Difference between Dropshipping and Third Party Fulfillment

Online shopping isn’t going anywhere anytime soon. According to Digital Commerce estimates, 2020 experienced the “highest annual U.S. eCommerce growth in at least two decades” with an increase of 44%. Between the widespread increase in cross-border eCommerce and a shifting motivation to purchase items online rather than shop in-person, shipping fees and delivery estimates have become a natural part of our day to day lives. For merchants especially, there has been a demand to fulfil more online orders which raises the concern of best shipping practices. This is partially the cause for the recent popularity of dropshipping.

Not everyone is going to have a strong awareness of what dropshipping is, but for start-up businesses looking to optimize their shipping costs, it’s in their best interest to learn. Many people have a tendency to mix up what dropshipping is and how it works within a production cycle. This article will explore how to start dropshipping inventory and how dropshipping varies from third party logistics. You’ll learn what dropshipping can mean for business growth and expansion, as well as:

  • What is Dropshipping
  • What is Third Party Logistics
  • Dropshipping vs FBA

What is Dropshipping

Dropshipping is a product fulfillment method that allows the products to be shipped without actually going through the vendor or retailer. Instead, items are shipped directly from the manufacturer or supplier. If you were to dropship with an eCommerce business such as Amazon or eBay, they wouldn’t have access to the physical inventory but would send the order to the supplier to ship directly on their behalf.

Dropshipping is only projected to grow in popularity in the near future. With the developments in smartphone technology that supports mobile eCommerce sales, we’re beginning to see a huge shift in the way consumers prefer to shop. Once upon a time, individuals had a few staple stores that they frequented for all their essentials, but nowadays the abundance of eCommerce options and “e-tailer” marketing through social media has consumers having limitless online options. Studies show that online sales are projected to experience a growth rate of “28.8% from 2019 to 2025.” Based on what we’ve experienced so far, those figures seem like only the beginning.

Dropshipping caters well to the needs of an eCommerce business structure for many reasons. Not only can sales be made without the hassle of arranging for brick-and-mortar accommodations, it also eliminates certain risks involved in inventory that may or may not sell. The retailer advertising a merchant’s product profits off the difference in consumer cost and vendor pricing, and merchants are able to fulfill orders exactly as demanded by having the manufacturer ship the inventory directly once an order is placed. E-tailers don’t need to manage inventory, merchant’s don’t worry themselves with inventory overflow, and manufacturer’s continue to produce inventory as demanded.

Pros of Dropshipping

As with any shipping method, there are certain pros and cons of dropshipping that should be considered before pulling the trigger on this order fulfillment process. There are many benefits to dropshipping, such as:

  • Less Capital Needed by Seller: Traditionally, it can take a lot of capital and investments to manage inventory and fulfill orders properly. With most other order fulfillment methods,  a large amount of inventory needs to be purchased to even get started. Dropshipping doesn’t require a massive upfront investment and allows less inventory to be produced unnecessarily.
  • Diverse Products: Dropshipping promotes business growth by allowing companies to feature more items within their shop. Lower overhead costs and upfront inventory investments allow businesses to have a larger product portfolio. Since businesses don’t need to order a surplus of any one item, they’re able to diversify their selection in a flexible way. 
  • Buyer Unawareness: Consumers don’t have the ability to see that an item is dropshipped, which allows you to continue to build your brand through these third-party retailers without compromising any optics. Consumers are unable to question their product source and can still build a consumer relationship with the brand. 
  • Get Product to Market Faster for Manufacturers: From the manufacturer’s standpoint, you’re able to make your goods available for dropshipping to help the items get to market quicker with strategic partnerships with eCommerce businesses. Better yet, ShipCalm provides a way for manufacturers to warehouse and ship the product on the manufacturer’s behalf.

Cons of Dropshipping

With the benefits of dropshipping come a few disadvantages that should be known prior to settling on a dropshipping partnership or inventory model. Some of the cons of dropshipping include:

