Dropship versus marketplace: Determining what’s best for your growing business

Whilst the perpetual search for continued success in ecommerce continues, retailers looking for a business strategy for growth and scale are sometimes torn between the dropship and marketplace models.

Both are becoming popular routes to broadening catalogue range and revenue opportunity. The dropshipping market is estimated to be worth $1.25bn by 2030, with a CAGR of 23.4% in that time. Meanwhile a report by ChannelX affirms that globally more than 35% of all online purchases are made on a marketplace. In Europe, marketplaces account for 85% of web traffic and represent 62% of the top 100 retailers by category.

At its most basic, the key difference between the two models is that in the drop ship model the retailer is the seller of record and sets the price. In the marketplace model the supplier is the seller of record and sets the price.

Don't worry, reader! It's a common misconception that adopting a marketplace model means becoming a mega marketplace and attempting to compete directly with Amazon. In truth, most retailers who embrace a marketplace strategy take a more curated approach, expanding their product range within their existing or adjacent categories, rather than aiming to compete with large platforms.

While both approaches offer opportunities for entrepreneurs to enter the ecommerce landscape, they fundamentally differ in various ways. By understanding these differences, retail leaders can make informed decisions to drive their business success.

The challenges of dropshipping

In a dropshipping setup, the online retailer acts as an intermediary between customers and suppliers and doesn’t maintain inventory or handle product fulfilment. When a customer places an order, the retailer purchases the item from a supplier who directly ships it to the customer.

But while the benefits of a retailer using suppliers in a dropship model include low upfront costs, minimal inventory risk, and easy scalability, its challenges could range from lower profit margins, limited control over product data quality and shipping times, and potential supplier reliability issues.

Since a seamless retail experience is all about data, in a dropship set-up some suppliers do not always have great product data. This should be a consideration for retailers as the products supplied may not be consumer ready, meaning they will need to invest administrative time and resources to enrich the products on behalf of the supplier, using internal or external data sources.

From a logistics perspective, third-party suppliers can be great at getting boxes, palettes or even truck loads of stock from A to B.However, they might not be as mature when it comes to delivering direct to the consumer, with any friction in the customer experience potentially impacting on consumer trust and brand loyalty.

Other key processes such as the returns and quality assessment journeys may also not be as mature due to third-party suppliers’ calibre in providing this reverse logistics service direct to consumers. If retailers underestimate or overlook these administrative requirements this may impact their customer loyalty and ultimately, the bottom line.

Understanding the marketplace model

Alternatively, a marketplace set up is where an online platform features multiple sellers showcasing and selling their products, while handling their inventory, order fulfilment, and customer support. The advantages of a marketplace solution are the vast customer base, established brand reputation, and the ability to offer a wide range of products. However, operating a marketplace involves significant investments, intense competition, and the need for effective seller management to ensure quality standards and customer satisfaction.

With a good marketplace technology platform there are a host of features to help add and manage sellers and transactions from end to end. This allows sellers to manage their own inventory, shipping, and returns behind the scenes, creating a more seamless shopping experience.

Key advantages of marketplaces

Done well, a marketplace model can scale more easily than dropshipping and better manage sellers, and they can bring communities together, connecting like-minded buyers and sellers. Some key advantages of a marketplace approach include:

Revenue streams: The marketplace model generates revenue through various streams, such as transaction fees, listing fees, and premium services for sellers, rather than relying on the margin between wholesale and retail prices, which can limit revenue diversity.

Scalability: A marketplace allows the retailer to scale rapidly by onboarding multiple sellers and a wide variety of products without having to manage inventory or logistics directly. With dropshipping, scaling is limited by the number of suppliers and the complexity of managing relationships with them, which can constrain product variety and growth.

Customer experience: Unlike with dropshipping, where customer experience is often tied to the reliability of the drop shipping supplier, which can be inconsistent. Marketplaces offer more control for the retailer over the sellers and products and customer service. This ensures a unified customer experience for their shoppers.

Profit margins and costs: Marketplaces allow for greater flexibility in pricing and sourcing, often leading to higher profit margins when compared to dropshipping. Expanding product lines or testing new categories in a marketplace is financially less risky, as a retailer can leverage multiple sellers without investing in unproven categories.

Logistics and Operations: In a marketplace model, sellers are responsible for managing their own inventory, logistics, and order fulfilment. If the seller already operates a direct-to-consumer business using a modern commerce platform, no-code integration methods are often available, making onboarding and product listing easier. This typically results in a smoother and faster onboarding process for new sellers. However, for dropship sellers focused on B2B operations, older systems and more complex integration methods may be common, potentially slowing the process.

Control over branding: Launching your own marketplace allows owners to set their own rules with regards to branding, sellers, and products. This allows them to curate a brand presence that becomes a go-to destination in their market.

Five considerations for building a marketplace strategy

By making the following fundamental considerations to getting started, a retailer can establish their own marketplace, grow at their own pace, turn challenges into opportunities and take revenue growth a step further:

1. Carefully consider business goals, resources, and priorities to determine the most suitable marketplace model.
2. Evaluate how a marketplace could support the retail catalogue. Marketplaces can help retailers expand what they offer in their catalogues and branch out to new brands and markets with less investment risk. Adding more 3p range means the ability to offer more value to existing customers and give an opportunity to tap into new customers.
3. Select a scalable, flexible and secure technology platform that can handle growth. Retailers can grow and scale in today’s evolving e-commerce environment using integration solutions that incorporate third-party seller inventory into their e-commerce platform.
4. Develop a Seller and Supplier Acquisition Strategy to identify, attract and onboard sellers that offer high-quality, in-demand products, factoring in seller vetting to maintain brand reputation.
5. Consider cost and time in building for success – both are big considerations, especially when thinking about a custom build or a launch based on existing enterprise-grade tech.

Flexibility and collaboration are table stakes for building a marketplace that scales

How each individual retail brand manages its approach to range extension is critical to success and will be dependent on the needs of each business in its market sector. Having made a choice of direction – dropshipping or marketplace or both - open communication with third-party sellers is the secret to building strong partnerships that will drive the business’ journey to success.

This means supporting and guiding sellers effectively as they onboard and add products, as well as including their products in promotions. It’s also critical to be able to access and share data that will mutually benefit the marketplace owner and third-party sellers, to sell more products.