Dropshipping and Marketplace Selling: Strategic Choices and Trade-Offs

Businesses with a developed online presence pre-pandemic saw significant revenue increases through their online channels while businesses with underdeveloped online channels were able to expand their online footprint and generate higher margins.  Not surprisingly, more retailers, suppliers, and brands are looking to increase their revenue by entering the online market as a complement to their brick-and-mortar operations. 

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

D2C Drop ship and Marketplace: What’s the Difference?

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 buy and have it shipped to the customer from a third-party supplier. 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. Wayfair is a well-known example of a company that uses dropshipping to fulfill its orders.

D2C (Direct 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. 

This model also allows retailers to quickly source goods from new suppliers as consumer demand changes.

Dropshipping Benefits

With the fundamentals of each model clearly outlined, it is time to take a closer look at the pros and cons to the suppliers and retailers.

Dropshipping Benefits for Suppliers

• Total inventory risk
• Margin erosion, added costs
• Potential risk of poor customer experience through retailer, tarnishing your brand
• Possible loss of editorial control
• Expanded sales channels
• Open up liquidation sales
• Assortment testing

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 should lead to more sales. Additionally, excess product can be sold on flash sale or overstock specialty sites, which ensures better recovery than traditional bulk liquidation.

Dropshipping Benefits for Retailers

• Incremental costs
• Integrations
• Loss of control
• May be responsible for shipping costs
• More selection without adding more shelf space
• More profitable sales
• Assortment testing

 

Both models have their advantages, but different businesses may benefit more from one or the other depending on their strategy, business model and various cost factors. 

Driving Factors

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 suppliers themselves. They 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 D2C dropship model also allows retailers to quickly source new SKUs from new suppliers in response.

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 using site builders like BigCommerce or Shopify. 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.

Marketing expense

The main difference between the two models when it comes to marketing 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 increase if customers place orders containing items from more than one supplier. Retailers also see lower margins due to high product costs, since they are required to pay a premium for each individual order outsourced. Meanwhile, the competition is stiffer, so retailers need to allocate more funds toward marketing. 

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, probably 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 (Canada), Home Depot, and Express. 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.