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Before jumping into the world of e-commerce, it’s important to understand how these two types of companies function. The main distinction between the two is that with an order fulfillment company, you are responsible for sourcing products and finding a customer while with dropshipping your manufacturer handles all this work.
Dropshipping is a type of ecommerce where the retailer does not have an inventory. Instead, they sell products that are bought by another company and shipped to the customer. Order fulfillment companies work with retailers to fulfill orders for them.
Dropshipping and order fulfillment firms are often discussed or wrongly referred to interchangeably in the ecommerce sector, but their distinctions make a direct comparison difficult. While they both provide outsourced fulfillment services to merchants, they operate on very distinct business strategies.
- Dropshipping is forming relationships with manufacturers and suppliers in order to take orders for their products without actually having them on hand.
- Fulfillment firms, on the other hand, are hired by merchants to outsource the job of storing, processing, and delivering their own goods.
Understanding these distinctions is critical to choose the best technique for your small company.
Both purchase experiences may seem identical to the buyer, yet the two approaches are extremely different behind the scenes. Here’s a quick rundown of each system.
What Is Dropshipping and How Does It Work?
Dropshipping partners are manufacturers or wholesalers who own the goods rather than the merchant. Customers submit orders and pay for them on the merchant’s website, and the merchant then purchases the items from the dropshipper. The original order information is received by the dropshipper, who then sends the goods straight to the customer.
The merchant becomes a profit-making third party by promoting, selling, and providing customer support for the dropshipper’s items. You establish the selling prices as the retailer in this arrangement, thus the ultimate margins are up to you.
What Is an Order Fulfillment Company and What Does It Do?
Fulfillment refers to the section of the retail supply chain that accepts, processes, and distributes client orders, and many merchants prefer to outsource these operations to third-party fulfillment businesses. They are firms that specialize in inventory management, order processing, and delivering items for other businesses.
When a retailer hires a fulfillment company to help them with their operations, the fulfillment company purchases products to sell on their website and delivers them to the fulfillment center. The information is then sent to a third party, where the goods is packed and dispatched, whenever a consumer makes an order.
Order fulfillment may be done in-house in certain cases, which is a common choice among small firms and startups. It makes sense to delegate certain responsibilities to a partner firm when the business expands and order volume outgrows available space, manpower, and time.
Dropshipping versus Fulfillment Companies: What’s the Difference?
Both ideas are online versions of beginning a brick-and-mortar retail firm, but they represent two distinct business models with significant distinctions. The most significant differences between dropshipping and fulfillment organizations are in goods custody, operations and control, relationship dynamics, and related dangers.
Inventory Ownership
One of the biggest distinguishing factors between dropshipping and order fulfillment companies is the Inventory Ownership.
Merchants that work with fulfillment businesses have items that they require assistance with. Their merchandise is acquired in large quantities from wholesalers or manufacturers and then delivered to their fulfillment partner. The money needed to acquire stock before selling it may be substantial, but it comes with a lot of control over the offers and earnings.
Retailers that use dropshippers, on the other hand, never own or hold the things they sell. Merchandise remains in the supplier’s possession until it is delivered to the client. The store does not need to invest in inventory since things are paid for as they are ordered. This reduces their overall overhead costs by eliminating the need for storage and warehouse employees.
This hands-off approach to ecommerce reduces financial risk but leaves the seller uncertain about the quality of their products. Dropshipping retailers depend on product reviews from other sellers to determine whether or not a product will please their consumers.
Operational Control & Reliability
Though the day-to-day responsibilities of operating each kind of business differ greatly, both techniques begin with the creation of an online shop using an ecommerce platform such as Shopify. This requires a lot of research, setup, and promotion, regardless of your company strategy. When it comes to finding things to sell on your website, the two strategies start to differ.
Dropship marketplaces like Oberlo are often used by dropshipping businesses to explore items and connect with suppliers. By linking the platform with your online shop, things may be transformed into listings with a single click. This element of the process is less complicated and time-consuming than its conventional ecommerce equivalent, which entails finding wholesalers, forming connections, and making large purchases.
The order is transmitted to the wholesale supplier when buyers purchase products from a dropshipping merchant. Although certain dropship systems can automate this process, it still requires some attention. Sellers must keep an eye on their dropship orders to verify that they are being fulfilled, and they must contact their suppliers if there are any issues.
Automatic order routing is also offered by fulfillment businesses, but their efficiency comes with a far more dependable assurance. This enables merchants who work with them to spend as little time as possible processing orders.
Each business model has different customer service requirements. Dropshipping sellers must typically devote a significant amount of effort to assisting their consumers due to extended delivery durations and unpredictable product quality. When dealing with a fulfillment firm, these factors are more predictable and manageable, resulting in fewer complaints. Many fulfillment partners can even take care of your customer support needs.
Relationship with Your Business Partner
The dynamic between retailers and dropshippers differs from the interaction between retailers and fulfillment firms.
Suppliers give merchants with access to their inventory and infrastructure under the dropshipping model. They concentrate their efforts on production, wholesale, and fulfillment, leaving the rest to retailers. Retailers help them complete the supply chain by offering marketing, customer support, and sales channels. Reduced effort and expenditures benefit both parties.
