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Merchant Fulfillment vs. Third-party Fulfillment vs. Dropshipping: Which Should You Choose for Your Ecommerce Business

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There aren’t many eCommerce sellers who are passionate about back-end operations. It’s just not why people typically get into the game. But you can’t win a Super Bowl without a stellar front office. The decisions you make on the back end will inevitably impact your sales. This is especially true when it comes to fulfillment, the process through which customers receive orders made online.

Merchant Fulfillment vs Third-party Fulfillment vs Dropshipping

Picking an efficient and scalable fulfillment strategy is a lot like choosing a good mechanic: everyone notices how flashy your car looks, but if things are a mess under the hood, you won’t get very far. Each fulfillment method comes with its own quirks and kinks that have to be worked out. By being informed about your options, you can minimize the risk of costly mistakes and lost sales that come from poor supply chain management. Here’s what you should know about each form of fulfillment.

Merchant Fulfillment

I have a friend who recently started his own business selling accessories related to skateboard culture. His supply chain is pretty simple. He creates the designs himself, bulk orders products, and stores them in his own home and a small storage unit. When a customer makes an order through Amazon, eBay, or his Shopify store, he ships the item himself through USPS. This is an example of merchant fulfillment. Literally, it means the merchant handles every aspect of the fulfillment process.

This method has a few key benefits. The direct control over inventory allows the merchant to more quickly resolve errors. There’s no middleman communication to deal with. The merchant won’t end up getting blamed for mistakes outside of their control, as is a possibility with 3PL and 3PF services. However, if you want to make any significant money, merchant fulfillment requires a large initial investment. At larger volumes, you’ll need to rent or purchase a warehouse.

The process of shipping your own orders is also not scalable. You’ll eventually need to establish a way to ship more orders, and ship faster. For enterprise businesses, this kind of investment in money, time, and expertise is to be expected. For new or lean eCommerce businesses, merchant fulfillment may be fine for the very beginning but is unlikely to be a sustainable solution that accommodates growth.

Third-party Fulfillment

Third-party fulfillment is a process by which a merchant pays a monthly fee plus other handling fees to a business that specializes in storage and fulfillment. These services often brand themselves as experts in fulfillment who can take a huge weight off the shoulders of eCommerce sellers by housing their inventory and dealing with shipping, allowing sellers to focus on the reasons they actually got into the business. Amazon’s fulfillment service, Fulfillment by Amazon, is perhaps the most well-known of these services.

Outsourcing your fulfillment to a company with a pre-made infrastructure for fulfillment allows you to carry a larger or more varied catalog than merchant fulfillment. However, the fees can often be so high that it eats away at any profits you’d have from the extra sales. Some services add fees just about anywhere they can, and fees can fluctuate throughout the year with little warning.

You’ll also become a middleman in your own business. If an item is damaged during the fulfillment process, the customer will expect you to deal with it, but you’d have to contact your fulfillment service for an explanation. That’ll slow down the returns and refunds policies you have in place. Customers often say that a quick and easy returns policy is a major factor in whether or not they’ll return to an online store for another purchase. The resulting dip in feedback ratings will make conversion more difficult in the future. If you choose third-party fulfillment, make sure they’ve got great customer service and prompt account managers.

Dropshipping

Dropshipping is the entryway many new eCommerce sellers are most attracted to. It’s a fulfillment process where a supplier manufactures, houses, and ships orders. The merchant is responsible for listing and marketing the products, many times under their own brand. When an order is received, the seller forwards it to the supplier, who charges the seller a wholesale price for the item then fulfills the order.

What makes dropshipping such a draw for new sellers is the low investment it requires, both financially and in expertise. The seller never handles the inventory directly and with the right automated dropshipping software, they don’t even have to handle forwarding orders to their supplier or tracking info to their customers. In addition, the freedom to work with multiple suppliers allows savvy sellers to list only the most profitable products within multiple niches.

But dropshipping isn’t as simple of a get rich quick scheme as some try to make it seem. It takes a degree of skill. Because suppliers will work with just about any seller, profit margins are often razor thin, sometimes less than one cent per sale for certain items like phone and laptop chargers. Sellers need to generate a great deal of sales in order to make a significant profit on those items. With competition high, this may prove tough to do. Plus, just as in other forms of third-party fulfillment, you’ll become a middleman in your own business. It’ll take most sellers some trial and error to find their dropshipping sweet spot.

So that’s your guide to fulfillment methods. Fulfillment is a hugely important part of the back-end and supply chain strategy for eCommerce businesses. The learning curve is often so high that new sellers are caught off guard. That’s why being fully informed is so vital. Eliminate mistakes before they occur and choose the best fulfillment for your unique needs. Which did you choose for your business and why? Share below!

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About the Author

Dion Beary

Dion Beary writes about eCommerce for ecomdash, an eCommerce automation software system. He has more pairs of Chuck Taylors than any one person needs.

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