Which is better? Dropshipping or warehouse? We could debate this topic for hours. We can all agree that they have been a boon to the e-commerce sector.
Global retail ecommerce sales reached 4.28 trillion US Dollars in 2020. E-retail revenues are expected to rise to 5.4 trillion US$ by 2022 (Source: Statista). This trend is expected to continue.
Moving your business online is one thing. But managing the delivery of the product is another. It is important for business owners to understand that selling products online and dealing with customers face-to-face in a store is very different than selling the product online.
A robust system is essential for seamless order fulfillment, regardless of whether you own stock in a warehouse or dropship.
What is Order Fulfillment?
Fulfillment is about the assembly, packaging, and shipment of products to customers. The following steps are involved in order fulfillment:
- Selecting items from the stock
- It should be packaged with the label of the company selling the product online
- Shipping it to the customer
Let’s first discuss the importance of dropshipping before we get to the dropshipping model.
Millions of businesses sell online via their websites or apps. There are also millions of other registered Amazon sellers.
Each of these companies cannot have access to their warehouse inventory and delivery system. This is because they are mostly SMBs and startups.
They don’t want to spend too much money on purchasing the entire product inventory, hiring additional staff, or dealing with other issues such as product delivery.
Stella, for example, recently launched an online business selling baby products – clothes, accessories, toys, and more. Stella, as a startup owner must focus on sales.
She won’t buy all the inventory she can afford until she is certain of the best-selling products. However, additional costs such as hiring additional staff and paying for a warehouse are also involved. What should she do?
Dropshipping is the solution to her problems.
Dropshipping: What does it mean?
Dropshipping allows businesses to fulfill orders without having to purchase or keep stock. The company does not have to buy all product inventory.
It uses a thoughtful approach to transfer the customer’s order from the company to a wholesaler or manufacturer. If the retailer agrees to be a dropshipper, the company will do so. These suppliers will pick, pack, label, and ship the products to the customer.
What is Dropshipping?
Let’s take a look at this example to better understand the dropshipping model.
- An online grocery store for fruits and vegetables is owned by ‘A.’
- Customer “B” visits A’s online store to order some organic farm fresh mangoes.
- After placing an order, both A and B will receive confirmation.
- Now, ‘A’ will notify his dropshipper manually or automatically.
- Let’s say that the dropshipper is the wholesaler C who will deliver the mangoes from ‘B.
- Dropshipper – C is responsible for all aspects of shipping goods to ‘B’.
- The services are charged at ‘C’ and A respectively.
- However, B doesn’t know that the mangoes come from C. All pdackaging and labeling are from A’s.
Dropshipping is therefore as simple as this:
The customer makes a purchase at the online store. The online shop contacts its supplier to pick up the product, pack it and send it to the customer. The supplier ships directly to customers for products that they sell to them.
Dropshipping is a method that online businesses cannot see or handle products.
Both the customer and the supplier receive confirmation when they place an order through the online store. The order is sent to the supplier either manually or automatically. After packaging and labelling the product for the online store, the supplier then ships the products directly at the customer’s doorstep.
The online store depends on the third party to ensure the product is in good condition, that it is packaged properly, and that it arrives on time. It has limited control over inventory and order fulfillment.
Any one of the players below can act as a supplier.
- Manufacturers – They produce the products. They don’t deal directly with consumers. They sell bulk to wholesalers, and sometimes to retailers.
- Wholesalers – They purchase products in bulk from manufacturers and then they sell them to retailers.
- Retailers sell products directly to consumers.
We have already discussed dropshipping but we need to discuss another important aspect of dropshipping.
Dropshipping: How can customers return goods?
The online store will assist customers who receive the wrong product or are unhappy with their purchase. The online store works with the supplier to return the product or send the correct item.
The supplier is not available to the customer. His job is to pack, ship and stock the product for the customer. The online store has all of the responsibility, including marketing, customer service, and discounts.
Dropshipping is a popular option for new entrepreneurs. Dropshipping is a great way to start your own business.
