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Dropshipping vs 3PL: A Complete Analysis

You are currently viewing Dropshipping vs 3PL: A Complete Analysis

Often the term ‘dropshipping’ is confused with the 3PL fulfillment process; however, the two differ in terms of the services that each provides and both have distinct eCommerce fulfillment models. While order fulfillment services are outsourced in the case of both these fulfillment procedures, there are major differences in them. While many retailers prefer dropshipping fulfillment owing to some undeniable benefits that come with it, others prefer 3PL fulfillment due to the challenges that closely accompany the former. This article will help you understand the differences between the two fulfillment methods and how 3PLs can help with dropshipping fulfillment.

What is Dropshipping?

In a dropshipping arrangement, the online sellers do not have the resources for purchasing inventory and storing it. Therefore, they run their eCommerce set-up by working to secure customers without purchasing and storing inventory. These online sellers sign contracts with manufacturers to drop ship their products when customers place online orders on their forum. Once the contract has been made, the seller offers the selected products on their online shop, and when customers place orders the seller forwards these to the manufacturer who ships the orders directly to the customers.

In this fulfillment arrangement, the seller handles product marketing and customer support. However, the manufacturer manages the inventory, eCommerce warehousing and logistics on their own, therefore they charge a higher wholesale price per item. This method of eCommerce fulfillment is ideal for sellers who possess marketing and customer management skills but lack the resources required for purchasing and storing inventory. This method is also a great way for sellers to test new products for their sales performance before adding them into their regular inventory, as it involves minimal financial risk.

What is 3PL Fulfillment?

Outsourcing fulfillment services, such as inventory management, monitoring sales performance of SKUs, forecasting customer demand, packaging and shipping orders, etc., to a third-party logistics company is known as 3PL fulfillment. This fulfillment method is suitable for sellers who have the capital to purchase inventory and believe that their inventory will quickly sell out, but do not have the resources for warehousing and logistics.

3PL partnerships enable you to focus on other aspects of your business while the 3rd party company takes care of all the stages of order fulfillment including packing and shipping. In the 3PL fulfillment arrangement, a seller purchases products in bulk and stores their inventory in the 3PL warehouse. The products are then listed online on their preferred marketplace(s), and when customers place orders, the third-party fulfillment company processes, picks, packs, and ships those orders.

What are the Differences Between Dropshipping and 3PL Fulfillment?

While both drop shipping fulfillment and 3PL fulfillment are both methods of order fulfillment that involve outsourcing some operations, there are key differences in both. The two differ in terms of business purpose, inventory ownership and profit margins, order shipment, levels of service, and how they cope with eCommerce challenges.

Business Purpose

One main difference between the two is the business purpose. In a dropshipping arrangement, the seller markets goods owned by the manufacturer, also offers customer support, and in turn, receives an amount per order. The rest of the fulfillment process including inventory management, warehousing, and logistics is the responsibility of the manufacturer.

Meanwhile, in a 3PL fulfillment arrangement the 3rd party logistics company organizes and manages the physical inventory, provides end-to-end eCommerce solutions, allocates warehouse storage, and even offers additional services such as processing and managing returns.

Inventory Ownership and Profit Margins

Drop shippers don’t own the inventory; instead, they forward customer orders received through their sales channels to the manufacturers, who directly ship the order to the customer and pay an amount per order to the drop shipper. On the contrary, owners of 3PL fulfillment companies may choose to pay upfront for the inventory and get its ownership before selling it to the end customers. This way they can earn higher profit margins than drop shippers, as they get to buy the product for lower upfront costs.

Order Shipment

In a dropshipping arrangement, orders placed at the store are received and forwarded by the drop shippers to the manufacturers or distributors who directly ship individual orders to your customers. While in 3PL fulfillment, the third-party logistics pack and ship orders from the fulfillment warehouse to your customers.

Levels of Service

Drop shippers do not specialize in fulfillment services and their role is limited to product marketing and customer support, therefore the level of service offered by them is restricted to just these domains. On the contrary, third-party fulfillment providers are mostly experts in eCommerce fulfillment processing, including customer service and returns management. Most 3PLs specialize in packing and shipping and provide you with cost-effective and efficient eCommerce solutions.

Coping with eCommerce Challenges

Dropshipping works best for sellers who possess marketing and customer management skills but lack the funds and infrastructure required for purchasing and managing inventory. It is also a great fulfillment method for sellers looking to test the sales performance of new products with minimal financial risk. Meanwhile, partnering with a 3PL provider is a better choice for mature and already well-established eCommerce businesses that have the capital required for outsourcing eCommerce fulfillment activities to a 3rd party logistics. 3PL specialists streamline processes creating leaner supply chains and reducing shipping costs.

Since 3PL companies are mostly experts in the entire process of eCommerce fulfillment, unlike drop shipping companies who solely market products and deal with customer support, therefore 3PLs can even streamline dropshipping fulfillment. Contact ShipBots to learn more about how we can support your dropshipping business, and get a custom fulfillment quote here.