It should come as no surprise that everyone, from million-dollar businesses to solo entrepreneurs, experiences trial and error when it comes to choosing a fulfillment strategy. While some ecommerce businesses share similar marketing strategies, each online store requires a unique logistics solution. As industry experts, we often get questions from clients about the difference between dropshipping and third-party fulfillment. In fact, EcommOps still gets asked if we’re dropshipping agents (since that’s how we got started). We’ve shifted our focus entirely to third-party fulfillment, and while it’s similar to dropshipping, there are huge differences between the two.
In this article, we’ll talk about the difference between dropshipping and third-party fulfillment, and how businesses can choose between them to create the right fulfillment strategy to meet their goals.
What is Dropshipping?
Dropshipping describes a fulfillment model where a business takes customer orders without having inventory stored on-site in a warehouse. Instead, customer orders are forwarded straight to the manufacturer, and they make and fulfill orders directly to customers.
Dropshipping fulfillment operations can vary. They can be as simple as what we just described, or they can include a middle-man, often called a dropshipping agent. The agent helps edge dropshipping fulfillment closer to a legitimate supply chain, as they may help find better factories, or they may help prepare orders for fulfillment (like providing superior packaging).
What is Third-Party Fulfillment?
Third-party fulfillment (often described as 3PL), describes a third-party business that takes total responsibility for order fulfillment on behalf of a company. Not only do they handle fulfilling incoming orders, but they’ll also have a warehouse that stores inventory and will manage the back-end tech involved with order fulfillment.
What is China Fulfillment?
When you’re looking at third-party fulfillment, you may also see the term “China fulfillment” commonly used. China fulfillment is third-party fulfillment, but the location of the fulfillment warehouse is located in China. A third-party fulfillment provider can only offer China fulfillment if orders are being fulfilled from China.
Businesses that already source products from China factories often look to China fulfillment for a more flexible, resilient supply chain.
Why Would a Business Choose Dropshipping?
Dropshipping has largely fallen out of style since the pandemic, but there are a few reasons that a company may choose to use dropshipping as a fulfillment method:
The Business is Brand-New (or otherwise needs lower costs)
Getting a dropshipping store started is very inexpensive. Since you don’t carry inventory, there’s no need to invest a large amount in inventory up-front. You also won’t have warehouse fees, since inventory is never stored (it goes straight from the factory to the customer).
You Don’t Have Much Time to Manage Your Online Store
Small-time dropshipping stores don’t require the same amount of time as larger e-commerce stores. If you’re interested in running a small store as a side-hustle and aren’t sure if you want to branch into full-time e-commerce, then a dropshipping store is a low-risk, easy way to see if you enjoy it.
Demand is Unknown for a New Product
You may want to test a product that is brand-new, or a product that is brand-new to a specific market. If so, then dropshipping might be a good way to test it, since it allows you to get the product to market without needing to invest heavily in inventory.
There are some alternatives to testing a product with similarly low-risks without some of the drawbacks of dropshipping, which we’ll touch on a little later in this article.
What Are the Drawbacks to Dropshipping?
Dropshipping always had drawbacks, but a lot of them were highlighted when supply chains got disrupted during the COVID-19 pandemic. Let’s take a closer look at the downsides of dropshipping:
Inconsistent Fulfillment Times
Businesses will have very little control over how quickly orders are shipped to customers when using dropshipping. Traditionally, dropshipping took advantage of ePacket, but that service relies on consumer airlines (since it was developed for mail delivery, not e-commerce), so if consumer airlines get disrupted, then so will your shipping times.
During the COVID lockdowns, consumer air travel bottomed out, which meant the shipping times for dropshipping via ePacket were unreliable and extremely long. Many online platforms simply stopped offering ePacket as a delivery option, since there wasn’t a guarantee that packages would ever ship or arrive at their destinations.
More developed dropshipping fulfillment models may include legitimate e-commerce delivery (like through a reputable provider like Yun Express), but businesses who scale to the point of needing a real, dedicated e-commerce delivery service likely need to transition away from dropshipping anyway.
Low Margins
While the upfront pricing to start a dropshipping store is low, the per-unit pricing you get on products will be high. This is why you tend to only see certain kinds of products being dropshipped (generally items that are light-weight and easy to pack), since the margins are going to be razor-thin.
This has always been a challenge, but since ePacket had to raise its rates in 2020, that makes margins even thinner for businesses exclusively relying on dropshipping.
Quality Control Issues
Dropshippers generally don’t have established relationships with factories. The products being sold are already made by the factories, so the dropshipper is just making order requests for an existing product. That means if there are product quality issues, it will be a challenge for the dropshipper to address this with the factory.
This is especially true for small-time stores that the factory doesn’t see as a serious customer. If businesses want the sway to address product quality issues, then following a dropshipping model likely won’t yield the desired results.
Limited Product Selection
When you run a dropshipping store, you’re not selling a unique, novel product. It may be a product new to a specific market, but it’s going to be an item that a factory already makes. That’s going to limit your product selection, since you’ll be restricted to generic products.
Branding and Packaging Difficulties
Dropshippers have very limited control of the product they sell, which is a big problem for businesses looking to establish a reputable brand. Some problems that are specific to branding difficulties include:
- Difficulty with branding packaging (like adding logos or working with suppliers to use high-quality boxes or bags)
- Problems with product iterations (improving a product requires working directly with a factory to discuss designs, costs, and timelines, which is usually not available to dropshippers).
- And as we already discussed, inconsistent fulfillment times, low margins, quality control issues, and limited product selections will also make it hard to establish a reputable brand.
