Drop-ship vs. Marketplace: The Best Solution to Scaling Your Online Assortment (Pros & Cons)

Date :10 September, 2020
Categories :Article
Tags :Drop Ship, Marketplaces, Online Assortment, Supply Chain, Third Party Seller, Wholesale

The COVID-19 pandemic is having a significant impact on retail and consumer behaviours across the globe. While consumers turn online to demand greater availability and assortment; retailers face the challenges of a frail supply chain and the ability to quickly source products consumers want. The crux of this offline-to-online shift is: if retailers stop being relevant online, they will progressively lose relevance among shoppers as a whole.

It’s clear that digital transformation has never been more important. However, as retailers accelerate the digitalisation of their business, they must make important considerations on which e-commerce model will best serve them and their consumers during and beyond this pandemic — the traditional drop-ship model, or the rising marketplace model?

The terms drop-ship and marketplace are often used interchangeably, despite there being important distinctions between the two models. In this article, we’ll explore the differences within the two models and why the marketplace model is the way forward.

If you’d like to learn more about creating a digital one-stop-shop marketplace, book a free consultation with the Storesome team and learn how we can make your project a reality.

What is the difference between drop-shipping and the marketplace model?

Put simply, with drop-shipping:

  • The retailer lists products from the drop-shipper on its website.
  • When the retailer receives a new order, the retailer purchases the product from the drop-shipper who then ships it directly to the buyer on behalf of the retailer.
  • The retailer never holds inventory of the product. However, from the customer’s perspective, the package will come directly from the retailer they purchased from (e.g. Notebook Therapy is a notebook and accessories store utilising drop-shipping).
  • The drop-shipper provides invisible fulfillment in this arrangement.

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Whereas with a marketplace:

  • The retailer lists products from third-party sellers on its website (and unlike with drop-shipping, there may be multiple sellers competing to sell the same product).
  • When the retailer receives a new order, the buyer’s shipping information is passed on to the third-party seller, who ships the product directly to the buyer.
  • The retailer only facilitates the transaction. Despite the customer purchasing the product from the retailer, they understand the product will come directly from the third-party seller (e.g. sold by Amazon but fulfilled by J. Crew).
  • The third-party seller is not invisible to the buyer.

Drop-shipping is a supply-chain efficiency above anything else. The retailer usually pays for the item at a discount by working directly with the manufacturer or wholesaler; their profit comes from the difference in the item cost and the price they sell it at.

What are the advantages and disadvantages of drop-shipping?

There are a few key benefits of the drop-shipping model:

  • The retailer is free from the responsibilities of holding product inventory and paying for their storage costs (which is particularly useful for large or storage-heavy items).
  • The retailer absorbs less risk: rather than purchasing items upfront and hoping that they’re able to sell those items; the drop-shipping model requires only that the retailer buys the item once they already have a buyer who has already purchased that item.

The disadvantages of drop-shipping come from the rigidness of its approach:

  • Negotiating an agreement with a drop-shipper can take several weeks and they may require a sales volume commitment from you to enter the agreement.
  • You can be locked into these agreements even when the prices may not reflect the current supply and demand and/or dynamic market rates of the product at the time.
  • You are responsible for negotiating these agreements with suppliers, as well as gaining expertise in the product and coming up with the pricing strategy.

What can I learn from this as a retailer?

With the marketplace model, you not only enjoy the key benefits of the drop-shipping model (avoiding inventory responsibilities/storage costs and decreasing your risk) but you also free yourself from the friction of the disadvantages imposed by the drop-shipping model:

  • While onboarding and negotiating with drop-shipping suppliers can take several weeks, onboarding third-party sellers can take a matter of hours.
  • The third-party seller is responsible for sourcing the product and setting the pricing strategy. They are responsible for ensuring that their price is competitive enough in order to undercut the competition or reflect the market rate. This is a win for all.
  • As the retailer, you are only responsible for facilitating the transaction, while the seller is responsible for facilitating the order. Once the order is complete; you simply deposit the funds from the sale into the seller’s bank account, minus your commission.

The marketplace model ultimately affords far more scale and agility than the drop-shipping model could realistically achieve. This is particularly true during a time of pandemic crisis where retailers must adapt to the relative unpredictability of shopping behaviour.

Let’s consider an example:

If you’re a kitchenware retailer specialising in cookware and wanting to expand your assortment to include bakeware, you could consider a) owned inventory, b) drop-shipping or c) the marketplace model. In either case, you would need to think about how you’ll obtain the hundreds of bakeware products to make up a competitive and ranged assortment.

a) In the case of owned inventory, you’d need to obtain enough stock of each product and absorb the responsibility for those products. You’d be responsible for storage, pricing and shipping. If your entrance into the bakeware category does not meet your target sales figures, you could be left with a large amount of unsold inventory.

b) In the case of drop-shipping, you’d need to find drop-shippers for each product and set the pricing strategy. Finding drop-shipping partners could take several weeks and if it’s not a category you’re familiar with, the pricing strategy could be another headache for you to deal with. The plus side with this model is that you outsource inventory, storage and shipping obligations to the drop-shipping partner.

c) In the case of the marketplace model, you’d simply need to onboard sellers who held inventory of the items you wish to stock. Onboarding these sellers could take only a matter of hours. They’d be responsible for creating a competitive pricing strategy and for shipping products to buyers. You’d simply facilitate the transaction and take a fee.

Looking at these examples, it’s clear to see that the marketplace model offers the agility, speed and efficiency to rapidly enter new categories which drop-shipping and certainly owned-inventory solutions simply cannot compete with.

What’s next for retailers?

Whilst nobody can predict what the future of retail holds post-pandemic, we can reasonably foresee a new face of retail and a change in way consumers shop for products. The shift from offline-to-online has been greatly accelerated which presents opportunity for online retailers, however, a sluggish economy and dull supporting infrastructure can present challenges.

It’s never been more important for retailers to consider their digital transformation and navigate their business future. We believe the key to success in the new face of retail is in connecting buyers with sellers and facilitating the transaction, in order to scale your online assortment and meet the expectations of consumers. You no longer need to hold stock, real-time demand drives supply and suppliers deliver in a whole new way.

If you’re a brand considering creating a marketplace, we want to hear more about your aspirations. Book a free consultation and learn how we can make your project a reality.

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