How to Start an eCommerce Business | Step 2: Choose a Fulfillment Strategy
Connor Gillivan
I scale companies w/ SEO & content. Daily posts about the process. 7x Founder (Exit in 2019).
Are you ready to choose the best fulfillment strategy for your blossoming eCommerce business? You’ve come to the right place and I’m here to walk you through the 4 main options that you have as an eCommerce business owner.
Before we dive into fulfillment strategies, I encourage you to read Step 1: Choose a Product Niche. In the column, you’ll learn the importance of choosing a product niche that is hyper focused where you can make a real impact on the customer market.
In this column, we’re going to focus on helping you choose the best fulfillment strategy for your eCommerce business. I have been running eCommerce businesses for the past 6 years and have become an expert at the different fulfillment strategy options that are available to business owners.
I’ll describe the 4 main options, provide a real life example, then explain the pros and cons of each fulfillment strategy. By the end of this column, you should be able to make an educated decision on how you will get your product to your customers once an order has been placed through your online store.
How to Choose a Fulfillment Strategy
When starting to choose a fulfillment strategy, you want to look at your options, weigh the pros and cons of each, compare it to your current situation, then decide which will be best for your eCommerce business. As you grow and customers increase, you may decide to change your fulfillment strategy and that is completely okay. There are many eCommerce companies that started with one particular fulfillment strategy and then switched as they reached a particular level of scale.
Amazon’s Fulfillment Strategy Growth
A great example and one that everyone will be familiar with is Amazon. When Amazon started as the ultimate online book store, they were using the drop ship fulfillment strategy to send books to their customers. They partnered with book distributors who were able to ship the book directly to the customer at the time of an order and it allowed Amazon to keep their overhead low.
As the company grew and Jeff Bezos saw the opportunity to sell more books at stronger profit margins, he and the company began to purchase the books in bulk fulfilling them from their office and then eventually from their own warehouses. Fast forward 20 years later and Amazon has their own fulfillment centers all over the world fulfilling all of their products as well as thousands of other online retailers.
Wayfair’s Drop Shipping Commitment
Another prime example is Wayfair.com, a dominant force in the home industry of eCommerce. Since their founding, they have been committed to the drop ship fulfillment strategy partnering with thousands of drop ship manufacturers who can ship their products directly to the customer at the time that an order is placed. Just recently, they went public as a company and reached $1 billion in yearly sales. In their IPO filings, they released that still close to 95% of their fulfillment strategy was through drop shipping. Quite a powerful story to demonstrate the potential of the drop ship fulfillment strategy.
With those back stories as an introduction, let’s jump into the 4 core fulfillment strategies that you can choose for your eCommerce business.
Option 1: Drop shipping
Definition and Example
The drop ship business model is centered around the idea of a “digital inventory,” products which you never touch as the seller/retailer. In this fulfillment strategy, you partner with manufacturers (businesses that make the products) that are able to store and ship the product directly to your customer.
Let’s look at a simple example. You have decided that you want to start an eCommerce business centered around high tech toys. With the drop ship business model, you would form drop ship relationships with the businesses that are making those types of products. You would list their products on your eCommerce store and market it to your community. As you receive orders from customers, you will send the product and customer information to the manufacturer. They will charge you a discounted rate for the product plus shipping charges then ship it to your customer. You are responsible for sending tracking information to the customer and following up with any customer service inquiries.
Pros
Lower investment to start
You don’t have to buy inventory upfront to stock your eCommerce business so it costs much less to get a drop ship business off the ground than traditional wholesale.
No need to worry about storing products
Since your suppliers will be making and storing the products, you don’t need an expensive warehouse or office where you can hold your inventory before it sells. If you stick with the drop ship business model, you’ll never have to worry about storing your products.
Cash flow positive
In drop ship relationships, you get paid by the customer before you pay the supplier for the product. This makes your business cash flow positive eliminating the higher risk of paying for products before they are sold. This can help in keeping the business running for longer and adjusting your inventory to meet customer demand.
Ability to work anywhere
Because you don’t have inventory and there are skilled eCommerce freelancers all over the world, you can work from anywhere that you have Internet.
Carry a large selection
Since you aren’t storing your inventory, you can list as many products as you gain access to. While it may seem tempting to list as many products as you can, you’ll want to stick within your product niche to make the customer experience competitive with other online retailers. Learn about choosing a product niche through Step 1 to Starting an eCommerce Business.
Focus on marketing
With less time and money needed for storing inventory, you can invest more time into marketing your selection to potential customers. Marketing your eCommerce business will be a big task at first as you gain consumer’s trust.
Cons
Lower margins
Drop ship fulfillment relationships tend to offer lower profit margins because the manufacturer is still handling storing and shipping the product to the end customer. In general, you will receive 20-40% off the retail price with drop shipping whereas wholesale relationships will receive 50-70% off retail. Some businesses also incorporate a drop ship fee (to account for the extra labor involved in shipping 1 unit at a time) which lowers your profit margin even more.