Why Should a Business Choose Third-Party Fulfillment?
There are a lot of reasons a business would choose third-party fulfillment as their overall fulfillment strategy. If a business already sources products from China, then these reasons are also strong reasons to partner with a China fulfillment partner.
Better Margins and Lower Inventory Risk
Since you buy inventory upfront with third-party fulfillment, you end up getting a better price on your products, which means your margins improve. Keep in mind that you don’t have to buy months of inventory in advance with third-party fulfillment (for example, if you’re using direct-to-consumer (DTC) China fulfillment, you only need days or weeks of inventory).
Consistent Fulfillment Times
Order fulfillment is one of the key offerings third-party fulfillment providers offer, so it makes sense that consistent fulfillment times are a key reason to choose third-party fulfillment. Working with a provider makes shipping times far more consistent, which is crucial to creating a positive customer experience that will encourage repeat business.
Better Quality Control
When you use third-party fulfillment, your business will usually have a direct relationship with the factory (which some third-party fulfillment providers will help facilitate, like EcommOps). Dealing directly with your factory means it’s easier to hold factories accountable to quality control standards, and it’s easier to work together to find solutions to quality issues.
Broader Product Selection
With third-party fulfillment, your business won’t be constrained to generic products that are already in production. Instead, you can work with a factory to customize generic products, create brand-new products, or to create an iteration of a product you already partner with the factory to sell.
High-Quality Packaging and Easier Branding
A third party fulfillment provider can make it a lot easier to develop high-quality packaging that reinforces the overall trustworthiness of your brand. The packaging may also help address quality issues (for example, if you’ve received customer feedback that products are commonly damaged during shipping).
Opens the Door to Scaling Growth
It’sA third-party fulfillment provider can be positioned to scale with your business as demand grows for your product. Keep in mind that this is not true of all providers, so if scaling is goal for your business, then you’ll need to make sure your fulfillment provider:
- Has warehouse space to accommodate more inventory storage as you buy more to meet demand
- Understands how to provide services to help make scaling a success
- Has the technological know-how to integrate into your sales systems to help coordinate fulfillment and inventory management
Is Dropshipping or Third-Party Fulfillment the Better Choice?
The answer to this question will depend on what kind of business you want to run and what your business goals are. In general, a business may choose to pursue a dropshipping model if:
- They are brand-new and just don’t have the resources to pay for inventory, warehousing, and fulfillment services
- The business owner is running the online store as a side-hustle and doesn’t have the time (or doesn’t plan) to scale up their operations into a full-time operation
- Demand for a product is unknown and a business wants to test a product with low risk
A business may opt to partner with a third-party fulfillment provider if:
- Demand for a product is proven to the point where it makes sense to buy inventory and store it in a warehouse for fulfillment
- Product quality has become a concern, and the business wants the opportunity to have a direct say in quality control
- A business feels it’s time for a product iteration (based on demand and customer feedback for a winning product)
- Demand is growing and a business is ready to start scaling operations
- The customer experience needs to be improved (for example, through better shipping times or through higher-quality packaging).
In short, new businesses with limited resources may decide to start with dropshipping, while established businesses that have winning products may decide to choose third-party fulfillment for sustained growth.
EcommOps: Premier Leader in China Third-Party Fulfillment
If demand for your products is growing, and you’re serious about growing your business sustainably, then it’s likely time to consider partnering with a third-party fulfillment provider. If you already partner (or plan to partner) with China factories, then we would love to talk to you about the unique advantages EcommOps offers to our clients, like:
- Offices in the United States and Shenzhen, China
- Bilingual English/Mandarin support
- Warehousing
- Full-suite of fulfillment services, including factory management, inventory management, and order fulfillment services.
To get in touch, you can fill out our online form, and the experts at EcommOps will be in touch to create a fulfillment strategy that’s the perfect fit for your business.
Dropshipping vs Third-Party Fulfillment FAQs
1. Does dropshipping work in 2023?
There are still legitimate uses for dropshipping in 2023, but there are challenges to dropshipping that make it very difficult to scale a business with that fulfillment model. First, the COVID lockdowns showed the weaknesses of dropshipping (especially exploiting ePacket for cheap shipping rates).
Next, in 2018, the United States Postal Service established new, higher rates for incoming international packages. This eliminated the “cheap shipping” advantage that ePacket offered for dropshipping, which encouraged businesses to begin looking for an alternative shipping method.
Any more, businesses that are serious about growing and scaling their business will look to third-party fulfillment to help get products from China to international customers in cost-effective ways.
2. Why did dropshipping collapse in 2020?
There were two major factors that hurt dropshipping in 2020. First, international postal rates were raised in 2018 by the United States Postal Service, which eliminated the super cheap shipping dropshippers were taking advantage of.
Next, when consumer air travel greatly reduced during the COVID lockdowns, ePacket was directly impacted. The reason is because ePacket is delivered via consumer airlines, so when consumer flights were reduced, the shipping time for ePacket exploded. Some online ecommerce platforms just stopped offering ePacket altogether, which further harmed dropshipping.
3. Is dropshipping or third-party fulfillment better for scaling?
Third-party fulfillment is better for scaling a business. The reasons are because third-party fulfillment:
- Requires investing in inventory, which is important to keeping up with high demand while keeping product costs down.
- Uses a warehouse, where inventory can be stored while demand waxes and wanes.
- Offers a variety of fulfillment services to help improve the customer experience.
- Keeps fulfillment times consistent so proper customer expectations can be set.1
