The COVID-19 pandemic is having a major impact on retail and consumer behaviours worldwide. Whilst consumers are switching online to demand greater availability and variety, retailers face the challenges of a weak supply chain and the ability to quickly source products consumers want. The essence of this shift from offline to online essentially is: if retailers stop being relevant online, they will progressively lose relevance among shoppers in total.
It is more than evident that digital transformation has never been more prevalent. However, as retailers accelerate the digitalization of their companies, they must make important decisions on which e-commerce model will best serve them and their consumers during and beyond this pandemic — the traditional drop-ship model, or the rising marketplace model?
The terms marketplace and dropship are often used interchangeably, despite there being quite significant differences between the two models. In this blog, we explore the differences between the two models and why the marketplace model is the best way forward.
So let's start by having a look at what the purpose of each is.
Dropshipping: Effectively, dropshipping was originally invented with one main purpose. To reduce supply chain complications for a small number of specifically- selected products in core categories. As such, when dropshipping, retailers sell products that are shipped directly from the suppliers, but they retain control over promotions, customer service, and importantly pricing.
Marketplace: The purpose of online marketplaces is to help businesses evolve through digital transformation. This is done by significantly scaling online selection and availability without significantly increasing overheads. When using a marketplace model, retailers sell products that are shipped and priced directly by sellers to gain merchandising agility and scale faster.
Now we know what the primary purpose for the creation of Dropshipping and Marketplace models was, let's delve deeper into the differences between the two and the impact they can have on one's business.
- One party sells a good and another party delivers the goods on behalf of the seller.
- From the customer's POV, the box came directly from the seller they purchased from.
- 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.
Marketplace: A marketplace is an online platform, similar to Farfetch, Amazon, or eBay, where sellers can effectively host their stores. The model allows third parties to sell products alongside the marketplace’s regular inventory.
- One party sells a good and another party delivers the good - on its own behalf.
- From the customer's POV, the box came from the 3rd party seller, even though the customer made the purchase at another site (e.g. Amazon).
- The customer gets the product with all the branding on the box and returns shipping labels having the 3rd party seller's branding.
Effectively, there are 3 main advantages for a retailer or online shop owner when using a marketplace instead of Dropshipping. Let's have a closer look at each below:
Accounting. A retailer using dropship methods, 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 cost of goods, reflecting only the commission it takes on the sale as revenue.
Resource commitment. When dropshipping, a company will need to allocate significant resources to products sourced and fulfilled via dropship. It will need to know how to price, maintain and merchandise the product, and it will likely need to a certain level 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. With Marketcube'ss free onboarding process, that becomes even easier at no cost whatsoever.
Branding. With a dropship model, all branding will be the retailer’s, whereas marketplace sellers are able to make use of their own branding. Subsequently, 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.
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