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Order fulfilment versus drop shipping on eBay

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Introduction

If you are selling on eBay, one of the most important decisions you have to make is what are the best ways to store and ship your product. There are three basic choices – in-house fulfilment, outsourced fulfilment and drop shipping though all, in reality, are forms of order fulfilment, which, in simple terms, can be described as the steps involved in receiving, processing and delivering orders to end customers.

Before deciding which one is best for your eBay business, a side-by-side comparison will help outline the pros and cons of the competing methods.

In-house fulfilment

With this method of order fulfilment, the retailer is responsible for sourcing the inventory themselves, storing it their own warehouse, storage space, or even home, and then shipping it to their customers themselves. It is a viable option for new e-retailers shipping less than 100 orders a month since product variety is limited and the соnѕumеr bаѕе will be rеlаtivеlу small.

However, in-house fulfilment does tаkе time аnd requires lоgiѕtiсаl ѕuрроrt аnd an еѕtаbliѕhеd frаmеwоrk. Evеntuаllу, as thе оnlinе vеnturе grоwѕ in ѕizе аnd orders ѕtаrt rolling in, if thе business cannot handle thе inсоming product demands, the ѕеllеr will need to outsource fulfillment.

Outsourced Fulfillment

Outѕоurсеd fulfillment entails handing the packaging аnd dеlivеrу rеѕроnѕibilitу оvеr tо a third раrtу. That company ѕtоrеѕ рrоduсt for thе оnlinе rеtаil ѕtоrе, then picks. packs and ships orders according to thе infоrmаtiоn and specifications provided bу thе е-rеtаilеr.

Outsourcing dеlivеrу аnd расkаging аllоws a lot of room for еxраnѕiоn. Because a fulfillment centre specialises in logistics and shipping, the rеtаilеr саn use the time and energy saved to еxраnd product vаriеtу and marketing tactics.

In addition, third раrtу lоgiѕtiс соmраniеѕ also have more storage space. This mеаnѕ the e-rеtаilеr hаѕ nearly unlimited орроrtunitу tо еxраnd the company’s рrоduсt linе without having to worry about expanding their current operation.

 Drop shipping

Drop shipping is an order fulfilment method where a store or retailer does not keep the products it sells in stock. Instead, when a store sells a product, it purchases the item from a third party and has it shipped directly to the customer. As a result, the merchant never sees or handles the product. With this methodology, the  merchant purchases inventory as needed from a third party – usually a wholesaler or manufacturer – to fulfil orders.

The advantages and disadvantages of each

In-house fulfilment

Advantages:

Establishes buyer trust. Buyers want to feel as if someone is taking personal responsibility for their order. Fulfilling orders yourself helps establish this.

Easier to resolve shipping errors. Instead of having to communicate with a third party, you can resolve any fulfilment errors without having to play middleman.

More control. You are responsible for your own product and know for sure if you are running low on stock.

Drawbacks:

Higher overhead: The merchant is responsible for  selling, promotion, supply chain management, inventory management, shipping solutions, and customer service.  That means additional costs and potentially labour expenses.

Requires larger initial investment. You will have to buy wholesale inventory upfront as well as create an infrastructure for storage and shipping.

The process is not scalable: Unless you want to invest in a warehouse of your own, merchant fulfilment is not a scalable model

Drop Shipping Concept Icon Flat Style

Outsourced Fulfilment

Advantages:

Extensive infrastructure: Third-party Fulfilment services have an extensive infrastructure set-up to handle shipping and storage which an individual business cannot hope to match.

Volume: Third-party fulfilment services can house a lot more inventory than you can. This allows you to sell more without space becoming a ceiling. Third-party fulfilment is more scalable than merchant fulfilment.

 Drawbacks:

Competition with the Third Party Fulfilment Service: Some order fulfilment companies also stock and sell their own goods. Since these business tend to be large national, or, in some cases, international companies, when they buy stock of a certain item they generally get the lowest wholesale rate possible, which can sometimes mean that they can sell the item on eBay at lower margins than you could comfortably bear.

High fees: In some cases, it is actually cheaper to ship your product on your own than to pay the third-party  fees.

