For the processing of orders and the management of your stock, there are roughly 3 options:
1 - You manage your own stock and ship the orders to customers yourself.
2 - You have your own stock, but leave it managed by a third party. This party also packs and ships orders for you: We call that 'fulfilment'.
3 - And the most far-reaching solution: You don't have your own stock, but show the stock of a partner in your web store. Orders you receive are forwarded to this partner. The partner picks up the ordered item from his own stock and ships it under your company name to the customer: This is called 'dropshipping'.
In this article we will explain what the pros and cons of dropshipping and fulfilment are, compared to each other and compared to managing everything in-house.
In case of fulfilment, the online business owner enters into an agreement with a logistics service provider and moves his own stock to the warehouse of this company. The business owner remains responsible for the purchase and composition of the stock, just as it would be with his/her own warehouse. The big difference lies in the fact that from now on the web store will automatically send the orders (usually via an API) to the fulfilment company. Here the ordered products are then taken from the warehouse, packed and shipped to the supplied delivery address.
The fulfilment company uses your own packing material and adds your packing slip, so that a customer won't know that you have outsourced this part of your business process. After shipment you will receive a track & trace through your API with the fulfilment company. This link you can share with your customer (often again automatically).
Fulfilment therefore saves you a lot of time packing and shipping. And in our experience fulfilment is not expensive for small and medium-sized web stores, because you can benefit from the lower shipping rates that fulfilment companies receive from shipping companies. As an indication: From a minimum monthly amount of 75-100 pound/euro/dollar you can already make use of a fulfilment solution. In many cases you will directly save money through a fulfilment company compared to doing everything in-house. (In addition, you can only go to the post office until closing time and fulfilment companies have better opening hours).
So if you are acquiring an online business that still has the order handling and stock in-house, then it is certainly an idea review the options of fulfilment. We have good experiences with various fulfilment companies that we could bring you into contact with.
Dropshipping takes outsourcing a step further than fulfilment: in this type of cooperation you no longer have your own stock. Your risk decreases considerably, so at first glance this seems like a smart concept. Comparable to fulfilment, your web store is linked to your partner's systems. But in this case you show the (current) stock of the dropship partner in your shop. Orders that come in will be forwarded and handled by the dropshipper under your company name, which is also comparable to fulfilment.
In practice, the dropshipment partners are often wholesalers. In the past they sold their products to web stores in the traditional way and by offering a dropshipping solution, they reduced the barriers for online businesses to get started. In addition to the absence of stock risk, dropshipping often also has a cash flow advantage: At the moment a customer orders from you, the customer usually pays at the same moment , but you only afterwards settle with the dropshipper.
On the other hand, you may assume that these advantages have a lower margin as result for the business owner. Whether dropshipping is an interesting alternative must be thoroughly calculated. Another disadvantage is that your assortment will not be unique, because the dropshipment partner probably supplies to competing online businesses as well. This will gives an additional pressure on the margin. In practice, for these reasons you will often see that a start-up will make use of dropshipping in the first period. At the moment that he/she better understands the market and the business, a move to a fulfilment solution or doing everything in-house is often seen.
There currently are 10.000's of small and large companies in Europe that offer themselves as a dropshipment partner, where one has arranged its processes better for this process than others. It therefore is worthwhile to make a thorough investigation before you acquire an online business!
A recent phenomenon is the cooperation of many small web stores (often quickly set up based on hosted web store software) with Chinese web stores/platforms such as AliExpress. The dropshipping principle works the same here: as a web store owner, you maintain customer contact and the sales take place via your web store. You give the order to the Chinese dropshipping partner. Please note that the orders through this construction cannot be delivered within 24 hours but will take at least 3-7 working days. Depending on which Chinese web store you work with, this can increase even further.
In practice, there are quite a few complaints about these Chinese dropshipping web stores, so be careful what you take over. It is slightly more difficult to coordinate something with Chinese dropshipment partners than with a Dutch wholesaler who offers a dropshipment solution.
An additional disadvantage is that the Chinese web stores most likely offer the products you sell in your web store through their own web store. Your customers can of course also see this (provided that they know the Chinese web store) and thus quickly find out your margin. In our opinion, this is a model with a relatively short horizon.
Also make sure that the products you sell are safe! As the seller of the non-European products in the Netherlands, you are responsible for the quality of the products your dropshipping partner sends from Asia.
An advantage is that there are hosted web store software providers (such as Shopify) that already offer complete apps with which you can have a web store filled with products from a Chinese platform such as AliExpress within seconds. So, in theory it is possible to be 'in business' very quickly.
In summary, dropshipping is a logistical solution that allows you to start an online store without keeping stock and without having to ship products (or process returns) yourself. We will briefly summarize the advantages and disadvantages:
Advantages of dropshipping
1. No inventory risk: store daughters, poorly selling products but also the risk of fire or theft, these risks all lie with the partner.
2. You do not need to organize the processing of orders such as packing, shipping and inventory management. This saves time and possibly personnel costs.
3. No own stock means that you do not have to rent your own warehouse. This definitely saves on costs.
4. No stock also means that you can get by with less working capital (money that is actually 'stuck' in your stock and which is required to be able to run your business).
5. Normally it takes a while for a web store to fine tune the composition of its assortment. In the case of dropshipping you can use the knowledge of a partner with years of experience in the industry.
6. It is easy and cheap to carry large assortments and thus serve many customers.
1. Your assortment is almost never unique through this solution. Wholesalers will not only offer products to you but also to other resellers. This puts pressure on the margins you can make.
2. The dropshipping partner is invisible to the customer. As a seller you are responsible for a good sale of the shipment, but also for the warranty on the products. Of course there are agreements to be made with (Dutch) dropshipping partners, but the reputation damage in case of errors lies with you. An active relationship management is therefore recommended.
3. There is a price tag to outsourcing. Everyone in this chain wants to earn a living and especially with a generic and not unique assortment it is not easy to make a healthy margin.
4. Are you working with non-European suppliers? Then remember that you are liable for the products they supply and which you actually import into the EU.
5. The fact that you do not have to manage the stock yourself also means that you cannot control it. If the dropshipping partner does not keep the stock up to date, you may end up selling products that are not available. If this happens more often it can be very frustrating for you as a web store owner (and expensive).
Dropshipping is an approachable way to start online business. As we have elaborated in this article, there are without a doubt advantages, but also serious disadvantages. In our experience dropshipping is a great way to start in a market, but it is important after the first years and sufficient turnover to really look at own inventory management (whether or not through fulfillment) with a unique range where also there is less price pressure.