse selling if that’s you. Happy selling!
Editor’s Note: This blog post was updated in August 2016 to reflect more accurate and relevant information.