Dropshipping vs Order Fulfillment: Which Method Is Better?
Meaghan has provided content and guidance for indie retailers as the editor for a number of retail publications and a speaker at trade shows. She is Fit Small Business’s authority on retail and ecommerce.
Katie-Jay aims to put answers in the hands of small business owners by leveraging over 10 years of retail and hospitality experience. With a background in gemology, she specializes in jewelry and luxury ecommerce.
This article is part of a larger series on Retail Management.
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 is when sellers partner with manufacturers and suppliers to accept orders for their goods without actually having them in stock. This is good for startups and testing new products.
- Conversely, merchants using fulfillment companies hire them to outsource the work of storing, processing, and shipping inventory they own. This is good for growing businesses and well-performing products.
The buying experiences may seem exactly the same to the customer, but behind the scenes, the two methods are very different. Understanding the differences is key to finding the right method for your small business. Here’s an overview of each system.
Dropshipping vs Fulfillment Services Quick Comparison
Dropshipping | Order Fulfillment Services | |
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What is it? | A fulfillment method and business model in which the retailer markets, sells, and accepts orders for inventory that the supplier owns and fulfills | A solution for retailers to outsource the tasks involved in order fulfillment to third-party companies |
Key differences |
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Who is it right for? |
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Recommended solutions | Oberlo is a popular dropshipping solution owned by Shopify, our top-recommended ecommerce platform | ShipBob and Red Stag Fulfillment make our list of best fulfillment companies |
Watch the video below or continue reading for an in-depth look at these two business models:
Process Overviews
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, and 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 that receives a profit. As the retailer in this arrangement, you set the selling prices, so the final margins are up to you.
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 specializing 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, a popular option for small-scale businesses and startups. As the business develops and order volume outgrows available space, labor, and time, handing those duties off to a partner company makes sense.
Key Differences of Dropshipping vs 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.
Here’s a run-down of the most important contrasts between dropshipping and fulfillment companies.
Ownership of Inventory
One of the biggest distinguishing factors between dropshipping and order fulfillment companies is who owns the inventory being sold. Here’s how it works in each ecommerce model:
Operational Control & 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.
Read our guide to opening a Shopify dropshipping store in five easy steps.
Sourcing products to list on your site is where the two methods start to diverge, which leads to differences in the amount of control and reliability each model has:
Relationship With Your Partner Company
The relationship between retailers and dropshippers has a different dynamic than that of retailers and fulfillment companies:
In the dropshipping model, 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.
However, 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.
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.
Since fulfillment companies are hired and paid by the merchants they support, they make it easy to customize and monitor their services (unlike many dropshipping suppliers).
Risk & Impact
Any ecommerce venture requires some level of risk. 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.
Here’s how the risk level differs in each ecommerce model:
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.
| 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 stores—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 it will perform. Dropshipping lets merchants 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: Dropshipping opens the door for retailers that want to start an online store with a nominal investment. Since no capital is required to purchase inventory, it’s a great option for those with minimal financial resources.
| 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 get 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.
Order fulfillment companies are best for:
- Traditional retailers looking to expand online: A retailer’s physical location may be far from their online customer base, which can create problems for their fulfillment process. To offer competitive delivery times and keep their operation cost-effective, they need to have their products stored and shipped from a location near the customer. Order fulfillment companies make this possible without the retailer having to move their own facility.
- Traditional retailers wanting to optimize their time: Hiring fulfillment partners 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.
Frequently Asked Questions (FAQs)
Expand the sections below to get answers to some of your most-asked dropshipping vs fulfillment questions.
Ecommerce refers to the buying and selling of goods (or services) over the internet; dropshipping is a type of ecommerce in which the seller lists, markets, and takes orders for products that are owned and fulfilled by a third-party supplier.
In traditional ecommerce, the seller buys bulk inventory in advance, which is then listed online and shipped to customers after they place their orders. In dropshipping, the seller keeps no inventory on hand, but rather uses their online store to sell products that the manufacturer or supplier owns and ships out.
Dropshipping usually earns lower profit margins than traditional ecommerce, but requires a much smaller startup investment and involves less risk. On the other hand, traditional ecommerce gives the seller more control over their operation and the products they sell.
Selling online through Amazon FBA is typically more profitable than starting a dropshipping operation, but requires a greater investment of time and money to get started. This is because it involves buying inventory in bulk, which is then sold online and shipped to customers from FBA.
FBA is notoriously complex to use: it requires products to adhere to strict packaging and labeling guidelines and racks up a host of extra fees. That being said, it’s still the best way to make high-volume sales on Amazon—the top ecommerce site in the world.
You can sell dropshipped items on Amazon without using FBA by following the company’s dropshipping policy. But keep in mind that shipping speed carries a lot of weight on Amazon, which is already a highly competitive marketplace. If you choose to go this route, try to work with local suppliers and select products with little competition.
Looking for a product that’s profitable and in demand? Read our list of the best products to sell on Amazon.
Dropshipping gives you full control over your selling prices, products, branding, and sales/marketing channels—making it more scalable (and potentially more profitable) than affiliate marketing. However, affiliate marketing is quicker and easier to get started, and requires a smaller investment of time and money. Both ventures have plenty of earning potential in the modern ecommerce landscape.
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 depends on which they choose.
A retailer with the available capital to buy inventory in bulk and wanting to avoid investing in their own warehousing operation would do well partnering with an order fulfillment service—like ShipBob and Red Stag Fulfillment.
On the other hand, a merchant that 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—such as Oberlo.
Ready to begin dropshipping? Check out our guide on how to start a dropshipping business.
