This is part three in a series about how to start an eCommerce business: Answering the Five Fundamental Questions. In the first two posts, we discussed both how to decide what to sell and how to produce your product. Today’s post answers the question: How Will I Deliver my Product to My Customers?
To review, here are the five fundamental questions that we’re covering in this blog series:
- What product should I sell?
- How will I produce my product?
- (This Post) – How will I deliver my product to my customers?
- Who is my ideal customer?
- Digital Marketing 101: How do I convince my ideal customer to become a repeat buyer and brand evangelist?
Interested in taking a deep dive into the 5 questions? Check out our book on Amazon!
Every e-commerce entrepreneur must, whether they know it or not, answer all 5 questions before launching their business. It is standard practice to have multiple product ideas in the running until you’ve answered all 5 questions. Once you’re done, you will have a skeleton of a business plan for each idea, and it will be clear to you which one you should turn into a reality. That’s the beauty of the 5 fundamental question framework!
So, if you’ve been following along with our previous posts, you will have a list of potential product ideas that fall within markets you understand very well. You have a good idea of how you can produce your product so you actually have something to sell.
Maybe you were just searching around Google and found this post because you are trying to figure out a daunting piece of your business: logistics. I’m talking about managing the processes of inventory storage, product preparation, and delivery to your customers. We’ll tackle all of that and more in this post.
So, on to the question you’ve been asking…
How will you deliver your product to your customers?
In previous posts, we wrote about 2 categories of products: “information products” and “physical products.” For information products (courses, consulting, and coaching), it is very easy. You will deliver your products, well, digitally (usually over email). I won’t spend time on those in this post. We will, however, cover the marketing of information products in a subsequent post.
Now, for physical products, product delivery is an entirely different beast. This beast has a name. It’s name is Order Fulfillment.
Order Fulfillment, one component of the broader topic of Logistics, is the process involved from the time a customer places an order to the time it arrives on their doorstep.
Order Fulfillment is of massive importance. I think this topic scares people a bit. Who wants to talk about, research, and carry out a plan for *logistics*…?
Impact of Choosing the Right Fulfillment Model
Picking a Fulfillment Model is a critical component to every business. The ramifications of this decision will in some cases determine:
- What marketplace your business will use to sell products
- Where you will find a manufacturer
- How much work it will take to set up your store
- Your plan for customer service
If done right, your fulfillment strategy can be a major differentiator and give you a leg up on your competition. If a misstep is made, it can spell disaster for your e-commerce business in the form of lost products, unnecessary fees, ballooning expenses, and dissatisfied customers.
Let’s make sure that doesn’t happen. We’ll now take a look at the most common answers to the question: “how will I deliver my product to my customers?”
The Most Popular E-Commerce Fulfillment Models
In the world of e-commerce, there are many ways to handle order fulfillment. However, there are really only a few mega-popular fulfillment models. The majority of e-commerce ventures use one of the following four options:
- Seller Fulfilled
- Fulfillment by Amazon
- 3PL Fulfillment
Let’s spend some time now to define each of these models. I’ll provide you with an overview of how they work, the benefits, and downsides of each. By the time you are done, you will know exactly how to answer the question: “How will I deliver my product to my customers?”
That’s a promise!
Model #1: Seller Fulfilled
What is it?
With a Seller-Fulfilled model, you, the owner and operator of the business, store inventory in your own home and manually ship out each order (via FedEx, UPS, or USPS).
Some people prefer to start with seller-fulfilled in order to cut costs and get proof of concept that their business is a viable idea. In all cases, if the business is successful, the owner ends up outsourcing their order fulfillment to a third party.
I ONLY recommend starting with a Seller Fulfilled model in very limited cases. For example, if you are launching a handmade products business through a platform like Etsy, then seller-fulfilled may be your best bet to get started. If that’s you, then I recommend taking advantage of the discounted shipping labels that Etsy provides and don’t stress too much about it. Remember, you’re only doing this to get proof of concept before switching to another fulfillment model.
That’s because, ultimately, the Seller-Fulfilled model does not scale. In order to succeed with e-commerce, you will likely need to be selling 10s or even 100s of products every single day. Do you really want to manually box up and ship out hundreds of products every day?
Of course not.
So, if you’re asking “how will I deliver my product to my customers?”…Seller Fulfilled is most likely not the answer.
