When it comes to online sales, there are several different strategies that businesses can use to get their products into the hands of consumers. One of the most popular options is dropshipping: a fulfillment model where retailers don't keep any inventory on hand but instead rely on suppliers to ship products to customers. Drop shipping has many benefits, which contributes to its popularity with merchants.
While this strategy is effective for many e-commerce merchants, it has some limitations. That's where fulfillment services come in! This article will discuss the critical differences between drop shipping and fulfillment services, the pros of drop shipping, and how fulfillment services can supplement your drop shipping strategy to help you grow your business.
Before we get into how fulfillment services can help your business, it's essential to understand the difference between drop shipping suppliers and fulfillment companies.
Dropshipping suppliers are manufacturers or suppliers who agree to produce and ship products to your customers on your behalf. Drop shipping suppliers save you the hassle of dealing with inventory and shipping logistics while simultaneously providing your company access to all their products.
Fulfillment companies provide warehousing and shipping services for e-commerce businesses but do not help source the product itself. Using a fulfillment company means you'll graduate from a pay-per-unit drop shipping model to purchasing bulk inventory from your supplier. Buying in larger quantities drives down your inventory costs. You'll be responsible for stocking inventory at a fulfillment center, but the fulfillment service will pack and ship orders to your customers. This arrangement can give you more control over the quality of your shipping process and the customer experience while providing scalability and flexibility as your business grows.
Both dropshipping and fulfillment strategies remove the headache of managing logistics – either the drop shipping supplierer or the fulfillment center manages the order fulfillment and shipping process, so you don't have to. Understanding the differences between drop shipping and fulfillment strategies will help you choose which is best for your unique business. Sometimes supplementing a drop shipping strategy with fulfillment services can provide the best of both worlds.
Inventory Ownership and Capital Investment
The traditional fulfillment center and drop shipping models have different approaches. In the fulfillment model, the owner purchases merchandise from a supplier and stores it at the fulfillment facility. In contrast, a drop shipping supplierer does not need your business to take ownership of the inventory. Instead, the drop shipping supplierer processes each individual order from your customers, and the suppliers will deal with the shipping and deliveryshipping from their manufacturing facility.
Drop shipping eliminates inventory ownership and thereby reduces risk. Drop shipping is a great strategy to cut capital outlays, where your business doesn't buy any inventory and doesn't have to implement a storage and shipping strategy. The only limitation is that drop shipping maywill not help your business achieve the lowest price per unit on each product. To achieve lower per-unit inventory costs, you must make bulk product purchases.
Product Access and Ability to Scale
Another critical difference between drop shipping and fulfillment is the level of access to products and the number of items and SKUs (stock-keeping units) available for sale. Unless a drop shipping supplierer experiences supply chain issues, your business will have full access to its entire production spectrum. You'll be able to sell any of the products they produce, giving your business a full suite of products at your disposal.
Under a fulfillment strategy, you'll only be able to sell the products you purchased in bulk and have on hand at the fulfillment center. To add inventory or additional products to your online website, you'll have to order the goods from the drop ship supplier and have them shipped in bulk to your fulfillment center. This time delay could lead to a loss of sales. You can only sell what you have on hand or is in transit, which is smaller in scope than the drop shipping supplierser.
Drop shipping will also allow your business to scale more quickly, assuming the drop shipping supplierer has idle capacity and does not encounter supply chain disruptions themselves. As your sales increase, the drop shipping supplierer will increase production and continue to ship products to your customers.
With a fulfillment strategy, a significant increase in sales means you will have to purchase from the supplier to fulfill demand above and beyond the supply, or you will only be able to sell the inventory you have on hand. Add shipping delays to this equation, and this could spell disaster, especially in times of peak demand.
For a multitude of businesses, drop shipping is the primary fulfillment method employed. One of the most significant advantages of drop shipping is that it requires less capital to start. Since you don't have to buy inventory upfront, you can start your business with less money. This can be a major advantage for entrepreneurs who are starting out and need more capital to invest.
