In the world of ecommerce, dropshipping and order fulfillment companies are often debated or incorrectly referred to interchangeably, but their differences make a direct comparison tricky. While they both offer solutions for merchants seeking outsourced fulfillment services, they apply to entirely different business models.
Dropshipping involves partnering with manufacturers and suppliers to accept orders for their goods without actually having them in stock. Conversely, merchants who use fulfillment companies hire them to outsource the work of storing, processing, and shipping inventory that they own.
Understanding these differences is key to finding the right method for your small business.
To the customer, both buying experiences may seem exactly the same—but behind the scenes, the two methods are very different. Here’s an overview of each system.
Dropshipping vs Order Fulfillment Services at a Glance
Dropshipping | Order Fulfillment Services | |
|---|---|---|
What is it? | A business model in which the retailer markets, sells, and accepts orders for inventory that the supplier owns and fulfills | A third-party company that retailers hire to outsource the resource-intensive tasks involved in order fulfillment |
Key differences | Inventory is owned, stored, and shipped by the supplier | Inventory is owned by the retailer and shipped by the fulfillment company |
Dropshipping partners are manufacturers or wholesalers of the goods they sell | Order fulfillment partners are companies selling access to their infrastructure | |
Minimal capital is required to start a dropshipping business | Substantial capital is required to start a business that would benefit from order fulfillment services | |
Who is it right for? | Retailers with limited capital and time | Retailers with sufficient capital and time to invest in large upfront costs and long-term growth |
Sellers who want to test out certain products, markets, or strategies | Sellers who are confident in the performance of their goods | |
Merchants who don’t want to invest in the space and workforce of their own warehouse | Merchants who don’t want to invest in the space and staff of their own warehouse | |
Recommended solutions | Oberlo is a popular dropshipping solution owned by Shopify—our recommended ecommerce platform |
Let’s take an in-depth look at what these business models are:
What Is Dropshipping?
Dropshipping partners are manufacturers or wholesalers; in this process they own the inventory—the retailer does not. Customers place orders and make payments on the merchant’s site, then the merchant buys the ordered goods from the dropshipper. The dropshipper receives the original order information and ships the product directly to the consumer.
By marketing, selling, and providing customer service for the dropshipper’s goods, the merchant becomes a third party who receives a profit. As the retailer in this arrangement, you set the selling prices, so the final margins are up to you.
What Is an Order Fulfillment Company?
The part of the retail supply chain that receives, processes, and ships customer orders is called fulfillment, and many merchants choose to outsource the tasks involved to third-party fulfillment companies. They are enterprises that specialize in handling inventory, processing orders, and shipping goods for other businesses.
When retailers hire fulfillment companies to assist their operations, they buy goods to be listed on their site and deliver them to the fulfillment center. Then, whenever a customer places an order, the details are routed to the third-party where the merchandise is packaged and shipped.
Order fulfillment can sometimes be effectively done in-house, which is a popular option for small-scale businesses and startups. As the business develops and order volume outgrows available space, labor, and time, it makes sense to hand those duties off to a partner company.
Key Differences Between Dropshipping and Fulfillment Companies
Both concepts are alternatives to starting a brick-and-mortar retail business by running your store online, but they represent two separate business models with fundamental differences.
The most important contrasts between dropshipping and fulfillment companies are in the possession of merchandise, operations and control, relationship dynamic, and associated risks.
Ownership of Inventory
One of the biggest distinguishing factors between dropshipping and order fulfillment companies is the ownership of inventory.
Merchants who partner with fulfillment companies own goods that they need help managing. Their inventory is purchased in bulk from wholesalers or manufacturers, then delivered to their fulfillment partner. The investment required to buy stock before selling it can be hefty, but this comes with a high level of control over offerings and profits.
On the other hand, retailers who operate through dropshippers never possess or own the products they sell. Merchandise stays with the supplier until it is shipped to the customer. The retailer pays for goods as they are ordered, so no investment in inventory is required. This saves them on overhead costs across the board, as storage and warehouse staffing expenses are nonexistent.
