B2B & B2C Dropshipping vs Marketplace: Strategic Choices and Trade-Offs

To succeed in modern commerce, companies need to understand the differences and cost benefits of the two main types of business models for digital commerce: dropship and marketplaces.

What is Dropshipping?

Dropshipping is a way for retailers to fulfill orders without having to hold their own inventory. Instead, when a retailer sells a product, they send the order to a third party seller for fullfiment and shipping directly to customer. Typically, the retailer’s branding appears on the packing slip and packaging, so the end customer may never even realize the product isn’t coming directly from the retailer. Almost every big box store and retailer is known for this practice, even Amazon, who runs both a marketplace & dropship platform, depending on the goods sold.

B2C (Buisness to Consumer) Dropship is a fulfillment method where suppliers ship orders on behalf of the retailer. A customer places an order from a retailer’s site, then the retailer places the same order at a from a supplier or brand and has it shipped directly to the customer with their own branding applied. Retailers do not need to hold their own inventory, reducing the risk of holding on to excess, unsold goods. B2B (Business to Business) Dropship is very similiar, and is faciliated the same way. Business orders, however, are typically larger and more focused on pallet size, rather than individual orders. 

Fundamentally, there is no change for the retailer/distributor when faciliating B2B orders or B2C orders.

This model also allows retailers to quickly source goods from new suppliers as consumer demand changes for both B2B and B2C. 

Dropshipping Benefits

B2C Dropshipping Benefits For Retailers & Suppliers

• Customer Access
• Customer Acquisition Cost (CaCs) Reduction
• Brand Awareness Expansion
• Expanded Sales Channels
• Assortment Testing
• Reduced Shipping Costs
• Strategic Brand Improvement Via Targeted Suppliers
• Increased Margins
• Lower Operating Costs

For retailers, the perceived risks of dropshipping are mostly financial from managing relationships and integrations to possibly being on the hook for shipping costs. However, the benefits of dropshipping negate the expenses, with cutting inventory and overhead costs, typically not being responsible for pick, pack, ship (as the suppliers take this on), and testing assortment. These inventory tests allow retailers to offer new products and expand the line without any risks. If the products sell, they reap the benefits of increased sales without ever having to buy bulk inventory. Dropshipping typically gives a retailer more control with a tradeoff of liability. Marketplaces allow more autonomy for sellers, a legal safety net, but can negatively impact experience associated with the channel, as much power is given to the suppliers.

Though suppliers have the risk of inventory (storage, shipping, etc.), the benefits of selling through expanded sales channels alleviates the con of having too much inventory on hand, as more exposure leads to more sales. Additionally, excess product can be sold on flash sale or overstock specialty sites, which ensures better recovery than traditional bulk liquidation.

B2B Dropshipping Benefits For Distributors & Manufacturers

• Increased Margins
• Lower Operating Costs
• Assortment Testing
• Reduced Shipping Costs
• Customer Access
• Customer Acquisition Cost (CaCs) Reduction
• Special Order Assortment
• Becoming a “One-Stop-Shop”
• Reduced Out Of Stocks (OOO) and Lost Sales

As you can see, B2B benefits for Distributors and Manufacturers are fundamentally similiar but start to diverge as you look at the big picture. For B2B organizations, dropshipping operates almost identically but also provides businesses the opportunity to set up ‘special orders’ of certain products that you wouldn’t normally have on site, the ability to reduce OOO and ample coverage across your distribution network, and the ability to meet an evolving workforce that expects B2B catalog ordering to be as easy as shopping at Amazon. Consumers, whether its B2B or B2C, expect to buy their entire shopping cart in one location. B2B dropshipping gives your organization the unique ability to become a ‘one-stop-shop’ for all your customer’s needs.

The Honest Truth About Marketplaces

Realistically, virtually no retailer or distributor would enjoy an open marketplace model for their eCommerce operation. Open Marketplaces increase risk across the board, except in owned inventory. Even the largest open marketplace in the world, Amazon, doesn’t operate solely as a marketplace given their immense amount of dropshipping capabilities.

While curated marketplaces, ones that feature only a select group of products that meet your brand expectations, could function better for the average retailer/distributor, it comes with the added risk that suppliers poorly manage their own inventory streams and customers blame your organization for facilitating the transaction. 

Driving Factors When Deciding Between Dropshipping & Marketplace

Reduce Inventory Risk and Costs

Keeping inventory in house is one of the main differences between the two business models when it comes to cost. With dropship, retailers never hold or handle inventory, so they avoid inventory risk. Not holding the inventory also reduces or avoids some operating costs. In addition, with applications that automatically sync quantities from retailers’ sites to suppliers’ inventory, the risk of overselling and going out of stock is essentially non-existent. 

On the other hand,  marketplace sellers are often required to be suppliers themselves (think Amazon Warehouses ensuring over 70% of all products sold are faciliated through their distribution centers). These retailers carry inventory and are therefore susceptible to inventory risk. They must account for the cost of goods sold plus holding, handling, and shipping expenses. This provides a lower cost of inventory for the retailer and reduces their risk of unsold inventory. 

Expand and Manage Product Offerings

The time saved from dropship on handling inventory can be allocated to sourcing a larger pool of suppliers to offer a wider array of products. In a dropship model, the retailer has more control over the products being offered and how they are described and priced on their own site.  

As consumer demands and trends change with the ebb and flow of seasons, styles, and TikTok trends, the B2C dropship model also allows retailers to quickly source new SKUs from new suppliers in response.While Marketplaces do offer the ability to rapidly move products on and off their site, they reduce the retailer’s ability to control what products are being showcased at any given moment.