Digital inventory management
Even though you don’t have a warehouse of products that you have to manage, you do have the increased risk of selling a product that is out of stock. When running a drop ship business, you must receive regular inventory updates from your suppliers and upload them to your store to make sure that your inventory levels are up to date. If your store starts to sell products that are out of stock too often, customers won’t come back.
Choice of shipping carrier
Working with a group of drop ship suppliers means that you must figure out the best shipping carrier to use through each supplier. They will each have their own preference and it’s up to you to work with them to choose the best for your business as well. This can be a hassle.
Dependence on suppliers
You have to really depend on your supplier to have their operations under control. You may find yourself in a situation where a supplier does not ship quickly or they tend to send the incorrect item. This can be a huge inconvenience for your customer and reflect poorly on your business.
Option 2: Making your own product, storing, and shipping yourself
Definition and Example
This second fulfillment option is greatly dependent upon you as the product maker, storer, and shipper. In this fulfillment strategy, you design, create, and manufacture the product, store it in your own space, then ship it out to customers as they place orders through your eCommerce business. It’s a strategy commonly used by creative people selling handmade products on marketplaces such as Etsy.
Let’s look at a quick example. You love jewelry and you’ve been making your own jewelry for the past 10 years. Your friends, family, and social media followers have expressed that they love your creations so you’ve decided to start an eCommerce business centered around it. You source the string, jewels, and other supplies from a distributor in the United States and you make all of your jewelry in your home. As you receive orders through your online store, you package and ship them to the customer yourself.
Pros
Complete control
You have complete control over the entire eCommerce business from making the products to handling customer service. This puts you in a position where you can offer a unique and personal shopping experience to your visitors.
One of a kind items
People are always looking for new, unique items to buy online. When they find them, they can quickly go viral through social media groups and chats. With a handmade inventory, your items will stand out from the standard products in major online retailers.
Higher profit margins
With little outside expenses, your profit margins should be in the upper 50-70% bracket. This can help to continue to invest in new inventory and staff growth.
Cons
It’s all on you
While it’s a pro that you are in control of the end-to-end process, it’s also a con because it’s so much work to complete on a regular basis. It comes down to whether you should be good at all of the operations or GREAT at one of them.
Limited ability to scale
Since you are the one making all of the inventory and shipping it out to the customers, you can be quite limited to the amount of orders you can take on. Unless you find someone else who can also make the bracelets, you will get stuck at a certain level of orders and revenue.
Unable to take large orders
As mentioned above, you won’t be able to take on bulk orders. Let’s say that a retailer sees your products and loves them so much that they want to order 500 pieces to sell in their store. If you stopped making the jewelry for your eCommerce store to fulfill the large order, your online customers would suffer.
Upfront investment
There is a larger upfront investment to utilizing this fulfillment strategy as you need to purchase the suppliers upfront to make your products. Not quite as large as a traditional wholesale strategy, but still significant.
Option 3: Wholesale purchasing products, storing, and shipping yourself
Definition and Example
A second variation of the wholesale model is purchasing your inventory upfront at wholesale prices, storing it in your own warehouse/office, and shipping it out to customers as you receive orders. This is the most common business model for large eCommerce businesses as it offers the highest profit margins.
Let’s look at an example: ToysRus.com. ToysRus is one of the leading online toy retailers with a large variety of products for sale on their website. ToysRus has a merchandising team the decides on the hottest toys that they want on their eCommerce store on a regular basis. They work with the manufacturer of the product and negotiate the best possible pricing to purchase larger quantities of the product upfront. The manufacturer ships the product to the ToysRus warehouse where it is stored until an order has been placed for it. At the time of an order, ToysRus has a team that picks, packs, and fulfills the product to the customer. ToysRus then handles all customer services afterwards.
Pros
High profit margins
You’re buying products at minimum order quantities so you are receiving higher discounts off the retail price. For investing money upfront, you are rewarded with 50-70% discounts off the retail price.
Control over shipping process
You are in complete control of shipping the product to the customer and don’t have to depend on other suppliers. If you can hire an intelligent team to handle your warehouse operations, you can offer faster shipping and advantageous return policies.
Already established brands
When you are willing to invest money upfront, you are able to gain access to top tier brands that you wouldn’t be able to access through drop ship partnerships. Most of the top brands in each industry only work through wholesale relationships.
Cons
Large upfront investment
As a new company, this option poses the largest upfront investment because you are purchasing the products before you sell them to the customer. It is in your best interest to sell the product as quickly as possible so that you recoup that money and make profits.
High risk
There is much more risk in wholesaling. If you invest $10,000 in your initial inventory, there is the risk that you never sell those products and you are left with a loss.
Competition
By purchasing and selling the top tier brands, you will end up competing with the top tier retailers as well. You’ll really need to differentiate yourself outside of your product selection.