A common question we frequently get it “what is the difference between the dropship model and the marketplace model?” These two terms are often used interchangeably, which has caused a great deal of confusion about the significant differences between marketplace vs dropship business models. In this post, we will provide clear distinctions between both models to help resolve any confusion you might have about the differences of each. We’ll also cover how the two operate in unison and why a marketplace should be on your road map right now, whether dropshipping or not.
With the dropshipping model, one party (the retailer) sells products to a customer and a third-party (usually a manufacturer or wholesaler) fulfills orders for those products to the customer on behalf of the retailer. While the customer gets the product from the wholesaler or manufacturer, the labels and packaging typically have the retailer’s branding and contact information. To the customer, the order came directly from the retailer they purchased from.
With a marketplace model, one party sells products and a third-party (virtually anyone – manufacturer, wholesaler, small business, another retailer, etc) delivers the product to the end customer on its own behalf. In this model, the customer gets the product from the third-vendor with the labels and packaging displaying the third-party’s branding. From the customer’s perspective, the package was sent by the third-party even though the purchase was made from a different site. Amazon is a great example of the marketplace model.
For retailers, one of the greatest appeals of the dropship model is the ability to sell products without investing in physical inventory and the risk associated with it.
The terms marketplace vs. dropship can become confusing without the correct context. For example, a marketplace seller (third-party sellers on marketplaces like eBay) may be using the dropship model to fulfill their orders. In the example below, imagine the seller – donfo-14 – is partnering with a wholesaler or manufacturer to dropship this phone case on its behalf.
The best way to grasp the differences between the marketplace vs. dropship model is to look at it from the perspective of a retailer. In a marketplace model, retailers partner with vetted third-party vendors to sell goods alongside their own. The retailer’s site becomes a connection point between consumers and third-party vendors. When a customer places an order, the third-party vendor is then required to ship the product directly to the customer while providing customer support if necessary. Once the order is delivered, the customer will see the third-party vendor’s branding and contact information on the packaging.
While this sounds very similar to dropshipping, there are a few significant differences:
- Accounting – Retailers who leverage a dropship model will need to account for the cost of goods sold (COGS) from their gross revenue, which will of course diminish their profitability. When using a marketplace model however, retailers do not account for COGS. Their revenue is generated from commission taken from the sale between a customer and third-party vendor.
- Commitment – In the dropship model, retailers will need to allocate resources to product research, pricing, merchandising, and potentially sales volume requirements. This results in a longer onboarding process when partnering with new vendors. The marketplace model differs as retailers do not need to commit to resources. They will take a profitable commission on sales made through their site, meaning new vendors can be onboarded relatively quickly.
- Branding – The dropship model often includes all branding on packaging to be the retailer’s, while the marketplace model requires third-party vendors to use their own branding.
For retailers with a smaller core offering of products, the dropship model usually makes sense. The marketplace model allows for virtually unlimited vertical and horizontal scaling, making it ideal for high-volume retailers with larger assortments.
Which model is right for me?
Dropshipping is best for:
- Core product offerings that are required to have the retailer’s brand and are not easily warehoused and fulfilled
- Products where a commitment to dropshipping can lead to deeper discounts
Marketplace is best for:
- Merchandising experiments
- Long tail products
- Complementary products
- Depth in core product lines
The scalability and speed of the marketplace model makes it a serious catalyst for growth opportunities. In online retail, vendor managed inventory with a relatively small collection of dropship products is no longer sufficient for maximizing revenue opportunity.
Let’s look at a real-world example of a large retailer who does not have a marketplace: Target. Target is interested in expanding its current catalog of CBD products to better compete with Amazon, who is dominating Target on CBD product selection and price. Amazon offers over 10,000 results for CBD products while Target shows 47.
If Target truly desires to capture a larger share of this rapidly growing market, there are three options for doing so:
- Invest in more CBD products for its owned inventory
- Find third-party vendors to partner with who offer CBD products through dropshipping
- Increase assortment by allowing third-party vendors to list their CBD inventory directly on Target.com
As a retailer, adding new products to your owned inventory takes a substantial amount of time. Negotiating pricing and developing a merchandising strategy alone will take significant amount of time. The longer Target waits, the more market share it risks losing as more players enter this industry.
By adopting a dropship model, Target could skip the supply chain piece of the process. However, price negotiation and merchandising strategies still come into play, making the dropship model less than ideal.
Through a marketplace, Target could procure hundreds of sellers offering thousands of CBD products in as little as a few hours, allowing customers the shopping experience they’ve come to expect while creating healthy price competition that benefits the end consumer. The best part is that Target does not have to assume any risk. There are no upfront inventory costs, so Target can focus exclusively on meeting customer expectations by offering products from a booming industry.
From the perspective of a retailer, the key distinctions between a marketplace vs. dropship model become obvious. Both models allow retailers to expand their product range and assortment, but the marketplace model is much more scalable and agile – especially for a retailer like Target.
By not adopting a marketplace model, retailers miss the chance to re-engage customers without risk. They also submit sales and customers to competition the longer they lag behind.
Let F13 Works help you launch your marketplace the right way. Get in touch to take the first step.