Technology Platforms

Both dropship and marketplace retailers need a technology platform and business processes to build a strong online presence and manage supplier relationships. Dropship retailers normally build an eCommerce site or app. They maintain their site and assume all associated costs. 

For marketplace retailers, on the other hand, the price of entry is much lower, with many marketplaces, such as Amazon, Wayfair, eBay, and Etsy, offering free retailer registration.

Brand Control

The main difference between the two models when it comes to marketing & brand control is which party assumes marketing expenses. With dropship, the retailer is responsible for marketing products and engaging customers with their brand. They have more control over the end-customer experience, with suppliers typically using retailer packing slips and branding. Well-executed shipping leads to customer satisfaction and repeat business, so it’s important for retailers to maintain strong seller-supplier relationships.

With marketplaces, the marketplace operator assumes marketing expenses and the retailer, in turn, complies with marketplace promotions and events such as Amazon Prime Day and Black Friday. Retailers who hold products in marketplaces sacrifice their branding, since customers know orders are being outsourced and suppliers ship on their own behalf. Suppliers can expect high traffic through marketplaces but may also experience the downsides of selling in an environment saturated with similar products. 

Through SEO tactics and product differentiation, however, marketplace retailers can set themselves apart from the competition.  In terms of customer behavior, dropship marketing encourages customers to buy products directly from retailers’ sites, strongly tying those products to the retailer’s brand. Marketplace marketing, meanwhile, directs customers to bestselling items and high-volume ordering practices through promotions and subscription deals like Amazon Prime. This trains customers not to buy products directly on retailer sites and encourages loyalty to the marketplace instead of to individual brands. 

Investment, Profit and Revenue

The up-front investment required to start selling online is relatively lower for marketplaces than for dropshipping. But where businesses see larger revenue differences between the two models has to do with how each model is used and who is implementing. 

For dropshipping retailers, shipping costs are generally lower but increase if customers place orders containing items from more than one supplier, as its up to the retailer to faciliate packaging and package slips. Retailers also see lower margins due to high product costs, since they are required to pay a premium for each individual order outsourced.

Another consideration is when each party involved sees their revenue. Retailers often hold funds in escrow, and suppliers do not see revenue until after 7-14 days (sometimes longer), giving the customer enough time to report any dissatisfaction. Through marketplaces, sellers may face lower sales volume due to competition with similar products, thus impacting revenue. Commissions and listing fees also eat away at profit margins.  

Taxes

Sales tax must be collected on most online transactions. But it’s not always clear whose responsibility this is. It is important to consider economic nexus laws by state, as each state has different thresholds for when sales and orders must be taxed. Dropshipping requires two transactions to be made: the first between the retailer and the customer and the second between the retailer and the supplier. 

Normally, the retailer charges sales tax to the customer, depending on the state the order will be shipped to. But depending on the state where the transaction is made and where the three parties are located, the retailer may be charged sales tax by the supplier. 

Through marketplaces, the distinction is clearer, since only one transaction is being made and the marketplace operator charges sales tax to the customer.

What makes the most sense for your business? (hint, it’s probably dropship or a combination of both) 

The good news is that you don’t have to decide between dropshipping and marketplace. Both methods, marketplace selling and dropship, ultimately lead to more exposure and more sales, and can be implemented with little to no risk.

If you’re looking to expand your product assortment without holding inventory, dropship is an excellent option. Historically, dropshipping has allowed retailers to sell larger items, like furniture, without needing to worry about shipping or holding the large items in their warehouses. Because there are no overhead costs for inventory, you can offer a supplier’s full product line, rather than just a few pieces.  

Marketplace, meanwhile, is an excellent way to diversify your offerings and reach new customers. Many retailers and brands that offer their own products (either via held inventory or dropshipping) are incorporating marketplaces, including Walmart, Best Buy, and Home Depot. For example, while Best Buy has in the past been viewed strictly as an electronics store, with their marketplace they offer consumers products in new categories including luggage, furniture, jewelry, and more. These orders will be delivered with the brand/seller’s branding, as opposed to Best Buy’s. 

Final Thoughts on Dropshipping vs Marketplace Selling

Dropshipping and marketplace selling both offer advantages, depending on a retailer’s or supplier’s goals.  Overall, dropshipping is ideal for retailers and brands who want to offer a broad selection of products but have control over curation and presentation with a smaller pool of core products, while connecting to a new marketplace can offer accelerated growth, new customer reach, and the opportunity to offer competitive pricing.  

Leveraging both models together can be a strategy as well: by diverting marketplace traffic back to their dropship platforms, brands and retailers can drive customer loyalty and hedge against marketplace cannibalization. For this hybrid approach to succeed, retailers  will need a robust yet agile eCommerce fulfillment platform that can handle both dropship and marketplace connections.

Regardless of which eCommerce model retailers adopt, building and maintaining strong relationships with suppliers is crucial for fostering customer loyalty and driving business success. Through Logicbroker’s eCommerce fulfillment platform and Connected Commerce NetworkTM, retailers, brands and suppliers can connect with each other and with Logicbroker’s cutting-edge dropship and marketplace solutions to open new roads to eCommerce growth. 

Traditionally, implementing a dropship or marketplace program was time-consuming and cumbersome, requiring complex integrations. With Logicbroker’s modern dropship and marketplace solutions, clients can quickly add new dropship suppliers and marketplace merchants and brands or upgrade their existing dropship and marketplace technology.

Let us help you quickly grow and diversify your product offerings and dramatically broaden your reach without increasing your held inventory or investing in new fulfillment resources. To learn more, contact us today.