Online shopping will not be going away anytime soon. Digital Commerce estimates that 2020 saw the “highest annual U.S. eCommerce sales growth in at least 20 years” with a 44% increase. Shipping fees and estimates have become an integral part of our daily lives due to the increase in cross-border eCommerce. Merchants have seen a greater demand for online fulfillment, which raises concerns about shipping best practices. Dropshipping is gaining popularity partly because of this.
Dropshipping is not something that everyone will be able to understand. However, for those who want to minimize shipping costs and start-ups, it is a good idea to get to know dropshipping. Many people confuse dropshipping with production. This article will explain how to begin dropshipping inventory, and how it differs from third-party logistics. This article will explain what dropshipping means for your business expansion and growth.
- What is dropshipping?
- What is Third Party Logistics?
- Dropshipping vs 3PL
- Dropshipping vs FBA
What Is Dropshipping
Dropshipping allows products to be shipped directly from the manufacturer or supplier. Items are shipped directly from their manufacturer or supplier. Dropshipping with eCommerce businesses like Amazon and eBay would mean that they don’t have physical inventory, but would instead send the order directly to the supplier for shipment.
Dropshipping will only grow in popularity in near future. We are beginning to notice a shift in how consumers shop, thanks to the advances in smartphone technology that allows for mobile eCommerce sales. There were once a few stores that people could go to for their basic needs. But today, there are many options online. According to studies, online sales will grow at a rate of 28.8% between 2019 and 2025. Based on our experience so far, these figures seem only the beginning.
Dropshipping is a great option for eCommerce businesses because it meets all of their needs. Dropshipping allows sales to be made without having to arrange for brick-and mortar accommodations. It also eliminates some risks associated with inventory that might or may not sell. A merchant can advertise a merchant’s product and make a profit by the difference between vendor pricing and consumer cost. Merchants can fulfill orders exactly how they want them to be fulfilled by having the manufacturer ship inventory immediately after an order has been placed. E-tailers do not need to manage inventory. Merchants don’t have to worry about inventory overflow and manufacturers can continue producing inventory as required.
The Pros and Cons of Dropshipping
Dropshipping is like any other shipping method. Before you decide to go ahead with the order fulfillment process, it’s important to consider all pros and cons. Dropshipping has many benefits, including:
- Seller requires less capital: It can be costly to properly manage inventory and fulfill orders. To get started with most order fulfillment methods, you will need to purchase a lot of inventory. Dropshipping is a great option because it doesn’t require large upfront investments and produces less inventory.
- Dropshipping: Dropshipping encourages business growth because it allows companies to showcase more products in their shops. Businesses can have a wider product range due to lower overhead costs and higher upfront inventory investments. Businesses don’t have to order surpluses of any item. This allows them to diversify their product portfolio in a flexible manner.
- Buyer Unawareness.Consumers aren’t able to see if an item has been dropshipped. This allows you to continue building your brand through third-party retailers, without having to compromise any optics. While consumers are not able to verify the product source, they can still establish a relationship with the brand.
- Make your product available for dropshipping and help it get to market faster with strategic partnerships with eCommerce companies. ShipCalm allows manufacturers to ship and warehouse the product for them.
Cons of Dropshipping
Dropshipping has many benefits, but there are also some drawbacks. Before you decide on a partnership or inventory model, it is important to understand the disadvantages. Dropshipping has its cons:
- Low Profit Margin With low overhead comes lower returns. It can be difficult to maximize your investment and make a profit due to the fact that the supplier gets a lot of the profits. It can be challenging for those who are just starting out to build a brand and generate traffic. If they want to make a large profit, it can be risky to see a return on their investment. Buying inventory in bulk can allow for discounts, which can be cheaper than dropshipping.
- Highly competitive: As we mentioned, dropshipping has become more popular in eCommerce. This means that there is a lot of competition for businesses who want to cut costs in order fulfillment. This means that there is a higher chance of competition from similar eCommerce businesses.
- Inadequate Control over the Supply Chain: Dropshipping can have its benefits, but it can also be a costly experience for merchants. Without proper notification or warnings, an item might not be in stock. This could lead to product quality being compromised and delivery delays. While sellers are at the mercy and control of their distributors while still providing a positive customer experience, they are not allowed to do so.
- It’s difficult to build brand awareness: Dropshipping is a way to create a filter between your brand and the perception of service. Dropshipping can make it more difficult to build brand awareness, especially if there is a lot of competition.
What is Third Party Logistics
Dropshipping is a different type of inventory fulfillment that third party logistics offers. There are some key differences. A seller may choose to outsource third party logistics to let a service provider store, package and manage inventory shipments. A third-party logistics fulfillment allows sellers to still purchase their inventory in bulk, but they will partner with a warehouse that will handle the physical aspects of order fulfillment once an order is placed. This is a popular option for eCommerce businesses who do not have the physical space to store their inventory, but still wish to keep an eye on their merchandise.
Third Party Logistics
Dropshipping is a great option, but there are many benefits to choosing to work with a third-party logistics company (3PL). This can be a big draw for business owners who want to create a 3PL partnership. These benefits show that businesses can:
- Get a Discount:3PL Companies such as ShipCalm have all the information you need about shipping and supply chain management. 3PL services can get discounts for potential clients because they are connected to the supply logistics industry. These connections can help you save money over the long-term. A 3PL makes inventory management easier because they provide the majority of the shipping facilities, which helps to reduce overhead costs.
