Ecommerce Drop Shipping vs. Marketplaces: Pros, Cons

This is the fifth installment in my series on drop shipping and inventory supply models.

In “Drop Shipping for Ecommerce, Part 1: Supply Chain History,” my first article, I addressed basic supply chain evolution inside of ecommerce. Then, in “Part 2: The Basics,” I defined drop shipping, reviewed contradictory real-world advice about it, estimated how large it might be, and outlined some specific challenges to adopting it. “Part 3: Suppliers vs. Retailers” addressed how drop shipping alters the traditional relationships between suppliers and retailers. Last month, in “Part 4: Winning Strategies,” I covered the methods of the most successful drop shipping retailers.

Most of us are familiar with the idea of an ecommerce marketplace. Ebay was a pioneer of the model. The best known marketplace is Amazon, which allows third parties to sell products alongside Amazon’s regular inventory. Many other retailers — such as Sears, Walmart, Rakuten, Newegg, Staples, and even Toms Shoes — have launched marketplaces.

Making the distinction, as a consumer, between in-house inventory and a marketplace item is a pretty simple. You’ll typically see something that looks like these screen shots taken from Amazon, Walmart, and Sears.

Amazon marketplace.

Walmart marketplace.

Sears marketplace.

You can see that the item is sold by someone other than the retailer, such “Sold & Shipped by eForCity” in the Sears marketplace example, above.

Ecommerce marketplaces are big business. Amazon sells more merchandise from its marketplace than from its own products. What’s behind this business model? And how does it compare to what we’ve been covering in this introductory series on drop shipping?

Similarities: Drop Shipping vs. Marketplaces

Ecommerce marketplaces and drop shipping are both based on a key foundation: the entity selling the product to the consumer does not physically control that product. Both are distributed product supply strategies. As I outlined in “Part 1: Supply Chain History,” they both allow retailers to significantly increase the supply that they offer to consumers. After the sale, both models rely on a third party to fulfill the product to the customer. For both models, the flow of virtual product data and physical product logistics are identical.

Marketplaces refer to their distributed supply sources as “sellers.” Drop shippers refers to them as “suppliers/vendors.” Brands and manufacturers are often involved with both models: They have seller accounts with marketplaces and also work with drop shipping retailers as vendors.

Differences: Drop Shipping vs. Marketplaces

There are, however, important differences between ecommerce marketplaces and drop shipping. Those differences involve the shopping and point-of-sale experience and the underlying business model.

• Source. With marketplaces, there is disclosure to the consumers that the product is physically located and controlled by someone other than the retailer. As mentioned above, it’s the “Sold & Shipped by eForCity” notation. Additionally, most marketplaces take an additional step and produce ratings and reviews of the seller’s performance. Many marketplaces also provide a seller storefront inside of the broader ecommerce site so that you can see all of the products that seller has put into the marketplace.

Drop shipping hides these facts. The consumer sees a brand, but cannot identify that someone other than the retailer is fulfilling this product. In the early days of ecommerce drop shipping, this was called “blind drop shipping” because the consumer is indeed blind to these dynamics.

• Selection. With a marketplace, the retailer typically doesn’t control or curate the products from third party sellers. With drop shipping, however, retailers curate, select, and merchandise products in a similar fashion to how they approach wholesale purchasing and buying.

• Price. With marketplaces, sellers set the price to the consumer. With drop shipping, however, the retailers control the prices.

• Fulfillment. With both models, the retailer does not control the fulfillment. The retailers cannot offer branded packaging or box inserts. With marketplaces, the seller typically specifies what shipping carriers and methods it will support. In most cases, drop shipping retailers dictate those methods to their suppliers.

• Customer service. To return a product, both models require the customer to get a return authorized. But for a marketplace transaction, the customer contacts the seller directly. With drop shipping, the customer contacts the retailer, who then coordinates with its up-stream suppliers.

• Business model. The business models are different. Marketplaces collect money from the customers, and then keep a portion of it and send the rest to the seller. With drop shipping, the retailer collects from the customer and remits the previously-negotiated wholesale amount (plus fulfillment costs) to the vendor — and keeps the difference.

• Accounting. If a marketplace provider sells a $100 item, and its marketplace fee is 10 percent, it counts only $10 as revenue. That’s why Amazon’s third-party transactions are almost 100 percent gross margin. With drop shipping, the retailer would account more traditionally, and record the $100 as revenue, then subtract the cost of goods sold.

Strategies

Both models provide pros and cons — mainly around transparency. Smaller and new retailers may find that product suppliers have more credibility in their brands (versus the retailer’s own brand) and might therefore consider marketplaces. Moreover, for certain product categories (like apparel) with a high percentage of returns, marketplaces might make all the moving pieces easier for you, your supply partners, and the customers.

It’s really about making sure you understand what experience you want to deliver to the end customer. Today’s consumers are familiar with the idea of “Sold & Shipped by eForCity.” So selling on marketplaces seems to be accelerating. Most marketplaces are large retailers leveraging their massive demand aggregation to entice the product sources to engage. However, in the last year or two, there have been many more start-up ecommerce retailers that utilize marketplaces. I see that trend accelerating. Increasingly, online retailers will look to a marketplace model to move inventory, and drive sales.

Originally published at Practical Ecommerce: http://www.practicalecommerce.com/Ecommerce-Drop-Shipping-vs-Marketplaces-Pros-Cons