Dropshipping is an e-commerce site that purchases the products it sells from third-party suppliers or manufacturers. This supplier will handle the entire order fulfillment process.
This model reduces operational costs and allows you to spend your time on customer acquisition.
What are the pros and cons of dropshipping?
Let’s now look at the pros and disadvantages of dropshipping.
Dropshipping: The pros
- Low capital Dropshipping reduces the cost of starting a business online. Businesses require very little capital because they don’t have to invest in inventory immediately.
- Low overhead expenses: Since there are no additional costs for purchasing or managing inventory, overhead expenses tend to be very low. You don’t lose your hard-earned cash if you have products that don’t sell or expire.
- Minimum risk: The process of starting a business involves many risks. There are 50-50 odds of success or failure. It is wise to be safe. Dropshipping significantly reduces the cost of operating an online business. Dropshipping is a great way to reduce the cost of running an online business. You don’t need stock that could be expensive and you don’t need a warehouse. You don’t have to hire people or go through all the hassle of delivering the products.
- Simple to Manage Dropshipping is a way to do away with physical products. You don’t need to manage a warehouse, pack orders, or deal with staffing issues. It is the job of the supplier.
- Dropshipping: You can operate your business from any location because you don’t need to worry about physical inventory. Only a reliable internet connection is required.
- A more comprehensive product range: It is simple to increase your product portfolio and increase customer offerings by adding new products without investing in your inventory. You just need to keep an eye on the latest trends and add them onto your website. It is also possible to change your offerings without purchasing them.
- It’s easier to scale Let’s say you sell party accessories online. You will receive five times as many orders on Halloween than you normally get. Dropshipping is a great way to save time and not worry. Suppliers do the majority of the work for additional orders. You can therefore focus entirely on customer service and sales growth.
- No need to worry about inventory management Inventory management can be cumbersome and time-consuming. You and your employees can spend more time doing other tasks and not worry about inventory management.
- Useful for product testing Dropshipping allows you to better understand your customers’ needs. You have a lot to test the products and understand the thought processes of the consumers.
Dropshipping: The Cons
- Inadequate Quality Control: Dropshipping is characterized by the seller being absent from the fulfillment process. The seller must trust the third party and hold them accountable for their actions. A seller cannot control the inventory, quality, delivery or customer experience and is therefore in complete disarray.
- Lower Profit Margin Dropshipping requires little investment but there are other obstacles that can lead to lower profit margins. You may receive a discount up to 40% when you purchase from a wholesaler, manufacturer, or distributor. Dropshipping is where you get less than 20% off when buying from a supplier. Your supplier could be playing an identical role to other online businesses in most cases. With no unique offering, your only option to remain competitive is to reduce your profit margins by selling at a low price.
- Inventory Issues – You don’t know if the stock is available because you don’t own it. It is difficult to track inventory when you are sourcing from multiple warehouses that also fulfill orders for other businesses.
- There is no control over the delivery: There may be errors on the suppliers’ part. You are responsible for product and delivery. This means that you can’t help but take responsibility for other people’s mistakes. It doesn’t matter if the product is of poor quality, is missing or is delayed in delivery. This is your responsibility. These errors can cause financial problems for your customers if they don’t know that the error was committed by a third party.
- Shipping costs: Let’s suppose you have an online shop selling furnishing products. You have multiple products on your website that you have purchased from different suppliers. Three items are ordered by a customer: bedsheets (to dropship by supplier A), carpet (to dropship by supplier B), or vase (to dropship by supplier C). The three items must be delivered to the same person. However, each supplier will charge for shipping. The extra cost of shipping to avoid coordination is an additional expense.
- Reduced brand power: This is a third-party that makes your products, which might be the same as other online businesses. It can be difficult to make yourself a distinctive brand. This can pose risks for your brand.
After we’ve discussed the pros and disadvantages of Dropshipping we can now discuss shipping from the warehouse. Then you can decide which shipping method suits your needs.