  • Low Profit Margins: With low overhead naturally comes lower returns. Being able to maximize your investments and turn a profit can be hard due to the supplier getting a lot of the profit. For those first starting out and building a brand, generating traffic can be difficult so seeing a return on their investments can be risky if they want to earn a high profit. Plus, purchasing inventory in bulk from manufacturers can often allow for discounting, which can potentially be more cost-effective than dropshipping allows. 
  • Highly Competitive: As we’ve mentioned, dropshipping is growing in popularity which means that the market is saturated in eCommerce businesses looking to save money in their order fulfillment processes. This causes the competition against similar eCommerce companies runs the risk of being higher. 
  • Lack of Control of Supply Chain: While there are certainly benefits of dropshipping being a pretty hands-off experience for merchants, this lack of control can sometimes come back to bite you. If an item is out of stock without proper warning or notifications in place, product quality might be compromised or delivery delays may be expected due to the lack of excess inventory. Sellers are forced to be at the mercy of their distributors, while still being the face of the customer’s experience. 
  • Difficult to Build Brand Awareness: With using a third-party retailer to fulfill orders comes an inherent filter between your business’ brand and the consumer’s perception of service. Especially if you have a lot of competition, building brand awareness is crucial in supporting growth, and creating that relationship can be a bit more complicated when dropshipping

What is Third Party Logistics

Third party logistics is another form of outsourced inventory fulfillment, with some key differences in comparison to dropshipping. Third party logistics is an option sellers will choose to take a step back from inventory management to allow a service company to store, package, and handle inventory shipments. In a third party logistics fulfillment, sellers will still buy their inventory in bulk and own the merchandise but will then form a partnership with a warehouse to handle physical elements of order fulfillment once an order has been placed. For eCommerce businesses that have a lack of physical accommodations for inventory but still want to keep a pulse on their available merchandise, this is a very popular option.

Pros of Third Party Logistics

While we’ve touched on the benefits of dropshipping, choosing to go with a third-party logistics (3PL) company also has many advantages that draw business owners to form a 3PL partnership. Some of these benefits highlight that businesses can:

  • Save Money: 3PL companies such as ShipCalm know everything that is needed to know about shipping and supply chain processes. 3PL services are in touch within the network of the supply logistics industry and can leverage discounts with potential clients. These connections can save money in the long run. Inventory management is simplified with a 3PL because the 3PL’s goal is to save money in infrastructure investing by providing the majority of the facilities within the shipping process, saving in overhead costs. 
  • Grow Business Faster: There are countless factors that go into properly managing a business’s inventory and order fulfillment processes. A 3PL company will already know all of them. Transport information, importing and exporting goods, and international regulations are all factors that can get in the way of order fulfillment that a 3PL company will already know how to handle. This all serves to support international expansion and traffic generation, all without having a physical presence. The business can grow fairly rapidly by minimizing production cycle duration and reducing delivery delays overseas by having a 3PL manage the supply chain to scale up or down as determined by your business’ direct needs. 
  • Better Customer Service: Inventory management is a time-consuming process and if you’ve yet to form a connection with your customer base you’re running the risk of your efforts being for not. Since 3PL companies take care of all stages of order fulfillment, this allows business owners more time to focus their efforts on marketing and building brand awareness. Additionally, once a consistent consumer base is established, 3PLs allow business owners the ability to focus on customer product questions and delivery concerns to maintain a consistent customer service experience across all markets.

Cons of Third Party Logistics

While third party logistics can be a reliable and consistent way to manage inventory, there are some downsides of choosing this order fulfillment model. The cons of third party logistics include:

  • Lack of Control of Logistics: For those that desire a direct overseeing of inventory and want a personal role in quality assurance, choosing a 3PL isn’t the best choice. The goal of a 3PL is to assume responsibility for the logistics of business shipping protocols, so there’s an inherent lack of control and dependency that the business owner needs to be aware of before forming a 3PL partnership. 
  • Can Take Time to Find the Right 3PL: When it comes to ensuring your business is set up for success, choosing the right 3PL for your company’s needs is a big step. Finding a reliable company that you can trust fully understands the intricacies of shipping and inventory logistics is key for not having product fulfillment issues down the line. Every business is different, so finding the best 3PL for your unique needs is an important factor in choosing a 3PL company. 
  • Lack of Inventory Control: While in a 3PL arrangement the business owner has a stock of inventory, this doesn’t mean that they have direct control over it. Since they’re not physically warehousing the inventory, there is an inherent lack of control over what is happening to your products during the fulfillment cycle.

Dropshipping vs FBA

As we’ve discussed dropshipping and third party logistics options for business,  we’ve yet to touch on FBA, which stands for “fulfillment by Amazon”. Amazon FBA is a popular 3PL service provided by Amazon that serves as an eCommerce model for order fulfillment. While dropshipping services might choose Amazon as a preferred eCommerce retailer, they don’t necessarily have to opt in for Amazon FBA services. 