To summarize, the pros of drop shipping are abundant, including:
- No inventory carrying costs and very little capital investment needed
- Easy and instant access to a wide variety of products to sell
- Ability to scale, which is only limited by the supplier's capacity
- No need to manage the fulfillment and shipping of orders
However, using a drop shipping service means you have less control over logistics, the customer delivery experience, and the returns process. This is when it may be a good idea to supplement drop shipping with a fulfillment strategy.
While drop shipping is the "go-to" choice for many businesses, the fulfillment model is sometimes a better option. Despite the advantages of drop shipping, there are some situations where it makes more sense to use a fulfillment company. Here are a few scenarios where you might consider using a fulfillment company.
Time Sensitivity and Lower Freight Costs
Using a fulfillment company might be a better option if you need your orders shipped fast or are looking for the best possible shipping rates. Especially if the drop shipping supplierer is in another country, shipping times will be longer, and delivery costs will be higher than if shipped from a local fulfillment center.
Furthermore, fulfillment companies also have negotiating power with shipping carriers. By leveraging the collective buying power of all their clients, they can achieve significant discounts, which will lead to lower shipping rates for your business and your customers.
Spikes in Demand
If you have a seasonal business or experience spikes in demand, using a fulfillment company can help you keep up with your orders during periods of fluctuating demand. For example, many online merchants experience higher order volumes during the winter holiday season.
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Fulfillment companies can scale up their operations to accommodate sudden increases in demand during these timeframes. Having a pre-purchased, ready stock of goods during higher volume times of the year will help your business avoid stockouts. It also helps avoid paying a premium for goods during these peak timeframes. This can be a significant advantage for your business during the holidays or other peak times.
Safety Stock for Disasters
In the blink of an eye, businesses can suffer from unforeseen circumstances. Your business could be at risk, whether it's a global pandemic, supply chain disruptions, economic downturns, natural disasters, or other unexpected catastrophes. It's crucial to have a safety stock of inventory on hand to mitigate such risks.
This way, if something happens and your drop shipper cannot fulfill orders, you'll still be able to meet customer demand. Fulfillment companies can help you maintain a safety stock of inventory and serve as an overflow warehouse storage solution so that you're never caught without product.
If you have a high return rate or sell products prone to damage, using a fulfillment company can help you manage returns. Fulfillment companies with warehouse locations in your local market can handle returns faster than drop shippers, especially when the drop shipper is in another country or remote area.
Because fulfillment companies are specialists in forward and reverse logistics, they are experts at inspecting products for damage and processing returns, which can save your company time and money. Many drop shipping suppliers either do not handle returns, or the reverse logistics process is cumbersome. Having a local partner manage your returns will simplify the process – a key to keeping customers happy and returning as repeat buyers.
Added Value Such as Kitting and/or Better Unboxing Experience
A fulfillment service can be a more robust option if you're looking to add value to your products or provide a better unboxing experience than competitors. Fulfillment companies can provide kitting and packaging services to make your products stand out from the competition. They can also help you create an unboxing experience that will wow your customers.
Providing a distinctive unboxing experience, whether it's a custom box, customized packaging, specialized inserts, or a handwritten card, is one of the few ways to differentiate from the competition. Most dropshippers cannot offer this type and level of customized service. If a top-notch unboxing experience is paramount to your company's success, looking into fulfillment services is essential.
Drop shipping is a great way to get started in e-commerce and offers many advantages for most companies. It's simple--you don't need to worry about shipping products yourself, and it can be a cost-effective strategy to launch and grow your business. However, there are some cases where it might make sense to supplement your drop shipping strategy with a fulfillment service.
From lowering shipping transit times and costs and avoiding stock outs to improving returns and creating a more compelling unboxing experience, fulfillment services can bring your company's logistics strategy to new heights. Knowing the advantages and disadvantages of dropshipping and fulfillment companies will help you make the best decisions for your business and put in place the best strategies at the right time.