What is Warehouse Inventory?
Another great option for online businesses is warehouse inventory. This is the traditional method of fulfilling orders.
This method is different from dropshipping. Online store owners buy goods and keep them in stock in a warehouse before selling the products.
E-commerce businesses buy the products in bulk from the manufacturer/wholesaler or a distributor and keep them in stock in a warehouse until they receive the order.
Warehouse inventory shipping has been proven to be a reliable retail method.
A warehouse is a space or place where you store your inventory. Warehouse space can be rented, built or purchased.
Shipping via the warehouse inventory model is therefore very simple.
The warehouse costs must be paid by the business owners, in addition to investing in stock and managing them. It takes hard work to manage the warehouse and fulfill orders.
Order fulfillment via warehouse inventory can now be achieved in one of two ways:
- Self-fulfillment method
- Third-party (3PL), fulfillment method
This allows the online retailer to complete the fulfillment process without the assistance of dropshippers or third-party logistics providers. The retailer stores the inventory in-house or in a warehouse.
This is a common method for small businesses that handle their own picking, packing and shipping.
Many large companies also use the self-fulfillment model because they have the resources to purchase a larger warehouse and hire a team of experts who will pick, pack and ship the products.
3PL fulfillment Method
An e-commerce company transfers its order fulfillment process over to a third party. This is not dropshipping, however, as the company buys the goods directly from the manufacturer or wholesaler in order to keep its physical stock.
These stocks are stored in a fulfillment centre or warehouse. A 3PL is needed when a retailer receives too many orders.
These situations can lead to companies running out of storage space, which means that packaging and shipping takes too long.
A 3PL outsourcing company handles all aspects of fulfillment, from receiving inventory from the manufacturer to picking, packing, labeling and shipping to restocking any returned products.
3PL companies employ experts who will manage the whole process. The service is always of high quality.
What is a Warehouse Inventory model?
As mentioned, there are two types of warehouse inventory models. Let’s look at each scenario in detail to better understand it.
- Robby and Bob start an online leather goods business – bags, belts, jackets.
- These goods were purchased in small quantities by multiple suppliers.
- They have now rented a small warehouse space to store their stock.
- “A”, “B”, and “C” all visit the same e-commerce site and place orders for a bag or belt.
- Bob and Robby will receive confirmation once the orders have been placed.
- They collect the products from the warehouse and pack them, label them and send them to ‘A’, ‘B’, and ‘C.
- Robby and Bob’s business has grown to a large scale operation.
- Their company is well-known in the US and perhaps worldwide.
- They now have a large warehouse full of stock.
- Each day, they receive thousands of orders.
- They have a large staff of experts to handle their fulfillment and inventory.
Both scenarios are based on the self-fulfillment model.
- Robby and Bob rented small warehouse space because they had very little inventory.
- They were receiving on average three orders per day at that point.
- What if they started receiving 100 orders per day?
Can you manage your order fulfillment on your own? Or can you store your inventory in a small warehouse? No.
We are now looking at the 3PL order fulfillment process.
But, there are pros and cons to every method. Let’s talk about them.
The Pros and Cons of the Self-Fulfillment Method
Let’s now examine some pros here:
- Improve Customer Service: Self-fulfillment eliminates all middlemen. You will be able to offer better customer service because everything is done by yourself or under your supervision. You are in complete control of your operations and can ensure that every order is packed exactly how you want.
- Quality Control Because everything is within your control, it’s possible to maintain tight quality control.
- Create a Branded Experience. With the self-fulfillment model, you can offer a brand-friendly experience that includes branded packaging, faster delivery and better product quality. To build a stronger relationship with your customers, you can include special discounts or offers in your package. This helps to promote your brand and plays an important role in customer loyalty.
- Less direct costs: You don’t need to hire staff for picking, packing and labeling. Small businesses will find it less expensive because they pay for shipping only and do all the work themselves.
Let’s now take a look at what the Cons of Self-Fulfillment Method is.
