Retail and ecommerce have a lot of overlapping terms that can be confusing to understand. When we talk to retailers, one of the first things we do is define some fundamental concepts for them.
Two concepts that we get asked about all the time are dropship and marketplace. Everyone has their own conception of what these terms mean.
For retailers, marketplace and dropship models are similar in that the retailer doesn’t actually hold the inventory and the supplier is fulfilling the order. However, there are some very interesting nuances that make the decision to go with one or the other very important.
In this article, we’ll break down dropship vs. marketplace for retailers and what you should consider when you’re choosing one of these models for your retail or ecommerce business.
What is dropship?
Dropship (or dropshipping or drop ship) is a fulfillment method that retailers use to service customer orders without storing products in their inventory. In a dropship program, orders that are placed on a retailer’s website are routed directly to the brands that manufacture and/or inventory the products included in the order. Brands then ship the products to the retailer’s customers.
How dropship works
Retailer Harry Rosen uses dropshipping for its grooming product category. Some of the brands they work with in this dropship model include Truefitt & Hill, Baxter of California, and Tom Ford.
Using their ecommerce store as an example, here’s how dropshipping works:
- The customer places an order for an Exfoliating Body Bar from Baxter of California through Harry Rosen’s store.
- Harry Rosen collects payment. Then, it sends the order and its associated shipping details to Baxter.
- Baxter packs the Body Bar and ships it directly to the customer. They label the package with Harry Rosen’s brand and may also use Harry Rosen’s packaging.
- The end customer receives it as if it came from Harry Rosen.
- Harry Rosen keeps the margin it has placed on the price of the items in the order. It sends the rest of the payment for the order to Baxter.
Benefits of dropshipping for retailers
Dropshipping carries benefits beyond faster order fulfillment for retailers. It enables retailers to offer vastly more products to their customers at minimal additional cost.
- Expand product assortment - prior to dropshipping, retailers carried the number of products that they were able to store in their warehouses. With dropshipping, retailers can offer a broader assortment to their customers without worrying about inventory costs. It also enables them to provide product substitutions — multiple listings of a similar product type so that they aren’t overly reliant on one product or brand.
- No inventory risk - since retailers aren’t carrying their own inventory when they dropship, they don’t carry the risk of unsold inventory in case there isn’t demand for a particular product (more on this here).
- Overcome forecasting limitations - the wholesaling model in retail constrains retailers to the accuracy of their forecasts. Over-buying and under-buying inventory affects the capital efficiency of the business. With dropshipping, retailers don’t have to worry about getting their forecasts right — as long as a brand has inventory of a SKU, they can sell it.
- Extension of the retailer’s brand - dropshipping gives retailers control of all the touchpoints in the customer journey. For example, support requests for dropship order are handled by the retailer.
What is a marketplace?
A marketplace is a discovery platform for customers and brands, curated by a retailer. Orders that occur in a marketplace are placed directly with brands versus a dropship model where orders are placed with the retailer first and are then forwarded to brands.
How marketplaces work
Amazon Marketplace is an ecommerce marketplace of third-party sellers operated by Amazon. Roughly 25% of total ecommerce spending in the US happens on Amazon Marketplace. Walmart Marketplace and eBay are examples of online marketplaces that compete with Amazon Marketplace.
Products sold through Amazon Marketplace look similar to those sold by Amazon. You can identify which is which by the ‘Ships from’ and ‘Sold by’ labels in the Amazon product page. In the image below, this case of Athletic Brewing non-alcoholic beer is shipped and sold by Athletic Brewing, not Amazon, which means that it is being sold through Amazon Marketplace.
Using Amazon Marketplace as an example, here’s how a marketplace works:
- The customer places an order for a six-pack of Athletic Brewing through Amazon.
- Amazon deducts a % commission of the payment for the order. It sends the order and the remaining payment to Athletic Brewing. Athletic receives it as one of its own orders.
- Athletic packs the 12-pack in Athletic packaging and ships it directly to the customer.
