Established retailers exploring how a marketplace model would best fit into their business strategy have a common question — what’s the difference between dropship and marketplace fulfillment that utilizes third-party sellers, and how can it benefit their business?
The answer is, quite a lot.
Dropshipping means different things to different businesses. There are nuances based on type of retailer, existing ecommerce strategy and whether the products are first-party only or also include third-party fulfillment.
One customer we worked with had been managing over 100 third-party fulfillment relationships following a traditional dropship approach. At that volume a marketplace model is the most efficient way to scale through use of technology.
And the good news is, dropshipping and a marketplace model are compatible, albeit requiring different approaches based on the needs of your business.
Differences Between Dropship and a 3P Marketplace
When examining the step-by-step process of traditional dropshipping versus running it through a marketplace technology platform, stark differences start to emerge.
Product ownership flips: In a traditional dropship model, legal custody of product ownership transfer happens between the retailer (or operator) and the consumer. In the marketplace model it flips, with the product transfer happening between the seller and the consumer.
Seller-controlled pricing: In the traditional dropship supply path there are several manual processes that become automated through direct seller access when sharing a marketplace platform.
For example, with dropship, the retailer’s buyers must pre-negotiate pricing with third-party sellers for most products. Doing this at scale can be cumbersome, especially when also having to manage the data entry on the brand’s site. In the marketplace model the pricing side is simplified.
Sellers are onboarded on a commission basis and the seller is responsible for determining product pricing and availability as it appears in the marketplace on the retailer’s website. For example, they can decide whether to make a manufacturer’s suggested retail price (MSRP) visible for buyers or indicate to the marketplace operator that they don’t want to sell above that limit.
ERP efficiencies: With dropship, a retailer’s Enterprise Resource Planning (ERP) solution has to be made aware of seller products, inventory and sales. They also must record the cost of goods sold, which affects topline profitability. In the marketplace model, because the platform becomes a data center, it creates less of a need to issue purchase orders through ERP.
The ERP would no longer have to worry about issuing a purchase order. Additionally, accounts payable does not have to worry about incoming invoices from suppliers since they no longer have to issue invoices now that operators control payouts via the commission, which is designated in the platform. Instead of supplier-issued invoices, here the operator is telling the seller, ‘I am paying you this amount.’
Less burden on the retailer: The very nature of a marketplace platform caters to third-party sellers, making it easy for them to onboard their products, content, pricing, promotion and discount parameters, and more. With traditional dropship the burden falls on the retailer’s merchandising team to manage product curation and dynamic information. In the marketplace model, third-party sellers take on more management of their inventory.
These are just a few compelling reasons we’ve seen for retailers to scale up third-party fulfillment partners through a marketplace model. Retailers often want to pick and choose which third-party products are being offered and how they are represented on their site, which gives them more control in protecting their brand name and increasing loyalty. It’s also increasingly viewed as a low lift and low-cost way to “test” a new category.
Retailers that are exploring a marketplace model can expect a shift in automation and efficiency when connecting with sellers through a marketplace platform. It helps bring on price and inventory with a faster turnaround that scales, all while delivering a customer experience a brand can be proud of.
Richard Hankin is SVP of go-to-market strategy in North America for Marketplacer, a global technology software-as-a-service platform equipped with all the tools and functionality needed to build successful and scalable online marketplaces at speed.