What's the difference between third party order fulfillment and drop shipping? See how the two compare in this short guide over their differences.
Are you meeting your customers' delivery expectations?
A whopping 60% of Amazon customers are deterred by slow shipping. So if you're struggling to maintain an efficient supply chain, expect to start losing out to your competitors.
In fact, if you're looking to scale your business or boost your conversions, you could probably benefit from the help of a fulfillment service. Third-party order fulfillment and dropshipping are two of the most popular solutions for digital retailers. But which should you choose?
To minimize risk and develop a sustainable supply chain, it's crucial that you understand your options. Each method serves a different type of retailer and comes with upsides and downsides.
This article explains the critical differences between the two, so you can choose the right solution for your business.
Let's dive right in.
How Does It All Work?
Third-party order fulfillment and dropshipping both help streamline your delivery process, freeing up time for you to focus on sales. But the way that they serve retailers is entirely different. Before we break down the nitty gritty, here's an overview of how both work.
Third-Party Order Fulfillment
With third-party order fulfillment, you send your inventory (in bulk) to a specific fulfillment center. Then, when a customer buys your product, you inform the fulfillment company of the sale.
The fulfillment company then handles the packing and shipping of your order. Essentially, you pay a fee for a third party to do the hard work.
You buy in bulk from a manufacturer or wholesaler
The product is delivered to a third party fulfillment company
You advertise your product digitally
A customer places an order (via your listing)
You send the order to the fulfillment companyThe company packs and ships the product to your customer
As a drop shipper, you never deal with the inventory that you sell online. Instead, once a customer purchases from you, you place the same order with the original manufacturer or wholesale supplier. They then take on the responsibility of packing and shipping, sending the product straight to your customer's address.
You advertise your product digitally
A customer places an order (via retailer)
You place the same order with the manufacturer or wholesaler
This supplier packs and ships product to your customer
You may be surprised to know that many retailers view drop shipping and third-party fulfillment as synonymous. As such, they miss out on the potential benefits associated with both services.The good news is that if you're following things so far, you're already ahead of most!
Just remember, the fundamental difference is the service that is offered to retailers. Third party fulfillment companies provide retailers with warehouse storage and shipping solutions, but not with stock. As dropshipping enterprises typically manufacture the product themselves, they also offer their inventory.
Despite their differences, both third party fulfillment and drop shipping solve a similar set of problems for retailers. It comes down to 3 main factors, so let's take a peek:
If you know that you're capable of selling the stock you hold, but don't have the sufficient infrastructure to manage it effectively, a third-party order fulfillment company is the ideal solution.Similarly, if you don't yet hold inventory or are considering moving into a new product market, using a drop shipper is a low-risk option that doesn't require any inventory management at all.
Buying or leasing a warehouse is no small decision. It involves a lot of capital, and many business owners find this cost negates the benefits of their expansion to a new storage unit.
Using a third party order fulfillment services is a much cheaper way of expanding your capabilities. It's also much more flexible in the case of changes to your business operations.
Drop shipping is a capital-friendly option too, as it requires no initial outlay for inventory. Bear in mind though, the overhead charges associated with this service could drive down your margins significantly.
If your physical location is a significant distance from your customer base, shipping times can be a real pain. Use a third party and you'll be able to store your inventory in a location much closer to your customer, without opening up an additional location.
With dropshipping, this can be a little more difficult as you're limited by the location of the manufacturer. Still, it's possible to build relationships with several suppliers, simultaneously.
Positives & Negatives of Both Services
It's not about one service being 'better' or 'correct,' but about finding the right match for your current business position. Here's a handy list of pros vs. cons that should help you decide:
Third Party Order Fulfillment
(+) Expertise. They're specialists in fulfillment, allowing you to focus solely on sales.
(+) Volume. Third party fulfillment services can store significant inventory.
(+) Scalability. Enabling you to sell more without space becoming a ceiling to growth.(-) Fees. Of course, nothing comes free. Expect to pay for the added convenience.
(+) Low initial investment. No need to pay for inventory in advance.
(+) Product Diversity. You can sell a diverse product range, housed all over the world.
(-) Thin profit margins. The dropshipperdrop shipper will be dealing with all overheads, and this won't come cheap.
(-) Competition. It's open to all. You'll be competing against the same products, at the same prices.
Third Party Order Fulfillment vs Drop shipping: Which Is Right for You?
While third-party order fulfillment and drop shipping both offer a hands-off fulfillment solution, they're made for two different retailers.If you can afford to buy inventory in bulk but would prefer to avoid setting up your own costly warehouse, a third-party fulfillment service is a definite bet. But if you'd struggle to invest in new product right now, expansion may be more comfortable with the help of a dropship partner company.