The ecommerce industry has seen incredible growth in recent years, which has given online sellers new opportunities to make customers happy while bringing in a profit. Two models have had a parallel rise in popularity, making it hard for brands to know which option to choose.
We're talking about dropshipping vs. marketplace.
Both options can help any ecommerce business succeed, depending on the specific companies. We want to help you find the best match for your brand, so we've put together this article that will compare the two while highlighting the advantages and disadvantages of both.
What is Dropshipping?
*We've covered the fundamentals of dropshipping extensively in another recent post but wanted to provide a quick overview for comparison. Check out the beginner's guide article for an in-depth look.
Dropshipping is using a third-party seller to fulfill orders on sales you generated. You do the work of building the customer relationship, marketing the product, and making the sale. Then you pass off the rest to third-party sellers who handle inventory and delivery.
It makes no difference who handles what to the customer, as long as it doesn't affect their product or experience. Many brands work with sophisticated software systems that help automate the process into one seamless transaction to accomplish this.
What are the advantages of Dropshipping?
Dropship programs have recently grown at a substantial rate. That doesn't happen unless brands see legitimate results and benefits.
Here are a few of them:
- Reduced expenses around inventory, warehousing, product development, and manufacturing
- Easy entry point for running an ecommerce store
- Wide selection of product offerings
- Increased focus on selling and reaching new customers
Dropshipping allows brands to focus on building their business without having to produce actual products.
What challenges come with Dropshipping?
Dropshipping works great for a particular type of online store. It usually brings the most success to companies who carefully select a collection of core products to highlight and sell.
It does still have its challenges, however. Dropshippers can be challenging to work with if you don't find the right fit for your company. That relationship becomes a core part of your business because the dropshipping company functions as a middle man between you and your customers. You have to trust them to deliver on what they promise.
Additional challenges include:
- Lower profit margins than traditional selling
- Reduced control over the whole process
- Increased distance between you and your customers
- Potential conflicts between brand priorities
- Oversaturated market
The Biggest Challenge with Dropshipping
Brands who dropship also have to deal with the fact that they will still have to find a place to sell their products. Those who don't have an established online store will have to partner with marketplaces anyways.
Many online stores succeed with a dropship model despite these challenges, but that doesn't make it a one-size-fits-all strategy. Knowing what to expect can help you decide if it's the right fit for your online business.
What is the Ecommerce Marketplace Model?
Marketplace selling looks much different than dropshipping. Whereas dropshipping allows your brand to partner with a company that handles the product side of the business, the marketplace model brings you into a relationship with a company that focuses more on marketing.
Consider some of the largest marketplaces: Amazon, eBay, or Walmart. These brands don't make every product they list. Most of their products come from third-party sellers who trust the marketplace to attract customers looking for products.
In this way, the marketplace model works like a shopping mall. Each store sells its products alongside other stores, while the marketplace functions as a one-stop-shop for customers to access multiple vendors and find the products they want.
What are the advantages of online marketplaces?
Marketplace sellers gain access to several perks when they partner with successful platforms.
Some of the benefits are:
- Access to a more extensive customer base
- Reduced marketing costs
- Greater transparency with customers
- Better opportunity to build trust with your buyers and increase customer loyalty
Brands who choose the marketplace model also experience some of the same benefits dropshipping businesses do because the marketplace will often fulfill orders. Programs like Amazon FBA or Walmart Fulfillment Services make it easy for brands to outsource their inventory and fulfillment needs without utilizing a dropship partner.
What are the challenges of online marketplaces?
Selling on a marketplace comes with its issues. You still hand over some control to a different brand, and you must play by their rules to stay on their platform. You're a guest in their house – a wanted one – but a guest, nonetheless.
Brands often go through struggles to reach success when they join a marketplace. Some things to consider:
- New vendors may struggle to stand out amongst more established competitors.
- Many marketplaces will take a percentage of sales or charge fees for different services.
- You may have to adapt to different marketplaces' terms and conditions.
- Vendors rely on the success of the marketplace's brand for their success.
The Biggest Challenge With Marketplace Selling
The symbiotic relationship between sellers and marketplaces can become complicated quickly. Because you sell the products their customers want, they want you to succeed. You want their marketplace to succeed because it will bring customers to buy those products.
When you develop the right strategic partnerships, that mutual dependency works brilliantly. But it can start causing issues if either side makes it difficult for the other.
Sellers can do their part to reduce the friction by:
- Following the guidelines and procedures set out by the marketplace
- Thoughtfully considering which marketplaces they want to partner
Little challenges will always come up, but you can keep things running smoothly by following those two steps.
Questions to Ask When Considering Dropshipping or Marketplace Selling
There is plenty of overlap between dropshipping and marketplace selling, but they are not interchangeable business models. Success comes from knowing the options and which one best fits your brand's unique needs. That highly selective decision will require your team to work out the nuances, but asking these questions can get you started:
- Would you rather sell products or develop them?
- Does it matter to you what kind of products you sell?
- Can you handle the inventory load of selling on an online marketplace?
- How much are you interested in dealing with logistic details?
- What kind of customer experience do you want to provide?
- Are you looking for a long-term solution or a short-term start?
Closing Thoughts
Your ecommerce business has plenty of options for success. Dropshipping and marketplace selling have become popular models to help sellers and customers alike.
With so many similarities between the two models, brands who develop a nuanced understanding of their options will have a better chance of success with either one.
Brands will also benefit from utilizing software to help automate and streamline their multichannel sales operations. Our flexible solution allows you to have a single source of truth for all your data, no matter what model you choose.
Learn more about how our platform can help you succeed with a free demo with our expert team.