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Handling Fulfillment In-House and Outsourcing Have Their Pros and Cons
E-commerce brand founders, operations managers, and DTC teams must decide whether to fulfill orders in-house, hire a fulfillment company, or use a dropshipping model. Each fulfillment strategy has pros and cons, and some models work better at different stages of business growth.
In this article, we break down the differences between self-fulfillment, fulfillment company offerings, and dropshipping. By the end, you’ll clearly understand what’s right for your e-commerce business based on time, labor, cost, control, and other factors.
Drop Shipping Explained
The use of drop shipping is not at all new. It is a scenario in which you are more the proverbial “middleman” than vendor. This is because you never actually have the merchandise in your possession. Instead, you are going to market the products and once orders are placed through your website, special software or other methods convey those orders to the “drop shipper”. They will package the goods per your requirements and ship them to the buyer. Drop shippers can be manufacturers, but they are just as often specialized warehouses.
In short, drop shipping is where you focus on your core competency of selling and marketing while outsourcing everything else to the drop shipping firm. The only exception is that you may be in charge of customer service.
What are the pros of this model? You have almost no overhead, which means you can begin this sort of eCommerce model at once. The profit margin depends entirely on the prices you negotiate with the drop shipper or manufacturer. You are never at risk for investing in too much merchandise you then unload at a loss. It also offers you tremendous insight into your audience. Did they respond more to product A or product B? Maybe they wanted a little of both? With this data, you never had to invest in huge amounts of merchandise, but you could then (with confidence) do so and use an alternative approach to the post-purchase process; third party fulfillment, also known as fulfillment companies.
There are multiple drop shipping platforms that allow you to find great products and connect electronically to your web store. Full automation is available, streamlining the entire process. One great example of a highly rated drop ship platform is Syncee.
However, in terms of cons – you will pay a higher per unit price because you’re not purchasing the product in bulk. Also, you will be at the control of the drop shipper in terms of fulfillment and shipping, relying upon their services for the critical last steps of the customers journey.
Fulfillment Companies Explained
In this approach, you do make that investment and buy the inventory before you offer it for sale on your various websites, marketplaces and landing pages, meaning that you can capitalize on lower costs per unit due to buying in bulk. Where the fulfillment companies enter the equation is that the warehouse and shipping center receives, stores and ships orders to your customers. In other words, they receive bulk lots of goods you sell through your online venues, and they then process all your orders and ship them to your clients.
Though you might automatically assume that your profit margins are lower with this model, give it a few moments of reconsideration. Firstly, you don’t have the cost of keeping a warehouse (either buying or renting). You have no employment expenses, utility costs or materials costs (such as investing in large quantities of packing materials). Instead, you have the cost of the goods and the fees from the fulfillment company used to determine your retail price and profit margin.
Are there other pros and cons? Absolutely, just consider the amount of time that is saved by outsourcing every part of the process after making the sale. Instead of managing a warehouse and shipping operations yourself, you are going to look at expanding your audience, offering superior customer service and satisfaction, improving marketing, and exploring additional product lines.
One thing to consider in our “versus” comparison thus far is this: Fulfillment centers “are best for brands which have their own, unique product (in drop shipping, you are using a supplier’s product), no inventory space and want to focus on acquisition rather than shipping.”
This brings us to the final model to consider, the self-fulfillment model that is the one that leaves you with the most control, but also the most responsibility.
Self-Fulfillment Explained
As you might realize, a business that uses the self-fulfillment model is one that owns the inventory and handles all the order fulfillment itself. It means you may be making your products (or buying them), storing them and performing other warehouse operations. It means you will have a shipping department, and all the staff that these various tasks require. You may have to maintain separate offices and handle all the administrative work from there. This would mean relationships with shipping firms (if you are not manufacturing your own goods) and doing a tremendous amount of work to ensure the utmost quality and satisfaction.
Isn’t this the original model followed by mail order and other similar businesses? Yes, and it does give you immense control over everything from customer data to costs for supplies. Brands choosing self-fulfillment are often particular about the delivery experience. As we pointed out, this is a huge factor to buyers, but it does not mean that drop shippers or fulfillment centers cannot also supply that exact delivery experience, too.
Choosing What’s Right for Your Company
How can you determine which is the ideal model for your company and its goals? Let’s reconsider them each briefly.
Drop shipping is fast and easy to begin, it doesn’t require a lot of business development, it is incredibly cost effective and affordable, it is scalable and allows you to expand your offerings, and lets you focus on your core competencies of marketing and sales. However, it is not ideal where customer support is concerned because you are (in essence) selling other’s products. It does not nurture your company as an actual brand and the ease of entry into the market means your profit margins are going to be the lowest of all three approaches.
Fulfillment centers are one of the darlings of today’s eCommerce firms because they allow you to have global reach and without huge overhead expense. The fulfillment centers themselves are experts at packing and shipping, guaranteeing less damage and lower shipping prices. Where you need to be careful is in the old “if it sounds too good to be true, it probably is” area. In other words, a fulfillment company that promises the world but doesn’t have the credentials to prove it may be worth avoiding. Go with the proven leaders, even if they ask higher prices as your customer satisfaction counts on it, and as we learned at the beginning of the article – that is what matters most in the current climate.
Self-fulfillment is the final path, and is great if you have the funds to make it work. Why? You are in total control of product quality, customer service, optimized and prompt shipping, and even costs for materials. It is heavy in logistics and takes you away from your desire to focus on marketing, sales and company growth – unless you hire someone to tackle it for you. It is not always ideal for a startup because it does demand staff, space and specialized software (and even servers).
Which is right? Only you can know the answer, but if you sell your own products/inventory and want a third-party to handle storage, packing, and shipping for you, you’re looking for an order fulfillment company. If, however, you don’t have products or inventory, but are happy to sell another brand’s goods, the drop shipping model is an affordable way to get started right away. If you are looking to have total control and have the capital, you will find that self-fulfillment is ideal. Whatever path you choose, know that there are many services and resources available to you. From sites like Amazon that allow you to sell and fulfill your orders to online marketplaces like eBay, Etsy or even Walmart, you can leverage your presence. However, don’t overlook the importance of developing your brand. A website, social presence, blog and competent SEO are also part of any eCommerce success, and fulfillment can become one aspect of your favorable reputation and success.
To get a full understanding of costs of using a fulfillment company versus in-house fulfillment, use our handy in-house versus outsourced fulfillment pricing calculator.