Dropshipping firms and their retail partners may be thought of as having a symbiotic connection in this manner. Order fulfillment businesses, on the other hand, have a much more traditional commercial connection with their merchant partners.
Fulfillment businesses are hired by ecommerce retailers to handle resource-intensive operations. In return for payment, these third-party order fulfillment partners give access to their infrastructure. They have a linear and conventional connection with their retail partners since they are offering a service that addresses a problem.
Communication and dealing with each sort of partner firm is a highly varied experience for sellers, in addition to the general dynamic of both business ties. Fulfillment businesses make it simple to modify and monitor their services since they are employed and paid by the retailers they assist.
Dropshipping vendors, on the other hand, are more strict in their operations and more difficult to connect with. Because many of these well-known wholesalers are based in Asia, distance and language issues might also be a problem.
Risk & Impact
Any ecommerce company has a certain amount of risk. Dropshipping operations might also have a poor success rate (with one frequently cited stat pegging it at 10 percent ). That’s a stunning amount of unsuccessful enterprises, but since starting a dropshipping company requires such a tiny commitment of time and money, such failures are likely to be minor setbacks.
The ease of entrance into the dropshipping industry contributes to much of the risk involved with this business strategy. Many vendors are unaware of how thin profit margins might be, how high return rates can be, or how saturated the market is.
According to numerous statistics, a typical ecommerce business has a comparable or slightly greater success rate, whether or not fulfillment operations are outsourced to a third-party company—but the associated risk is substantial. Investing in non-movable goods may be financially disastrous, and low overhead beginning expenses can be as damaging.
In any instance, experts advise that you thoroughly analyze your industry and choose a specialty carefully before diving into beginning an internet business.
Which Is Better for Your Company?
The conclusion is that dropshipping partnerships and third-party fulfillment providers help merchants tackle a variety of challenges. Consider your available resources and expectations if you want to open an internet shop but aren’t sure which business model is best for you.
- When Should You Use Dropshipping?
- When Should Order Fulfillment Be Used?
Dropshipping has lower profit margins than traditional ecommerce companies, yet it may become profitable in as little as three months. This is primarily due to the little time and financial commitment necessary to get started. This way of operating an internet company is ideal for those with minimal finances or who desire a less taxing entry to ecommerce.
Dropshipping is particularly beneficial in the following situations:
- New enterprises with low market confidence: Setting up a standard web shop requires purchasing large amounts of stuff, which may be risky if you’re not sure how well the products will do. Dropshipping enables businesses to offer items without the worry of losing money, allowing for more experimentation and long-term trust.
- Dropshipping enables new company owners with a full-time job or limited time to work on their shop to be very flexible with their time commitment, making it suitable for those who have a full-time job or can only work on their store a few days a week.
- Dropshipping makes it possible for new company owners with minimal resources to create an online shop with a small initial expenditure. It’s an excellent alternative for folks with little financial resources since it requires no funds to acquire merchandise.
The profit margins you’ll get from a regular internet business are likely to be considerably higher, but the time and money commitment will be much bigger. Although it would take longer to repay your initial expenditures, the amount of control given by this business model appeals to many devoted sellers. It is excellent for entrepreneurs with sufficient resources to commit to a company’s long-term development.
Order fulfillment businesses are particularly useful for:
- Traditional shops trying to grow their online presence: The actual location of a business may be far away from its online consumer base, which may make the fulfillment process difficult. They need to store and transport their items from a location close to the consumer in order to provide competitive delivery times and retain their business cost-effective. This is made feasible by order fulfillment businesses, which eliminate the need for the merchant to relocate their own facilities.
- Traditional merchants that wish to make the most of their time: Traditional internet retailers save time by outsourcing numerous labor-intensive operations to a partner fulfillment firm. The time saved by dedicated shop owners is typically better spent on other activities that boost profitability and promote expansion.
- Traditional merchants missing warehousing capital: Some retailers have the finances to buy product in bulk but lack the resources to lease and staff a warehouse. Order fulfillment firms save merchants money by allowing them access to their infrastructure in exchange for a considerably lower monthly fee.
- Working with a fulfillment business may help retailers who traditionally handle fulfillment in-house but encounter considerably greater order volumes over the holidays manage the rush without recruiting more personnel or acquiring additional warehouse space. You can resume in-house fulfillment once the busy season is over.
A third-party order fulfillment service might help you build or scale your company if you currently have an online shop and wish to outsource your fulfillment chores.
Conclusion
Order fulfillment firms and dropshipping companies are two different types of businesses. Online merchants may profit from outsourcing their fulfillment process in any of these ways, but whatever they select will determine their whole business strategy.
A merchant with enough cash to purchase merchandise in bulk but not enough to run their own warehouse might benefit from collaborating with an order fulfillment service such as ShipBob or Red Stag Fulfillment.
A merchant that does not have the resources or inclination to make a major investment in an untested product or marketing approach, on the other hand, might benefit from a dropshipping platform like Oberlo.
Frequently Asked Questions
What is the difference between dropshipping and FBA?
Dropshipping is a technique where you sell directly to your customer without having to store inventory on-site. With this, the sellers only cost of doing business are the costs of delivering their product and fulfilling orders, which can be done in bulk via shipping companies or couriers such as UPS and FedEx.
What is an order fulfillment company?
Order fulfillment is a term that refers to the process of receiving, storing, packing and shipping goods.
