By Jake Rheude
The rise of e-commerce has given entrepreneurs new ways to start and run a business, including multiple techniques for quickly getting orders to customers to keep them happy. Two of the most popular options are drop shipping and working with a third-party logistics provider (3PL).
While these options may appear similar, there are differences in (1) how orders are managed and (2) the amount of work required after the sale. Although control is difficult in an internet-based business, it’s also the core difference between drop shipping and relying on a 3PL.
Drop Shipping Explained
Drop shipping makes sense for businesses whose preference is to run a sales operation without having to worry about the products it sells — or how to make or ship them. With drop shipping, companies don’t own or manage their own inventory: They sell products created and stored by a separate manufacturer. They never handle products — they typically work with a warehouse company or the manufacturer directly to sell their inventory.
The breakdown of the average order for a business that uses drop shipping:
1) It runs an online store
2) A customer visits and buys a product
3) The business receives the customer’s payment
4) The company purchases the product from a wholesaler or manufacturing partner
5) The partner sends the product to the customer.
The internet powers this transaction. Drop-shipping storefronts, which are almost exclusively online, focus on selling across a standard website as well as on social media. Software integrations allow a company and its partners to communicate immediately to customers about product availability and features like tracking numbers, so that customers never see the handoff from sales to shipments from someone else. As far as they’re concerned, the experience all happens within the same logistical silo.
Products available for drop shipping are generally mass-produced. Because a selection of products can be sold in this model, companies pick the right mix for them. Drop-shipping products are rarely exclusives, so businesses are competing based on their ability to find customers, generally through smart marketing and search-engine optimization.
Drop shipping can have relatively low margins for retail, but since a company isn’t paying overhead related to product storage or equipment maintenance, there’s still plenty of room for profit.
Working with a 3PL
A 3PL is designed to support a company and its products: It acts like a warehouse and shipping arm of the company. Unlike with drop shipping, the company has control over the products it sells. A 3PL will ship only the goods that the company — often through its manufacturing partner — sends to its warehouse. When a purchase order is received, the company sends the order information to the 3PL, which gets the product to the customer.
Companies have more control over the order fulfillment process by working with a 3PL. They can access other services that include:
●Tracking inventory levels
●Tracking and management of customer satisfaction metrics, including returns
●Assemblage of products that arrive as components
●Packaging multiple products into a single SKU, or kit, for more versatile selling
●Negotiating better shipping rates with carriers.
Working with a 3PL often is part of a company’s growth plan. Such companies might have started in a garage or small warehouse, filling orders as they came in and growing its brand. Eventually, it becomes too complex or time-consuming to get orders out on time while getting the best deal on shipping rates. So, the company turns to a third party to help manage costs, thus enabling the company to focus on increasing sales and new product lines.
A 3PL workflow and sales process often looks like this:
●The company creates a product or purchases it from a manufacturer or supplier
●That partner delivers the product in bulk to the 3PL warehouse
●The 3PL receives, unpacks and stores the goods, updating inventory levels that the company can also access
●A customer purchases the company’s product on its website or another channel
●The company’s e-commerce or other business management tools send an order to the 3PL
●The 3PL picks and packs the products and readies them for shipping
●The 3PL uses its relationships to find the best possible rate for on-time delivery with a carrier, prints the label and ships the order to the customer.
Companies using 3PLs are paying for warehouse space as well as the labor related to filling orders. However, a 3PL can scale with the company and can store as much product as needed to fill orders. If less space is required, the company can scale down and pay only for the space needed. Plus, shipping is typically faster than with drop shipping.
A Mix Is Possible
One misconception about these two options is that they’re mutually exclusive. But a company generally isn’t limited to a single type of fulfillment.
For example, let’s say Company X is considering introducing a new product to a new market. It wants to know whether the market is receptive, and if it should devote the resources to creating a separate custom product that offers a higher margin. Company X can test this by approaching a Manufacturer A and forging a temporary drop shipping relationship where Manufacturer A is tasked with supplying the new product while Company X handles the marketing end of things. If all goes well, Company X can bring the product into its own lineup, including it on the website next to the drop-shipped item, and using a 3PL to ship it. Eventually, the drop-shipped item can be phased out, with the higher-margin product remaining.
The advantage to combining fulfillment methods is that marketing and sales work done to gain awareness in a new market is not lost. Contacts, sales, customers and other data can be leveraged to give the new branded product its best shot at success.
Drop shipping and working with 3PLs are among the most popular options for e-commerce companies seeking to get their products quickly out the door to customers to keep them happy — while growing their revenue. Which option to choose depends on the company, its products and its business profile.
Jake Rheude is vice president of marketing at Red Stag Fulfillment, a 3PL provider in Knoxville, Tennessee.