Dropshipping and Amazon FBA can often get confused for one another because a dropshipping arrangement looks very similar to Amazon FBA, but misses out on one main benefit. Amazon FBA not only handles the warehousing of inventory and shipment logistics, they also handle all refunds, returns and customer service related elements of the inventory model. Business owners still purchase a stock of inventory and simply need to assure that the product arrives at the Amazon fulfillment warehouse, and the rest is handled by Amazon. 

Pros of FBA

As with the previous shipping models, there are numerous benefits to Amazon FBA that can draw sellers to consider using this unique 3PL service. Some of the advantages of Amazon FBA include:

  • Consumer Credibility: Amazon already has a fully developed and comprehensive infrastructure in place for order fulfillment. Consumers trust Amazon because it’s a familiar name, which allows new business owners access to a valuable global network of customers through the Amazon platform.
  • Can Focus on Growing Business: Amazon handles many of the daily shipping tasks that would normally eat up substantial time for business owners. With warehousing, packaging, shipping, and ultimately quality assurance all being taken care of by Amazon, business owners are able to focus on marketing their services, brainstorming product expansion, and developing a consistent consumer base with the help of Amazon services.  
  • No Website Needed: Website management and investments can add up in costs, and being able to eliminate the need for a website entirely is one less thing for business owners to worry about. Amazon is an already incredibly popular eCommerce website that has only continued to expand in recent years, so you know your product has a stable and supportive platform.

Cons of FBA

While there are some unique advantages of choosing to go with Amazon FBA as an order fulfillment service, the drawbacks of the program should be known prior to business commitment. Some of the major cons of FBA include:

  • Large Upfront Investment: Amazon is an amazing platform to reach potentially new markets and generate traffic but there’s a hefty price to be paid to begin an FBA arrangement. From preparing for unexpected storage and shipping fees to providing a sufficient stock of inventory to the Amazon fulfillment location, these are high upfront investments that need to be considered prior to committing to FBA. 
  • Must Own Product Up Front: While dropshipping allows for sellers to manufacture based on direct orders, 3PL and FBA require merchants to already have the inventory necessary to supply a certain level of orders. This can drive costs even higher, with the potential for losses down the road if products don’t sell. 
  • Storage and Shipping Fees: Amazon features many shipping and storing fees that can eat away at profits unless properly managed. Many people love Amazon for the Prime feature of free 2-day shipping, which the seller in turn becomes responsible for paying. Not to mention, Amazon is big on offering commingled merchandise to reduce shipping materials, but can provide complications regarding product losses or delays. Sellers must pay attention to how these fees add up to ensure they’re still maintaining a profit and getting a return on their investment. 
  • Reliance on Amazon Platform: While FBA has many attractive features for shipping models and order fulfillment, there is risk in trusting any singular form for shipping management. You’re at the mercy of Amazon-provided customer service and resources, which can be notoriously spotty and out of the seller’s control. Being able to step in as a business owner to change or alter the trajectory of shipments processes is pretty minimal. Especially for pesky returns or lost products, the process of monitoring shipment developments and progress can be pretty time consuming when relying solely on Amazon for customer satisfaction.

At ShipCalm, we work closely with our clients to make sure Amazon shipments are properly processed, as well as providing insight to how you can maximize your investment for Amazon services. If you’re interested in learning more about FBA and how ShipCalm can potentially help, explore our Amazon FBA Prep services to see if an FBA model would serve your business’ needs well.

Dropshipping and Third Party Logistics Solve Different Problems

While some might confuse dropshipping and third party logistics as the same thing, they ultimately address unique complications that occur within a business. Every business’ order fulfillment model will be different, so while eCommerce sites can highly benefit from a dropshipping arrangement, other businesses might prefer the intricacies of 3PL more. If your goal is to save money on inventory production and shipping, knowing what dropshipping is and how it can help small businesses grow and expand can come in handy for those that want an interactive yet hands-off experience.

Alternatively, if a business owner with an established audience prefers to have a clear idea of the inventory and simply wants to outsource inventory management, both 3PL and FBA could be found to be highly valuable toward business growth. Ultimately, it’s up to the business owner to decide how they want their inventory managed, what level of interaction they will have with that management, and what their business needs to fulfill customer orders as effectively as possible while supporting long-term growth.

Let ShipCalm Help with Fulfillment!

At ShipCalm we’re dedicated to helping your business meet its demands in a way that supports your growth and success. We’re a 3PL company determined to simplify business shipping processes, from logistic services to Amazon FBA Prep services. Explore our Fulfillment Services  to see a breakdown of all the ways choosing ShipCalm can support your business and fuel your aspirations for growth over time. Have a question for one of our experts? Contact ShipCalm today!