There is no denying that eCommerce is here to stay. In fact, COVID has only further enhanced brands’ interests to expand their digital sales channels. Just this past year, eCommerce grew over 44% as consumers shifted their buying power online. Brands have been forced to alter their strategy in hopes of placing them where their customers are: on digital retailers. While deciding which channels might be the right choice for your brand, you may have also contemplated both drop ship or marketplace models, and which is the right fit for your business.
Let’s take a deeper dive into these two models:
What is Drop Shipping?
Drop Shipping is a retail fulfillment method where a store (such as an online retailer) does not keep the products it sells in stock. Instead, when a store sells a product using the drop-shipping model, it purchases the item from a third party and has it shipped directly to the customer. As a result, the brand doesn’t have to handle the product directly.
How Drop Shipping Works:
- A customer places an order for a product on the retailer’s online store.
- The retailer forwards the order and shipping details to the drop ship supplier.
- The drop ship supplier packages and ships the order directly to the customer in the retailer’s name.
As a result, the selling merchant does not stock or own inventory. Instead, the seller purchases inventory as needed from a third party – usually a wholesaler or manufacturer – to fulfill orders.
Benefits of Drop Shipping
Drop shipping is a great business model because it’s accessible. With drop shipping, you can quickly test different products and channels with limited downside, which helps you learn a lot about how to choose and market in-demand products. Here are a few other reasons why drop shipping is such a popular model.
- Speed and visibility – Quickly and effectively feature many products on multiple channels.
- Easy to get started – Cymbio enables seamless brand-to-retail connectivity. Automating the complete retail set-up, onboarding and daily management of processes.
- Widening your product assortment with each retailer- You can feature a broad assortment with a variety of department stores and drop ship programs.
- Reach new and different audiences – Each channel provides your brand the opportunity to widen its reach and gain a variety of new customers.
- Marketing expenses – Selling on marketplaces naturally expands the reach of your brand with no added marketing expense.
What is a Marketplace Model
Online marketplaces connect buyers and sellers on a proprietary platform. Often, the marketplace operator does not hold or own any type of inventory but helps the buyers and sellers to facilitate a transaction.
How a Marketplace Works:
- The brand is the seller to the end consumer. The end consumer understands it is coming from the brand (manufacturer, wholesaler, another retailer, a mom-and-pop seller, etc.)
- From the customer POV, the box came from the 3rd party brand, even though the customer purchased on another site (e.g., Amazon).
Benefits of Selling on a Marketplace
- They are very popular – Whenever people buy online, there is a huge chance they will go to a marketplace.
- You get instant reach to millions of customers – When you start selling your products on a marketplace, you get automatic access to all its customers without having to spend any money on marketing.
- You benefit from the reach of the marketplace – In a marketplace setting, you only need to worry about the internal rankings – you don’t need to convince any customer to come to your actual D2C website.
- Built-in global market – A lot of marketplaces operate internationally, so you’ll be able to instantly expand your reach.
5. Starting is simple and quick
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- Testing ground – You’ll be able to sell products that you have a surplus of or introduce new items and styles.
- Expand your niche – You will find different types of people browsing your brand which could expand your customer base to additional customer types.
- Marketing expenses – Selling on marketplace naturally expands the reach of your brand with no added marketing expense.
The Difference Between the Two
The main difference between these two models are 5 core elements: What is your margin for each sale? Who handles customer support, returns and taxes, and who is in direct contact with the customers?
- Drop ship – The margin is usually the wholesale price which is roughly 50% of the retail price.
- Marketplace – The brand is the seller and sells directly to the consumer. The brand completes 100% of the transaction and pays a small fee to the marketplace (usually between 5-20%).
- Customer Support
- Drop ship – The retailer is in charge of providing support to the customer.
- Marketplace – The brand offers support to the customers.
- Drop ship – The merchant of record is the retailer. The retailer handles the returns and usually sends the items back to the brand in bulk. The merchant (in most cases) creates the return labels and takes care of support.
- Marketplace – There are a few options, but in most cases, the brand governs the complete process. The brand provides the return guidance and support, along with product return labels.
- Drop ship – For example, in the US, there are no taxes between the brand and the merchant (B2B transaction) on the wholesale price.
- Marketplace – The brand is responsible for taxes even though many marketplaces assist the sellers and remit the taxes on their behalf.
- Who is in direct contact with the customer?
- Drop ship – There is absolutely no access or direct contact with the customer.
- Marketplace – The brand is the seller. There is also visibility and ways to communicate with the end customer.
Both drop ship and marketplace models provide excellent reach. It’s about selecting a model that fits your company’s goals and resources and provides the experience you want to deliver to your customers. You might also decide that working with both marketplace and drop ship, is the right choice for your brand and provides the reach necessary to grow your business. Whatever you choose, we are happy to connect you with the most fitting retailers for your brand’s DNA, increasing your digital sales channels, and supporting you every step of the way!