For most beginners, I recommend something else, like…
Model #2: Fulfillment by Amazon
What is it?
With Amazon FBA, you order inventory in bulk and send your products to an Amazon FBA warehouse. Amazon then delivers your products to your customers via Amazon Prime 2-Day (or, next day) Shipping.
Fulfillment by Amazon, or FBA, is an extremely popular business model. And for good reason: with FBA, you are able to list a product on the website of the world’s largest e-commerce retailer – Amazon. Many people don’t know this, but Amazon is made up of over 2 million third-party sellers. Over half of Amazon’s sales come through third party sellers (that’s well over $100B per year)! You can become one of those 3rd-Party Sellers.
How FBA Works
YOU can join their ranks simply by signing up for Amazon Seller Central, creating a product listing, and then buying inventory and sending it to an Amazon FBA warehouse. Amazon will post your listing on their site (you know, that site where you and everyone else buys EVERYTHING), and deliver your product to your customer as soon as they make a purchase.
It’s a bit like the digital equivalent of having your product listed for sale at every Walmart in the USA…
Here are some of the key benefits to Amazon FBA:
- I know what you’re thinking, and the answer is yes: your products are automatically eligible for Amazon Prime 2 day (sometimes, next day…) shipping.
- Amazon handles all customer service including returns, refunds, and inquiries.
- The Amazon platform comes with a host of marketing tools that you can use to advertise, run promotions, create coupons, and more.
Amazon FBA is a fantastic opportunity because of the natural traffic that Amazon generates for you by being so dominant in the world of e-commerce. As such, we devote an entire section of our site to teaching the Amazon FBA business model.
Downsides to Amazon FBA
Just keep in mind that like all of the fulfillment models, FBA has its downsides:
- It requires significant upfront investment, since you usually will need to import inventory in bulk from overseas.
- You don’t get to keep any of your customer’s data. Not even their email address; Amazon owns everything. This makes it difficult to create repeat buyers and build brand awareness.
- Since the opportunity is great, so is the competition. Product markets quickly become saturated. So, price wars are inevitable – and amazon shoppers definitely price shop, making it difficult to maintain a high profit margin.
- Amazon charges pretty hefty fees, sometimes up to 40% of the sales price, for their services.
These factors lead some people to steer clear of Amazon, and go for a different fulfillment model, such as…
Model #3: Dropshipping
What is it?
With dropshipping, instead of storing inventory at a warehouse, you don’t hold any inventory at all. When a customer places an order through your online store, the supplier ships the product directly to the customer.
Dropshipping is a completely different order fulfillment model, which also has major appeal among eCommerce entrepreneurs.
Instead of buying and storing inventory at an Amazon (or any other) warehouse, you don’t hold any inventory at all. Instead, an agreement is established with a supplier, usually on AliExpress or a “Print on Demand” company. Once a customer places an order through your online store, the supplier ships the product directly to the customer. You don’t pay a dime to your supplier until an order is placed by your customer!
Check out our most popular post, Dropshipping 101, for much more detail!
How Dropshipping Works
Since it involves no upfront manufacturing costs, dropshipping is a very attractive model to entrepreneurs that are interested in starting an e-commerce business on a small budget. The primary costs, in money and time spent, are in Marketing.
For example, marketing tasks and costs include:
- Creation of a well-designed online store where customers can find your products. Most people use Shopify, which is a turnkey solution allowing you to create an e-commerce store in minutes – no coding required.
- Development of a brand story, mission, and vision.
- Writing of enticing product listings with good pictures and compelling product descriptions.
- Directing traffic to your store so that people actually see your products and have the opportunity to buy them. The most popular way to do this is through paid advertising.
Most drop-shippers rely on Facebook Advertising, and for good reason. It provides cheap cost per click (CPC) ads that can be highly targeted to an audience’s interests, demographic information, geography, and more. But there are a huge number of options when advertising online, and we go into these in depth in a separate post.
Once again, since dropshipping represents such a great opportunity, we devote an entire section of our website to Shopify and Dropshipping methodologies.
Downsides of Dropshipping
But, again, be warned: dropshipping has its downsides.
- Navigating the competitive world of online advertising can be difficult, and often stops entrepreneurs in their tracks.