This hands-off approach to ecommerce offers lower financial risk, but it usually means the seller can’t be sure of the quality of their offerings. Retailers who run drop-shipping operations rely on reviews left by other sellers to know whether or not a product will satisfy their customers.
Operational Control and Reliability
Though the day-to-day duties of running each type of operation vary significantly, both methods take shape by starting an online store through an ecommerce platform like Shopify. Regardless of your business model, this requires plenty of research, setup, and marketing. Sourcing products to list on your site is where the two methods start to diverge.
Dropshipping retailers often use drop-ship marketplaces like Oberlo to browse products and connect with suppliers. From there, goods can be turned into listings with a single click by integrating the platform with your online store. This part of the process is more straightforward and streamlined than its traditional ecommerce counterpart, which involves seeking wholesalers, forging relationships, and placing bulk orders.
When customers buy goods from a dropshipping merchant, the order is forwarded to the wholesale supplier. Certain dropship platforms can automate this step, but in any case, some level of attentiveness is required. Sellers must monitor their dropship orders to ensure they are being fulfilled and reach out to their suppliers when any lapses occur.
Fulfillment companies offer automatic order routing, as well, but their efficiency comes with a much more reliable guarantee. This allows sellers who partner with them to spend minimal time on order processing.
Customer service obligations differ in each business model as well. Due to long delivery times and inconsistent product quality, dropshipping retailers often need to dedicate a sizable amount of time to helping their customers. These variables are more reliable and controllable when working with a fulfillment company, so complaints are minimized. Many fulfillment partners can even perform your customer service-related duties for you.
Relationship With Your Partner Company
The relationship between retailers and dropshippers has a different dynamic than that of retailers who partner with fulfillment companies.
In dropshipping ventures, suppliers provide retailers with access to their inventory and infrastructure. They focus their operation on manufacturing, wholesaling, and fulfillment, and partner with merchants to take care of the rest. By providing marketing, customer service, and sales channels, retailers complete the supply chain for them. Each party benefits from reduced workload and expenses.
In this sense, we can think of dropshipping companies and their retail partners as having a symbiotic relationship. On the other hand, order fulfillment companies and their partner merchants maintain a much more customary business relationship.
Ecommerce merchants hire fulfillment companies to take care of resource-intensive tasks for them. These third-party order fulfillment partners provide access to their infrastructure in exchange for payment. Their relationship with their retail partners is linear and traditional—they are selling a service that solves a problem.
In addition to the general dynamic of both business relationships, communicating and working with each type of partner company is a very different experience for sellers. Since fulfillment companies are hired and paid by the merchants they support, they make it easy to customize and monitor their services.
Conversely, dropshipping suppliers tend to be more rigid in their operations and tougher to communicate with. Many of these popular wholesalers are located in Asia, so distance and language barriers can become hurdles, as well.
Risk and Impact
Any ecommerce venture requires some level of risk. It’s estimated that the success rate of dropshipping operations is as low as 10%, according to cloudways.com. That’s a staggering number of failed businesses, but the minimal investment of time and money required to start a dropshipping store means those failures are potentially small blows.
Much of the risk associated with this business model comes from ease of entry into the dropshipping arena. Many sellers don’t realize how small the profit margins are, how high the return rates can be, and how much market saturation is already out there.
A traditional ecommerce operation, whether or not its fulfillment tasks are outsourced to a third-party company, has a slightly higher success rate. It’s reported on failory.com that around 80% of online stores fail—but the associated risk is high. Investing in unmovable inventory can be financially devastating, and sunken overhead startup costs are often destructive too.
In either case, experts recommend knowing your market well—with thorough research and a carefully-chosen niche—before taking the dive into starting an ecommerce business.
What’s Better for Your Business?