- The customer receives it as if it came from Athletic.
Benefits of marketplaces for retailers
Marketplaces offer similar benefits to dropship programs for retailers, like expanded product assortment and no inventory risk. However, there are some nuances to consider with this business model:
- Easier to land brand partnerships - retailers with successful marketplaces have large audiences that brands want to get in front of so that they can acquire new customers. Brands can also control pricing and promotions for their products, which is another reason it’s easier to partner with them.
- Minimal customer support - in a marketplace model, brands handle the bulk of post-sale customer support.
- Limited effect on the retailer’s brand - brands position themselves according to their unique value proposition on a marketplace. Retailers don’t need to make brands adhere to their voice and tone — they can focus on product discovery through recommendations and editorial for customers.
Differences between dropship and marketplaces
The main difference between dropship and marketplaces is in who owns the relationship with the customer.
In a dropship model, the retailer owns the relationship with the end customer. They’re responsible for the entire experience — product prices, promotions, shipping, returns, and customer support. Baxter of California may be shipping their products to Harry Rosen’s customers, but they don’t set prices for their products on Harry Rosen’s store and they don’t have access to Harry Rosen’s customers to market their products for future purchases.
In a marketplace model, the supplier owns the relationship with the end customer. They set prices and promotions and handle shipping and returns. Retailers offer a broad selection of brands for customers to choose from, but they operate in a more hands off manner. Amazon introduces customers to brands like Athletic Brewing, but after that Athletic owns the relationship with those customers (what makes this tricky is that Amazon is also a retailer with its own set of customer loyalty and promotion programs on the same platform).
This difference between dropship and marketplaces has downstream effects for retailers across their finances, product selection, brand, and customer experience:
- Pricing differences
Retailers set product prices in a dropship program, while suppliers set product prices in a marketplace.
- Revenue recognition differences
Dropship programs record higher topline revenue because retailers collect the entire payment on each order. As a % of sales made on their platform, marketplaces record lower topline revenue. The bottomline margins usually net out the same between the two models.
- Curation vs. mass aggregation
With more control over their dropship programs, retailers opt towards a more curated approach. In a marketplace, however, brands tend to list all their product offerings and SKUs to increase the likelihood of generating sales on the platform.
- Brand affinity
Dropship programs foster higher brand affinity from customers because retailers have control over more brand touchpoints, like merchandising, packaging, returns, and customer support. Marketplaces don’t foster as much affinity for a retailer’s own brand because customers are transacting directly with suppliers.
- Content differences
Retailers have control over the content of their listings in a dropship program. Each listing can adhere to a retailer’s voice and tone. Sellers have control over the content of their listings in a marketplace. Listings can widely differ from a retailer’s brand voice. Marketplaces also tend to be worse for SEO because marketplace sellers duplicate content for their listings in their website and in multiple online retailers and storefronts, which affects product discovery in search engines.
Supplier enablement matters for both dropship and marketplaces
Whether you choose to go with a dropship or a marketplace model for your online store, you’ll need to think about how you’ll onboard your suppliers. If you want to adapt to consumer tastes quickly, you need to be able to source and onboard new vendors to your store in days.
While that sounds easy enough in theory, we’ve seen retailers constantly struggle with this. Supplier onboarding times frequently average 2-3 months when retailers use outdated solutions like EDI to onboard their suppliers.
At Convictional, our approach to solving this problem is by placing suppliers at the center of the onboarding experience.
Modern suppliers can connect their products and inventory with retailers with our one-click Shopify, BigCommerce, and WooCommerce integrations and classic suppliers can connect with automated CSV and EDI files. Our guided onboarding flows enable suppliers to launch with their partners quickly and reduce the time it takes to get their first order.
When suppliers onboard themselves, retailers add new brands to their dropship and marketplace programs in days, not months. We call this supplier enablement.
If you’re looking for a supplier onboarding solution that reduces onboarding times for your dropship or marketplace, Convictional can help. Contact us today to get started.