Middleman: If there are any errors in fulfilment, you become a middleman between your customer and the fulfilment service. The resulting delays in resolving the issue can lead to lower seller ratings.

Drop shipping:

Advantages:

Low initial cost: Listing fees for marketplaces and hosting fees for your website are basically the only initial costs you will pay to potentially start selling dozens, or even hundreds of items.

Low risk: When holding on to inventory, there is a lot of pressure for a retailer to move all of it. Unsold products are money lost for the seller. The pressure of this risk can cause delays in changing inventory and updating the online store. With drop shipping, the risk factor is eliminated—you only pay for what you sell. Retailers are free to change their inventory at will and keep their store aligned with customers’ demands.

Product diversity: Anything can be drop shipped. Since volume is no problem, you can sell a diverse catalogue of products.

Reduced overhead In addition to being a burden to manage, inventory can get expensive. Most retailers stock up on inventory in large quantities to get the best price and maximize their profit. These large sums of up-front cash can start to weigh on a business’s bank account. With drop shipping, you can find more productive ways to use the cash that would have been set aside for expensive stock purchases.

Drawbacks:

Less control: When you hand over the shipping process to a third party, you have to let go of some control.  If the drop shipper makes an error and leaves your customer displeased, that reflects on your business.

Middleman: The merchant can find themselves acting as middleman when customer service issues arise.

More competition: Your drop shipper is working with lots of sellers. You are competing for sales against people selling the exact same item as you at the exact same cost. That makes it hard to stand out.

Thin profit margins: Because the drop shipper handles so much of the overhead, profit margins are very thin. This means that drop shipping is essentially a volume play – you have to sell in sufficient quantities to make any money using this method.

Parachute drop shipping

Which is best for your eBay business?

It is impossible to give a hard and fast rule as to which is the optimal means of order fulfilment for your business, as it depends on what you are selling, to whom, and in what quantities.

To a great extent, the number of  orders you receive, the suppliers you use and the products you sell will determine your options for order fulfilment and drop shipping. Whilst in-house fulfilment many be an option when you are starting out on eBay, in reality, once your business starts to grow to any sort of size, it is not a viable alternative for most sellers, particularly those working from home. Therefore, it is really a choice between outsourced fulfilment and drop shipping.

Here are some factors to bear in mind.

Consider your products and suppliers

Merchants often make use of more than one distributor or manufacturer, but not all will drop ship orders directly to the customers. For this reason, you may find that drop shipping all of your orders is simply not an option, or that you have fewer options when it comes to worthwhile suppliers. Similarly, depending on your needs or products, not all fulfilment providers will be suitable for your business. For example, if you sell products that require preservation, some fulfilment companies would not be able to house your inventory.

Consider your customers

Where are your customers located? Are many of them grouped in a certain part of the country, or are the geographically dispersed or spread across several international, markets?

Customer location is another significant concern when you think about your fulfilment options. Preferably, you want your fulfilment house or drop shipper to be as close to your customers as possible. If your supplier is in one part of the country and most of your customers in another, it may be more sensible and cost effective to find a fulfilment house that is closer to your customers.

Consider your margins

Always consider your profit margins. There are many additional charges or fees you have to pay in order fulfilment for inventory storage. On the other hand, drop shipping lets you manage virtual storage and keeps you away from the hassles of managing a huge inventory. Only in some cases, sellers pay manufacturers such a big retail amount to drop ship their orders that their profit margins become wafer thin.

To determine whether outsourced order fulfilment or drop shipping will yield greater margins for your business, look into your total average cost per order. When doing so, make certain to factor in any overheads, such as facilities and labour in the case of in-house fulfilment, as well as inventory costs, production costs, shipping expenses and fulfilment fees.

Conclusion

When it comes to order fulfilment on eBay, there is no universal answer to which is the best method – in-house fulfilment, outsourced fulfilment or drop shipping. All have their own pros and cons, although, in most cases, in-house fulfilment ceases to be a realistic option for most when the volume of business they are handling exceeds a certain point.

It may even be that a combination of outsourced fulfilment and drop shipping works best so, consider your business, your eBay customers and their needs, and then decide accordingly.