- Time Consuming: Because you do all the packing, it consumes most of your time.
- With Growth, It’s More Expensive: Warehouse space, warehouse management software, and other resources can become more expensive.
- Less efficient: Because all tasks are done in-house it can be time-consuming and frustrating.
- Limited Growth Potential: You spend a lot of time and resources on fulfillment activities. This leaves you little time to plan and execute business expansion strategies.
- Cash Problem. In order to have inventory, you will first need to spend significant amounts of money. If you are just starting out in e-commerce, it may not always be possible.
3PL Method: The Pros and Cons
Let’s now examine the pros and cons of self-fulfillment.
- Optimized Order Fulfillment: 3PL Services are experts in logistics support. They have a skilled workforce that is experienced in optimizing the order fulfillment process.
- Scalability and Rapid Growth: 3PL services can help you improve your order fulfillment. This allows you to concentrate on more productive tasks. You don’t have the hassle of meeting increased customer demands because they handle all picking, packing, shipping.
- Vast Fulfillment Network – 3PL providers maintain multiple branches. Their services allow you to expand your business beyond a single area.
- Increased Profit Margin: Because inventory is purchased in bulk from wholesalers or manufacturers, it is eligible for a substantial discount. This helps increase profit margins. You don’t need to rent warehouse space or warehouse management software. Or hire pick-and-packers.
- Professional Services: 3PL Service Providers are professionals, which is always a plus when you have a professional do your work.
- It’s easier to stay organized: You can work more efficiently and be more efficient with more space and a strong software system.
Let’s now look at the cons.
- Hiring cost: It is expensive to hire a 3PL fulfillment provider for order fulfillment.
- Less control: Because you’re giving stock control to someone else, who also takes care of shipping and packing your orders, it can be risky. There are sometimes risks that the quality of your services may be compromised.
- Customer Satisfaction Is Not in Your Hands: It’s the 3PL service providers that have the potential to make or break customer satisfaction levels. This can have a significant impact on your business.
How to transition from dropshipping to owning your own stock
It makes sense to transition to an e-commerce platform that is more traditional as your online business grows. This is the right time to build your brand and expand your company. Without stock, this growth is impossible.
These are the steps to help you make the transition from dropping shipping to owning stock.
Create the initial design of your product
It is your product that will make you stand out on the market and bring in sales. It is important to understand the product and its key components.
You might have a good understanding of customer needs from your dropshipping business. It is important to know the product type you are looking to create and what key features you need to add.
Do market research
Market research is an important step. This will help you to understand your target audience and their expectations. It may be quite different to what you thought.
To get an idea about buyer expectations for similar products, you can conduct a competitive analysis. Focus on your product differentiations. If you’ve been dropshipping similar items for some time, you already know what buyers expect.
Find the right manufacturer
After you have your design in place and done market research, it is time to start looking for a manufacturer. If you are looking to have them manufactured in the United States or abroad, it is important to make an informed decision.
It is important to analyze the costs and other factors that are associated with each manufacturer. For example, manufacturers in the country may charge more than those from overseas.
But, imports may be complicated due to overseas product manufacturing. It is important to know all the details and verify your manufacturer.
Create a business plan
You will need to invest more and plan better when you transition from dropshipping your stock to owning it. Forecasting all costs and revenue is therefore essential. You can better manage your finances by planning better and forecasting costs. This will ensure your business grows.
Create a unique product line and effective packaging
You should be focusing on the appearance, feel, and experience of your product or packaging. For quality control, you must get multiple samples of the manufacturing process.
While sampling is an investment, it can also increase the initial cost. However, it is essential in building a brand. The customer experience is the non-invested marketing of your product.
Good experience is essential at all stages of sales, including packaging, delivery, ease-of-use, and after-sales support. These are the key to developing a product line that is unique.
Adopt a Proper Distribution Network
You should consider which non-traditional marketing channels can help you reach more people and increase visibility. The logistics department plays an important role in customer service and prompt delivery. This is often overlooked by businesses.