- Grow Your Business Faster: There are many factors that affect the management of a business’s order fulfillment and inventory. All of these factors will be familiar to a 3PL company. A 3PL company will be familiar with all aspects of international regulations, including import and export information and logistics. All of this helps to support international expansion and traffic generation without the need for a physical location. A 3PL can manage the supply chain and scale up or down to meet your business’ needs. This will allow you to grow your business quickly by shortening production cycles and reducing delays in delivery overseas.
- Customer service is better: Inventory management can be time-consuming. If you haven’t made a connection to your customers, you run the risk of all your efforts going sour. 3PL companies handle all aspects of order fulfillment so business owners can focus on marketing and building brand awareness. 3PLs also allow business owners to concentrate on customer product queries and delivery concerns once they have established a customer base. This allows them to provide consistent customer service across all markets.
Cons of Third Party Logistics
Although third-party logistics can provide a consistent and reliable way to manage inventory, there are downsides to this model of order fulfillment. Third party logistics has the following cons:
- Insufficient Control of Logistics: For those who want to have direct oversight of inventory and take part in quality control, a 3PL may not be the best option. A 3PL’s goal is to take over the logistics of business shipping protocols. This means that there is an inherent lack in control and dependence that business owners need to understand before they form a 3PL partnership.
- It can take time to find the right 3PL. When it comes to making sure your business succeeds, selecting the right 3PL is an important step. It is crucial to find a trustworthy company that can fully understand the logistics of shipping and inventory logistics so you don’t have any product fulfillment problems down the road. Each business is unique, so choosing the right 3PL company for you is crucial.
- Insufficient Inventory Control: Although a 3PL arrangement gives the business owner inventory, it doesn’t mean they have any direct control. They are not physically responsible for warehousing inventory so they have no control over the fulfillment process.
We’ve already discussed dropshipping and third-party logistics options for businesses, but we have yet to mention FBA, which stands “fulfillment through Amazon”. Amazon FBA, a 3PL service offered by Amazon, is used as an eCommerce model to fulfill orders. Dropshipping services may choose Amazon to be their preferred eCommerce retailer. However, they don’t have to sign up for Amazon FBA services.
Dropshipping can be confused with Amazon FBA. While a dropshipping arrangement may look very similar to Amazon FBA’s, it misses one major benefit. Amazon FBA handles not only the logistics of shipping and warehousing, but also all customer service and refunds. Amazon FBA allows business owners to purchase inventory. They simply need to ensure that the product arrives at Amazon’s fulfillment warehouse.
FBA: Pros and Cons
Amazon FBA offers many benefits that are similar to the other shipping models. This can encourage sellers to use this unique 3PL service. Amazon FBA has many advantages.
- Amazon already has an established and robust infrastructure for order fulfillment. Amazon is a trusted name that consumers trust. This allows new business owners to access a global network of customers via the Amazon platform.
- Focus on growing your business: Amazon takes care of many of the shipping tasks that normally take up a lot time for business owners. Amazon takes care of all aspects of shipping and warehousing so business owners can focus on their products and develop a customer base.
- No website required:Website management can be costly. Businesses shouldn’t have to worry about investing in websites. Amazon is a well-known eCommerce site that has seen tremendous growth in recent years. This means you can be confident that your product will have a stable and supportive platform.
Cons for FBA
There are many benefits to choosing Amazon FBA for order fulfillment services, but it is important to understand the downsides before making a business commitment. FBA has several major drawbacks.
- High Upfront Investment:Amazon can be a great platform to reach new markets and drive traffic, but it comes with a steep price. These upfront costs are significant and should be taken into consideration before you commit to FBA.
- Must Have Product Up Front: Dropshipping allows sellers to make products based on direct orders. However, FBA and 3PL require that merchants have sufficient inventory to fulfill a specific number of orders. This can increase costs and lead to losses if products do not sell.
- Shipping and Storage Fees:Amazon charges shipping and storage fees. These fees can be a drain on profits. Amazon Prime offers free 2-day shipping. The seller is responsible for paying. Amazon offers a lot of commingled merchandise, which can reduce shipping costs, but can cause problems regarding product loss or delays. To ensure that they are still making a profit and getting a return for their investment, sellers must be aware of how these fees stack up.
- Trust in Amazon Platform: While FBA offers many appealing features for order fulfillment and shipping models, there are risks to trusting just one form of shipping management. Amazon-provided resources and customer service can make it difficult for you to control and provide support. It is very rare that a business owner can change the course of shipping processes. It can be time-consuming to monitor shipment progress and developments, especially for those pesky returns or lost products.
ShipCalm works closely with clients to ensure that Amazon shipments are processed properly. We also provide insight into how to maximize your Amazon investment. To learn more about FBA, and how ShipCalm could help you, check out our Amazon FBA Prepare services. You can see if an FBA model might be right for your business.
Third Party Logistics and Dropshipping Solve Different Problems
Dropshipping and third-party logistics may seem like one thing. However, they address the unique challenges that businesses face. Each business’s order fulfillment model is different. eCommerce sites may benefit greatly from a dropshipping arrangement. However, 3PL might be more appealing to some businesses. Dropshipping can be a great way to cut costs on shipping and inventory production. It can also help small businesses expand and grow by providing an interactive and hands-off experience.
If a business owner has a well-established audience and prefers to know the inventory, and wants to outsource management of that inventory, 3PL or FBA may be a good option. It is up to the business owner how their inventory will be managed and how much interaction they will have.