The heart of the matter is that dropshipping partnerships and third-party fulfillment companies work for retailers with different problems to solve. If you’re planning to start an online store but aren’t sure which business model is right for you, consider your available resources and expectations.
When to Use Dropshipping
| PROS | CONS |
|---|---|
| Minimal capital required | Small margins |
| Adaptable inventory | Long delivery times |
| Market experimentation | Less control over product quality and fulfillment details |
| Flexible investment of time | Communication difficulties |
Dropshipping yields lower margins but tends to become profitable more quickly than standard ecommerce ventures—often in as little as three months. This is largely due to the small investment of time and capital required to start. This method of running an online business is great for people who are limited in their resources or want a less-demanding introduction to ecommerce.
Particularly, dropshipping is best for:
- New businesses with low market confidence: A traditional online store requires taking ownership of merchandise in bulk quantities, which can be dangerous if you’re not sure how well the goods will perform. Dropshipping allows merchants to sell products without that risk attached, which opens the door for experimentation and building long-term confidence.
- New business owners with a separate full-time job: Running a dropshipping operation allows the merchant to be highly flexible with their investment of time, making it ideal for individuals who have a separate full-time job or can only work on their store a few days a week.
- New business owners with limited capital: For retailers who want to start an online store with a nominal investment, dropshipping opens the door for them. Since no capital is required to purchase inventory, it’s a great option for those with minimal financial resources.
When to Use an Order Fulfillment Company
| PROS | CONS |
|---|---|
| Greater margins | Substantial capital required |
| Short delivery times | Significant financial risk |
| Scalability | Large investment of time |
| Reduced overhead costs | Takes longer to generate return |
| Ample control over inventory and fulfillment details | |
The margins you’ll likely receive from a traditional online store are significantly higher, but the investment of time and money required is much greater. It will take longer to recoup your startup costs, but many dedicated retailers benefit from the level of control offered in this business model. It’s best for entrepreneurs with the available resources to commit to the long-term growth of a business.
Specifically, order fulfillment companies are best for:
- Traditional retailers looking to expand online: A retailer’s physical location may be very far from their online customer base, which can create problems for their fulfillment process. In order to offer competitive delivery times and keep their operation cost-effective, they need to have their products stored and shipped from a location near to the customer. Order fulfillment companies make this possible without the retailer having to move their own facility.
- Traditional retailers who want to optimize their time: Hiring a partner fulfillment company saves time for traditional online sellers by outsourcing many labor-intensive tasks. Dedicated store-owners often find that the time they save is better spent on other operations that increase profitability and drive growth.
- Traditional retailers lacking capital for warehousing: Some retailers have enough funds to purchase inventory in bulk, but lack the necessary capital to lease and staff a warehouse. Order fulfillment companies eliminate that hefty investment for merchants by providing access to their infrastructure for a much smaller monthly payment.
- Accommodating seasonal fluctuations: Retailers that typically handle fulfillment in-house, but experience much higher order volumes around the holidays can efficiently manage the influx without hiring additional employees or purchasing additional warehouse space by working with a fulfillment company. When the busy season is over, you can resume in-house fulfillment as usual.
If you already run an online store and want to outsource your fulfillment tasks, a third-party order fulfillment service can help grow your business or facilitate scaling. Visit FulfillmentCompanies.net to learn more.
Bottom Line
Dropshipping and order fulfillment companies are business concepts that belong to two separate categories. Online retailers can benefit from outsourcing their fulfillment process using either of these methods, but the entire model of their store is dependent on which they choose.
A retailer who has the available capital to buy inventory in bulk but wants to avoid investing in their own warehousing operation would do well partnering with an order fulfillment service—like Shipbob or Red Stag Fulfillment. On the other hand, a merchant who doesn’t have the capital or desire to make a large investment in an unproven product or marketing strategy would find more value in a dropshipping partner—like Oberlo.
Ready to start dropshipping? Check out our guide to getting started.