- Since you aren’t storing the product, you have very little control over the quality and timeliness of the delivery. As compared with Amazon FBA 2 day shipping, most dropshipping products take 2 weeks or more to be delivered.
- You don’t have the option to customize your product or its packaging, which are very important in brand development.
For these reasons, some people decide to go with FBA, or a different option, like…
Model #4: 3PL Fulfillment
What is it?
With this model, the seller buys inventory and sends it to the warehouse of a 3PL (3rd Party Logistics Company). Once your customer places an order through your online store, the 3PL delivers the products to the end customer.
A third party logistics company is one that specializes in product distribution, warehousing, and order fulfillment services. Essentially, logistics is such a burden for most businesses that an entire industry cropped up to solve this problem.
How 3PL Fulfillment Works
Start by buying inventory. Often, this involves importing a product to the US in bulk (likely using a platform like Alibaba).
So far, this is exactly like Amazon FBA model. Here’s where things differ. Instead of sending the product to an Amazon warehouse, you send your stock to the 3PL’s warehouse. And once your customer places an order through your own online store, they deliver it to the customer.
Remember the downsides of Amazon FBA and Dropshipping? Many of them vanish with this fulfillment model:
- Many 3PLs offer 2-day delivery
- You don’t have to pay Amazon’s high fees
- You are in control of the product quality
- It provides the freedom to customize your product and its packaging
- The big one: you keep your customer’s data (including email address)
Of course, you will still have to pay your 3PL inventory storage fees and order fulfillment fees. You also bear the burden of marketing your store (just like with dropshipping).
But this is an interesting hybrid model that most e-commerce entrepreneurs are not taking advantage of to answer the “how will I deliver my product to my customers?” question. There is something to be said for the benefits listed above. I have personally used this model with great success.
Now, many 3PL companies have large monthly minimums, making it prohibitive for eCommerce entrepreneurs that are just getting started.
ShipBob: Recommended 3PL for eCommerce
However, some innovative companies have come along that are friendly to small businesses. One great example, which I use for my business, is ShipBob. ShipBob is a 3PL with a modern technology stack and no monthly minimums. They can integrate directly with your Amazon, Shopify, WooCommerce (and more) stores and automatically fulfill your orders when a customer makes a purchase. They are definitely worth looking into!
Now, Which Fulfillment Model Is Right For Me?
OK, hopefully this wasn’t information overload. But the four fulfillment models are so important that the eComm Boardroom blog is sort of designed around fulfillment models. Check the menu bar at the top of the screen to see what I mean.
How should you decide which one to use? The primary drivers are budget, your skillset, and the amount of time you want to put into your business.
When to Use FBA
For most newcomers to eCommerce, I recommend getting your feet wet with Amazon FBA. So many people have walked this walk before, that the business model is very well defined. It has the most reliable ROI, but will take the longest to get up and running. That’s because it involves doing a lot of research and waiting while products are imported into the US. For reference, you’ll probably need a budget of at least $2k to give it a fair shake.
When to Dropship
If that budget sounds a little high for you at this stage of the game, start with Dropshipping. You can really test the waters and give dropshipping a good run for its money for about $400. And you can move fast: your dropshipping business can be up and running in a matter of a week if you put your mind to it. I would especially recommend this model to the creative-types that are reading this.
When to Outsource to a 3PL
Finally, for the 3PL Fulfillment model: I recommend waiting until you have a few eCommerce projects (or product launches) under your belt before trying it out. Generally speaking, you need to be good at brand development and have a good understanding of the all of the costs / processes involved in logistics.
How will I deliver my product to my customers? – Wrap Up
Ultimately, you will need to consider each fulfillment model for all of your product ideas. Where are you finding the best suppliers? Is dropshipping even an option? How does this product fare on Amazon? Is the product more of a commodity or am I developing a brand? Weighing these options can be a daunting exercise, but necessary.
Here is a flowchart to help you determine which fulfillment model to use. It’s by no means set-in-stone or fool-proof. Think of this as a basic guideline to use if you are struggling.
Awesome. Now, you not only know what product to sell and how you will produce it, you know how you will deliver it to your customers once they make a purchase! Next up, we will go over the first question related to digital marketing: Who is your ideal customer?
I’m excited. Digital Marketing is my personal favorite topic. Let’s keep moving.
What’s the best next step?
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