Drop Shipping and Marketplace: Understanding the Advantages of Each

By Logicbroker | August 30, 2021

Drop shipping and marketplace selling are often seen as interchangeable business models. While there are some similarities between the two, there are different approaches to selling, each with their own advantages and disadvantages. Before diving into which model (or models) makes sense for your business, it’s important to understand the differences between the two.  

What is a marketplace? 

An online marketplace is a website or app that serves as a host to multiple sellers. The marketplace operator may not have their own inventory; they just provide a place for other supplier and brand sellers to sell their inventory and facilitate the transactions. It’s up to the sellers to fulfill each order. eBay is the best-known example of a site that’s purely a marketplace. Amazon is another, although Amazon holds its own inventory of products as well.

What is drop shipping? 

Drop shipping is a way for retailers to fulfill orders without having to hold their own inventory. Instead, when a retailer sells a product, they buy and have it shipped to the customer from a third-party supplier. Typically, the retailer’s branding appears on the packing slip and packaging, so the end customer may never even realize the product isn’t coming directly from the retailer. Wayfair is a well-known example of a company that uses drop shipping to fulfill its orders.

What’s the difference? 

From a business perspective, the difference between marketplace and drop ship selling is in the handling of payment and onboarding. In a marketplace sale, money is collected from the customer upon purchase, the marketplace keeps a portion of the sale, and immediately pays out the rest to the supplier/seller. In drop shipping, the retailer collects payment, remits the agreed-upon wholesale amount plus fulfillment costs to the supplier, and keeps the difference as profit. The payment cycle is typically longer in a drop ship model due to processing times and internal reviews associated with remittance.

Typically, drop shipping gives a retailer more control over branding and the customer experience since they set the selling price and control the imagery and descriptions. All shipments include branding packing slips and inserts that look the same as they would with internal fulfillment. On the other hand, in a traditional marketplace model, the marketplace operator sacrifices branding and customer experience control, relying solely on their suppliers to pick, pack, ship, and send product and pricing information. However, as more retailers adopt solutions for curated marketplaces, this shifts the controls a bit, giving retailers more control of the customer experience. Keeping assortments highly specific and relevant to particular categories, tips the power balance in the retailer’s favor allowing them greater control over the supplier partner, product assortment, and better payment terms. As retailers seek a simplified experience for valued customers with flexibility to add a variety of fulfillment options on the supply chain side, they capture more sales while carefully maintaining customer trust and positive seller relationships.

Established brands looking to sell through a retailer, on the other hand, may prefer the marketplace model. With marketplace (or e-concessions), brands retain more control over product pricing, marketing, their product catalog and their eCommerce storefront, as well as product photography and description copy. They can also fulfill and ship orders using their own brand identity.  

In the marketplace model packaging and labels will have the seller’s information, not the marketplace’s. The advantage of marketplaces for retailers is that retailers can quickly add new sellers and expand their product assortment. Retailers can also choose to curate their marketplace, allowing only suppliers/sellers in a specific category, or who sell products with features, aesthetics or quality standards that fit their brand. One example of this is Houzz, a marketplace that includes only sellers of home design and décor products. 

At the end of the day, retailers want a seamless experience for their customers, with options that include combined shopping carts of drop ship and marketplace products. Consumers understand marketplace products are “fulfilled by a third-party seller”. The most important deliverable is to guarantee a single unified experience for consumers during check out and on-time, accurate delivery post-purchase.

Deciding what makes sense for your business (hint, probably both) 

The good news is that you don’t have to decide between drop shipping and marketplace. Both methods, marketplace selling and drop ship, ultimately lead to more exposure and more sales, and can be implemented with little to no risk.

If you’re looking to expand your product assortment without holding inventory, drop ship is an excellent option. Historically, drop shipping has allowed retailers to sell larger items, like furniture, without needing to worry about shipping or holding the large items in their warehouses. Because there are no overhead costs for inventory, you can offer a supplier’s full product line, rather than just a few pieces.  

Marketplace, meanwhile, is an excellent way to diversify your offerings and reach new customers. Many retailers and brands that offer their own products (either via held inventory or drop-shipping) are incorporating marketplaces, including Walmart, Best Buy (Canada), Home Depot, and Express. For example, while Best Buy has in the past been viewed strictly as an electronics store, with their marketplace they offer consumers products in new categories including luggage, furniture, jewelry, and more. These orders will be delivered with the brand/seller’s branding, as opposed to Best Buy’s. 

How we can help 

Traditionally, implementing a drop ship or marketplace program was time-consuming and cumbersome, requiring complex integrations. With Logicbroker’s modern drop ship and marketplace solutions, clients can quickly add new drop ship suppliers and marketplace merchants and brands or upgrade their existing drop ship and marketplace technology.

Let us help you quickly grow and diversify your product offerings and dramatically broaden your reach without increasing your held inventory or investing in new fulfillment resources. To learn more, contact us today.

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