It is essential that inventory storage, order fulfillment, product returns, and product returns are seamless. 3PL is a partner for businesses that wish to be more flexible in handling inventory, shipping, and other requirements.
Your USP should be defined
Ask: Why would a potential client choose your brand over a rival?
This is your USP. Your message should reach your target customers. Communicate the why to increase your brand’s potential to attract loyal and engaged customers. Your brand can be built by telling a compelling story that connects with consumers . You can refine your message if your message is not easy to comprehend.
Your brand’s look and feel. Although it sounds similar to differentiating your products from others, it is actually quite different. While products can change, your brand is the one that will always be there. New products can be launched under the same brand. You can deliver what you promise.
Your brand message should be clear and communicated using visuals. Communicate with your target audience.
Create a solid marketing strategy
A well-planned marketing strategy is essential to introduce a new product on the market.
Promotion and advertising follow. Good returns can be achieved by using email marketing in your business strategy. Engaging with others in your sector is a good idea in a world where influencers are omnipresent. You can also offer incentives to early buyers of your product.
Make sure to update your website and social media accounts
Customers log into brands’ social media accounts to access various functions, such as price comparisons or new offers. These accounts should be kept up-to-date and contain new content. It shows your brand’s seriousness and continuity by including new products.
Keep Customer Satisfaction
This will help you to gain an edge over your competitors. You can gauge the customer’s experience with your products by interacting with them often. It is obvious how important customer feedback HTML is if you want to make a product or brand work.
Social media platforms can be a great way to interact with customers and receive real-time feedback.
It takes time and effort to build brand and position products. However, a long-term focus on these areas will yield the desired results and help to create good business practices.
Dropshipping: Frequently Asked Questions
Let’s take a look at some of the most common questions about dropshipping.
Which is better: Dropshipping vs. Warehouse?
We’ve discussed both dropshipping and shipping through warehouses.
Only you can decide what’s best for you. Before you answer the phone, consider the pros and cons of each option and ask these questions.
Are I able to invest enough capital?
To purchase inventory, you need money. To purchase inventory, you will need to first buy the products. Then rent or buy a warehouse. You can make your own stock if you have the capital; if not, dropshipping may be a better option.
Do I have the Time?
It takes time to manage your stock, as well as packing and shipping orders. Dropshipping or 3PL orders fulfillment are options if you lack the time.
What is Quality Important for Me?
Dropshipping and 3PL services require you to trust a third party to handle your stock and product delivery. You can opt for self-fulfillment if you aren’t ready.
Dropshipping is a popular option for E-Commerce businesses
Let’s take a look at some E-commerce examples below.
Amazon.com is the most common e-commerce company that you will think of when you think about e-commerce. Amazon.com was founded in 1994 as an online book shop and has grown to be the world’s largest e-commerce business with $386 billion. The company was founded in 1994 by Jeff Bezos and has a market capitalization totaling 1,668 billion dollars. It is an international household name when it comes online shopping.
It is the third largest e-commerce site in the world, based in China, and is owned by Alibaba Group. Aliexpress was founded in 2010 by Jack Ma and allows small businesses to sell their products to customers around the world. Aliexpress sellers are independent and only use the platform for selling products to buyers. AliExpress differs from Amazon in that it is an e-commerce platform. It does not sell products directly to customers. Instead, it connects Chinese companies with international buyers. It has a market capitalization in excess of 619.84 trillion dollars and a revenue of 99 billion dollars.
Shopify, an e-commerce platform, is based in Ottawa Canada. Shopify provides a range of services including marketing, payments, shipping and customer engagement tools. Dropshipping, which Shopify has a revenue of USD 2.93 Billion, is one of the most favored services in the world.
Woocommerce, an open-source eCommerce platform built upon WordPress, is Woocommerce. It’s a flexible and user-friendly platform. It allows users to access all essential features such as inventory management, shipping costs calculation and payment options. This platform is available to any wholesale business.