According to Forrester, 65% of retail and brand professionals say they had already implemented endless aisle in/before 2019 or planned to in 2020. This expanded assortment may come from either drop ship partners or may be owned inventory stored in warehouses and not sold on store floors. In fact, 41% of retail and brand professionals have a drop ship program in place. This should come as no surprise, as in brick and mortar stores, floor space is limited and reserved for “hot” items and products deemed “safe.” This has driven consumers online, as it is the place they can find rare and unique goods.
Drop shipping is utilized by both retailers and brands, with retailers partnering with brands to expand their assortment and brands in turn, supply their goods to retailers. This is expanded upon to encapsulate:
- Suppliers selling to marketplaces as merchants
- Suppliers fulfilling orders on behalf of retailers
- Retailers expanding online product assortment
- Retailers becoming marketplaces
Drop shipping has become an umbrella term for many selling models, but to best understand the approach that most makes sense for your business, it is important to have an understanding of how the marketplace model differs from true drop ship. In regards to products, in a marketplace model the supplier has much of the power and is responsible for deciding what products will be sold on the channel and provides product content. It is worth noting that this content will be combined with content from other sellers of the same item, and some may edit it. Additionally, suppliers dictate when new products may go live on the site. Marketplace inventory is owned by the third party sellers and typically they dictate the pricing, too. In terms of returns, that is usually handles by the marketplace in addition to the ownership and service of customers. If a supplier “owns” the servicing of a customer, it is usually brokered by the marketplace.
In the drop ship model, the retailer chooses which products will be sold, usually with traditional buyer relationships and approval processes. While suppliers provide the product content, retailers have the right (and often do) to make edits as they see fit and hold the power when it comes to deciding when products will go live. Inventory is owned and shipped by the supplier, though the retailer will own and service customers along with handling the returns process. Goods are supplied at wholesale cost to the retailer. In counterfeit or fraud cases, while in a drop ship model, the retailer is on the hook, with a marketplace, due to Section 230, marketplaces are protected from liability, putting the seller (supplier) in the position of being legally responsible.
With the fundametals of each model clearly outlined, it is time to take a closer look at the pros and cons to the suppliers and retailers.
- Total inventory risk
- Margin erosion, added costs
- Potential risk of poor customer experience through retailer, tarnishing your brand
- Possible loss of editorial control
- Expanded sales channels
- Open up liquidation sales
- Assortment testing
Though suppliers have the risk of inventory (storage, shipping, etc.), the benefits of selling through expanded sales channels alleviates the con of having too much inventory on hand, as more exposure should lead to more sales. Additionally, excess product can be sold on flash sale or overstock specialty sites, which ensures better recovery than traditional bulk liquidation.
- Incremental costs
- Loss of control
- May be responsible for shipping costs
- More selection without adding more shelf space
- More profitable sales
- Assortment testing
For retailers, the perceived risks of drop shipping are mostly financial from managing relationships and integrations to possibly being on the hook for shipping costs. However, the benefits of drop shipping negate the expenses, with cutting inventory and overhead costs, typically not being responsible for pick, pack, ship (as the suppliers take this on), and testing assortment. These inventory tests allow retailers to offer new products and expand the line without any risks. If the products sell, they reap the benefits of increased sales without ever having to buy bulk inventory. Drop shipping typically gives a retailer more control with a tradeoff of liability. Marketplaces allow more autonomy for sellers, a legal safety net, but can negatively impact experience associated with the channel, as much power is given to the suppliers.
When it comes to expansion, whether as a supplier or a retailer, the best chance for success is having a solid approach to managing day-to-day operation. Ensuring a solid team is behind the initiatives and you stay on top of the relationships and maintain compliance is the best approach for success. Try multiple models to see what works best for your unique business, for many, a blend of both drop ship and marketplace selling drives success! To see Logicbroker’s list of EDI integrations, click here or learn more about our Connected Commerce NetworkTM.