How Dropship and Marketplace Drive Profitable eCommerce

December 18, 2018

eCommerce marketplaces like Amazon are quickly becoming the preferred shopping environments for digital consumers. Last year, Forrester Insights found that half of B2C online retail spend came from marketplaces, and those numbers continue to increase.

At Mirakl, we’ve found that retailers don’t always understand the difference between marketplaces—which facilitate third-party sales—and dropship—which overcomes logistical challenges associated with retailer-owned merchandise. Dropship and marketplaces are different, but they can work together to form an ideal model for retailers.

In our recent eBook Beyond dropship: Building scale and profitability with the marketplace model  <https://info.mirakl.com/dropship-vs-marketplace>, Mirakl CEO and Co-Founder Adrien Nussenbaum highlights how the price competitiveness retailers can achieve with marketplaces cannot be achieved with dropship alone:

 “Without an online marketplace, assortment falls short… unlike dropship, retailers use marketplaces to rapidly enter new categories or complement the assortment they already have… The difference lies in who owns the responsibility of pricing, customer service, and returns as you scale.”

Fortunately, retailers can enjoy the benefits of both. Here we’ll differentiate the two strategies and show how they contribute to greater customer satisfaction and a better digital retail environment.

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Dropship Alone is Not Enough

The first thing retailers must realize is that the two are not mutually exclusive. Unlike dropship, retailers use marketplace to rapidly enter new categories or complement the assortment they already have.

  • The dropship model is a strategy that alleviates pain points in logistics and fulfillment. Though handled in different ways, retailers are able to offer more products in core categories without taking on financial tie-downs to inventory.

Dropship expands opportunities in traditional retailer-to-customer sales. Although retailers essentially buy products from drop-shippers behind the scenes, customers witness only greater opportunities to buy retailers’ owned products.

  • The marketplace model is an environment where multiple sellers can sell a limitless range of products and compete on price within a single eCommerce environment. Though dropship helps retailers expand product offerings, they can’t achieve competitiveness with dropship alone.

Why allow third parties to sell on your eCommerce site? With marketplaces, retailers scale out their assortments quickly with minimal upkeep and minimal cost to expand. Retailers don’t take the lion’s share of each sale, but their profits grow with third-party adoption and sales. They achieve great competitive value and an evolving, superior experience for customers as well.

Here’s What That Means for the Long Tail

Most retailers are familiar with the “long tail” market concept coined by Chris Andresen and Clay Shirky. Applied to retailers, it shows that their most popular products drive high sales volume of their limited owned inventory; meanwhile, a limitless assortment of third-party products can drive the same amount of revenue with low-yield individual sales, where retailers earn a portion of each sale.

Conceptually, marketplace revenue picks up where owned inventory and dropship inventory sales fall off. That’s because with marketplaces, retailers pass the assortment baton over to those third parties who can capture the buying power of otherwise lost customers. Direct sales revenue from dropship is appealing to retailers, but a large assortment—stretching down the long tail—adds competitive value to both customers and retailers, for whom the stakes are minimal.

Realizing the Long Tail with Best Buy Canada

With Mirakl’s help, Best Buy Canada encapsulated this multi-tiered long tail strategy leveraging owned, dropship, and marketplace inventory:

  • Owned Inventory: high-turning products with deep inventory that drive the greatest net profit per unit.

  • Dropship Inventory: direct-from-vendor line extensions that complement owned inventory—an economic solution for products that are too costly to manage, hold in warehouses, or keep in-store.

  • Marketplace Inventory: mass assortment with flexible, fast entry into niche and net new categories—minimal risk required.

Their marketplace allowed them to rapidly grow their assortment and capitalize on sudden demand for a popular child’s toy. They immediately boosted online traffic and sales; and since their third-party sellers managed the logistics, they had zero risk of encountering excess stock in the process.

5 Returns from Your Marketplace Investment

Since marketplace adoption complements retailers’ existing owned inventory sales, disruption to their eCommerce operations isn’t an issue. In fact, in a recent article by Nati Harpaz, CEO and MD of Catch Group and a Mirakl customer, Harpaz says:

“We managed to expand Catch’s range from 30,000 products to 1.9m SKUs without adding any inventory risk. We also noticed that since launching our marketplace our AOV (Average Order Value) has also increased from $95 to $114, which really tells us that more customers are finding more of what they need.”

Our partners are unanimous in the success of their marketplaces. Here are five ways our solution is helping them succeed—and how it could help you succeed, too:

  • Scalability: No investments in direct sourcing means greater efficiency when onboarding sellers and products.

  • Profit margins: With virtually zero capital investment and minimal disruption, marketplace sales are ostensibly pure profit.

  • Agility: No locked pricing creates competitive value beyond owned and dropship inventory.

  • Cost-Free Traffic and SEO: let third-party content do the work for you and increase the appeal of your site.

  • Capture the Long Tail: With a potentially limitless assortment, you can double the sales numbers on your site.

Marketplaces can do even more. Access the report to learn about marketplace profitability, and start growing your assortment for long tail success.

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