This is part three in a series about how to start an eCommerce business: Answering the Five Fundamental Questions of a Business. 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 questions:
- What product should I sell?
- How will I produce my product?
- How will I deliver my product to my customers?
- Who is my ideal customer?
- How do I convince them to become a repeat buyer and brand evangelist?
Remember, you need to answer all 5 questions before launching your business to the world. 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 business plan for each idea, and it will be clear to you which one you should turn into a reality.
So! You have a list of product ideas that are in markets in which you have an interest, hobby, or proficiency. You have a good idea of how you can produce your product so you actually have something to sell. Now, once you’ve done that…
How will you deliver your product to your customers?
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 module!
Now, for physical products, this is an entirely different beast. 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. And it 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? Nobody.
But 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 eCommerce business.
Let’s make sure that doesn’t happen.
The Most Popular eCommerce Fulfillment Models
In the world of eCommerce, there are many ways to fulfill physical products to your customers. However, there are really only a few mega-popular fulfillment models. The majority of eCommerce ventures use one of the following four options:
- Seller Fulfilled
- Fulfillment by Amazon
- 3PL Fulfillment
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 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 via Amazon Prime 2-Day Shipping to your customers.
Fulfillment by Amazon, or FBA, is an extremely popular business model. And for good reason: with FBA, you are able to list a product with the world’s largest eCommerce retailer – Amazon. Many people don’t know this, but Amazon is made up of over 1 million third-party sellers. Over half (that’s billions of dollars per year) of everything sold on Amazon is by a third party seller. Crazy, right?
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 then 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.
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 eCommerce. 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:
- 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. Instead, when a customer places an order through your online store, the supplier ships the product directly to the customer.
Dropshipping is a completely different 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!
How Dropshipping Works
Since it involves no upfront manufacturing costs, dropshipping is a very attractive model to entrepreneurs that are interested in starting an eCommerce business on a small budget. The primary costs, in money and time spent, are in Marketing.
For example, marketing tasks / 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 eCommerce 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 will go into these in depth in a separate course. We’ll discuss Facebook, Google Ads, Native Ads, Push Notification Ads, Email Solo Ads, and more.
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 packaging, which can be 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, you import a product in bulk, and send it to the warehouse of a 3PL (3rd Party Logistics Company). Once your customer places an order through your online store, they deliver it to the customer.
A third party logistics company is one that specializes in product distribution, warehousing, and fulfilment 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 importing a product to the US in bulk (likely from Alibaba), similar to the Amazon FBA model. Only instead of sending the product to an Amazon warehouse, you would send it to the 3PL warehouse. And once your customer places an order through your 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
- You are free to customize your product and its packaging
- The big one: you keep your customer’s data
Of course, you will still have to pay your 3PL inventory storage fees and fulfillment fees, and bear the burden of marketing your store (just like with dropshipping). But this is an interesting hybrid model that most eCommerce entrepreneurs are not taking advantage of. There is something to be said for the benefits listed above. I have personally used this model with great success in 2020.
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 For Me?
OK, hopefully this wasn’t information overload. But the four fulfillment models are so important that the eComm Boardroom site is actually designed around fulfillment models. Check the menu bar at the top of the screen.
How should you decide which one to use? The primary drivers are budget 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 because it involves doing a lot of research and importing products to the US. And I recommend a budget of at least $2k to give it a fair shake.
When to Drop Ship
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 less than $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.
When to Outsource to a 3PL
Finally, for the 3PL Fulfillment model: I recommend waiting until you have a few eCommerce projects (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.
Wrapping It 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:
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 marketing: Who is your ideal customer?