At Mirakl, we get asked all the time: “what is the difference between dropship and marketplace?” Because the terms are often used interchangeably, there is an incredible amount of confusion about the important distinctions between dropship and marketplace. This post will clear up that confusion, succinctly outline the differences between the two models, and show how the models work together and why every retailer needs a marketplace (whether utilizing dropshipping or not).
Simply put, with dropshipping:
- One party sells a good and another party (typically a manufacturer or wholesaler) delivers the good on behalf of the seller.
- The customer gets the product from the manufacturer or wholesaler, but all the branding on the box and return shipping labels has the retailer’s logos and contact information.
- From the customer POV, the box came directly from the seller they purchased from.
With a marketplace:
- One party sells a good and another party (could be anyone - manufacturer, wholesales, another retailer, a mom-and-pop seller, etc.) delivers the good - on its own behalf.
- The customer gets the product with all the branding on the box and return shipping labels having the 3rd party seller's branding.
- From the customer POV, the box came from the 3rd party seller, even though the customer made the purchase at another site (e.g. Amazon).
For retailers, dropshipping has traditionally allowed them to sell items that are big and bulky (think: appliances) and don’t fit the retailer’s fulfilment capabilities. It has been more of a supply chain approach than a merchandising approach.
Much of the confusion around dropship and marketplace stems from differences in frame of reference. For example, some marketplace sellers (those that are 3rd party sellers on marketplaces like Amazon) may actually utilize dropshipping as their method of fulfilment. In the image below, you can imagine the seller – Agoodbuyforu2 – could be working with a wholesaler to dropship the oils on its behalf.
To examine the real differences between marketplace and dropship, it is best to take the POV of a retailer. With a marketplace, a retailer allows trusted 3rd party partners to sell products directly alongside its own. The retailer is essentially using its site to connect buyers and sellers. When the sale is made, the 3rd party seller is expected to ship the product and provide any customer service necessary. When the customer gets the product, the branding on the package and the contact info on the return slip is the supplier’s.
This all sounds similar to dropship, but there are some key differences:
- Accounting. A retailer using dropship will reflect the full topline revenue of the goods sold, but will also record all the costs of goods sold, which eats into profitability. A retailer using a marketplace will have zero COGS, reflecting only the commission it takes on the sale as revenue.
- Resource commitment. A retailer using dropship will need to commit significant resources to products sourced and fulfilled via dropship. It will need to know how to price and merchandise the product, how to service it, and it will likely need to make some kind of sales volume commitment. The byproduct of that level of commitment is a slower process to onboard new vendors. With a marketplace, on the other hand, the retailer will make zero commitment of resources and simply take a profitable commission on the sale. Marketplace sellers can be onboarded and selling products in a matter of hours.
- Branding. With a dropship model, all branding will be the retailer’s, whereas marketplace sellers use their own branding.
As a result, dropshipping tends to make sense for a smaller set of core products, while the marketplace model is the one that can scale far and wide and fast.
Dropshipping makes sense for:
- Core products that must have the retailer’s brand and are not easy to store and ship
- Products for which procurement teams can negotiate deeper discounts by committing to dropshipping
Marketplace makes sense for:
- Complementary categories
- Depth in core products
- Long tail items
- Products tests (e.g. new categories)
- Products with shortage
Given the speed and scale of the marketplace model, it is a critical component of growth opportunities for retailers. In the digital age, owned inventory and a small set of dropship products are not enough to capture the full revenue opportunity.
To put this into context, let’s look at the example of a familiar retailer that currently does not have a marketplace: Target. Target wants to expand its assortment of fidget spinners while the fad is hot because Amazon has it handily beat on selection (Target has 5 versus Amazon’s 135K+), and on price (Target’s best price for a fidget spinner is $14.99 versus $1.50 for Amazon).
If Target really wanted to capture revenue from this fad, it has three options:
- Bring more fidget spinners into owned inventory.
- Partner with dropshippers to provide more fidget spinners.
- Increase assortment of fidget spinners by inviting 3rd party sellers to offer their inventory of fidget spinners.
For retailers, bringing anything into owned inventory takes time – negotiating bulk purchases from suppliers, gaining expertise in the product, coming up with a pricing and merchandising strategy, and working the product into the supply chain for logistics. Since time to market is critical for a fad item like this, owned inventory is not a great approach.
If Target were to add fidget spinners via dropshippers, it still has to do all that work minus the supply chain piece. That still adds up to weeks or months, losing critical time.
With a marketplace, Target could have thousands of sellers offering thousands of fidget spinners in a matter of hours, giving their customers the choices they expect and creating price competition that will ensure the fair prices today’s consumers look for. And, there is no risk; Target does not need to pay any upfront sourcing costs and does not need to hold any inventory. All Target does is make sure it pleases its customers by having available this hot product they are looking for.
Viewed through the lens of the retailer, the differences between dropship and marketplace become clearer. Both are important mechanisms for range extension and assortment expansion. The marketplace model, though, is ultimately more agile and more scalable.
Without a marketplace, retailers are limiting their opportunity to please customers in a risk-free way.
Without a marketplace, retailers are sure to lose sales and stay a step behind the competition.
We would love to help you kick-start your marketplace journey, get in touch now to take the first step.