If you’re thinking of launching an e-commerce website, then one of the most important decisions you’ll need to make is choosing between e-commerce fulfillment or drop shipping. To help make this process clearer and simpler, below are some of the key differences between these methods.
What is E-Commerce Fulfillment?
E-commerce fulfilment is a process in which your products are shipped to customers via a third-party shipper, such as FedEx, UPS, DHL, and many others. Inventory can be stored in your own warehouse (or even your garage or basement if operating out of your home), or at a third-party warehouse (of which there are many spread out across the country).
For example: let’s say that you sell designer handbags. You manufacturer or purchase a sufficient inventory, and as customers place online orders, your fulfilment center — which again, could be your home and not necessarily a warehouse — ships them out.
What is Drop Shipping?
Drop shipping is a process in which you technically don’t purchase inventory until a sale is made. When that happens, a third-party drop shipper fulfils the order and sends it directly to your customer.
For example: let’s say (again) that you sell designer handbags. Instead of manufacturing or purchasing inventory, you partner on the back-end with a drop shipper who has inventory. As orders are placed on your e-commerce site, you automatically purchase designer handbags from the drop shipper. Your profit margin is therefore the difference between the wholesale price you pay and the retail price you charge — e.g. if your drop shipper charges you $70 for a handbag including shipping, and you sell that handbag for $100 including shipping, your profit on the transaction is $30.
Which is Better: E-Commerce Fulfilment or Drop Shipping?
In light of the above, you may be asking which option is better. As you might expect, the answer is: it depends.
The key advantage of e-commerce fulfilment vs. drop shipping is profit margin. For example, instead of buying a handbag for $70 from a drop shipper, you might be able to purchase (or manufacture) it for $50. That means you’ll make $20 more per handbag.
The key advantage of drop shipping vs. e-commerce fulfilment is risk mitigation. Since products aren’t technically purchased unless and until a sale is made, you don’t take the risk of being stuck with slow-moving inventory. This can be particularly beneficial if it’s unclear whether the marketplace will eagerly buy a new product. In addition, some new e-commerce companies opt for drop shipping for the first year or two, so they can focus on building their brand and marketing vs. sourcing and managing inventory.
The Bottom Line
As noted above, choosing between e-commerce fulfillment or drop shipping — or possible integrating both — is a critically important decision. As such, do your homework, talk to experts, and ensure that you understand all of the pros and cons.