How Do The Dropship & Marketplace Models Work?

Dropship. Marketplace. Two terms that any ecommerce operator should be familiar with - however, they are also two misunderstood terms, often mistakenly used interchangeably when there are distinct differences between the two business models. Understanding the distinction between them can be important for determining the best approach for your business.

So, what exactly are the differences between both models, and why and when should you opt for one approach over the other? What advantages do they offer over one another? Let's break down and examine both terms in depth to clarify them.

What is Dropshipping?

Dropshipping is a type of fulfillment model whereby a Retailer lists a range of products for sale on their online marketplace without physically holding the inventory. The retailer controls the product pricing displayed on its site instead of the end supplier, meaning it can keep a solid profit margin on the cost of the products on its site.

When a purchase is made, the customer's order is routed back to the supplier of those products, who then ships the item straight to the customer on behalf of the Retailer, often white labeled as the Retailer, for a seamless delivery experience. Under a dropship arrangement, the retailer retains greater control over all customer touchpoints, including customer support.

How it works

In a dropshipping arrangement, it is the marketplace platform itself that controls the pricing. Let's use an example - A supplement brand seeks to sell its products on a major fitness marketplace platform that is well-known to consumers.

Under a dropship arrangement, the vendor will handle the order fulfillment process on behalf of the retailer, including white labeling it as if its coming directly from the retailer itself. The marketplace then keeps the margin it has placed on the product and pays the supplement brand the remainder.

Advantages of the model

There are numerous reasons why the dropship model continues to grow in popularity for Retailers, some of which include points such as:

Expand Product Catalog - The dropshipping model allows Retailers to expand their product catalog much faster and with zero inventory risk because they do not need to allocate resources toward the inventory's handling, storage, and distribution.

New Revenue Streams - The dropshipping model allows Retailers to diversify their revenue streams by incorporating new vendors and products at a fraction of the cost of more traditional distribution channels. These new vendors can be onboarded quickly, and therefore, revenue can be generated faster.

Zero inventory risk - One of the key advantages of this model is that the end Retailer does not hold onto the inventory - the 3rd party vendor handles delivery. A Retailer may onboard a new 3rd party vendor and, using the dropshipping model, eliminate the risk profile by removing the need to retain inventory in their distribution centers.

What Is A Marketplace?

A marketplace is an ecommerce platform in which a retailer lists a number of different brands and vendors. Similiar to a dropship arrangement, the marketplace collects the payment and then passes the order onto the brand who then deals with delivery but branded as themselves, not the marketplace.

As the price for placement on the marketplace, these brands will then generally pay a commission percentage on their sales to the marketplace.

Under a marketplace model arrangement, the customer is generally made aware that their order will be fulfilled by the brand itself and not the platform on which they made their purchase.

How it Works

Let's take, once again, a look at our supplement brand example as above. The marketplace agrees and creates an arrangement where the brand will sell its product on the marketplace but will give a % commission of the overall total to the marketplace.

The marketplace routes the order back to the brand, which then handles the shipping. The end delivery is branded as the vendor and not the marketplace.

Advantages of the model

There are numerous advantages of using the marketplace model for both retailers and vendors, many of which help explain its growing popularity. These can include:

Access to a Large Customer Base: Online marketplaces have millions of active users and customers already. Retailers can leverage their extensive customer base as a way to attract vendors, potentially increasing their product visibility and sales.

Built-In Trust and Credibility: Established marketplaces and retailers are trusted by consumers. Consumers are more likely to purchase on reputable platforms, which can increase sales and boost brand credibility for the end vendor. This can make it easier for the retailer to attract new brands for its platform.

Reduced Marketing Costs: Marketplaces often handle advertising and marketing efforts to attract customers to their platform. This can reduce marketing expenses compared to running an independent e-commerce store.

One of the major benefits of this model for operators is the operational flexibility available, due to everything from product descriptions to post-purchase being handled by the brand, meaning that marketplace resources can be used to generate growth.

Conclusion

Whether your business would be best suited to adopting a marketplace or dropship model depends on multiple factors, such as your available resources in terms of capital and workforce and your end business goals.

Both models offer unique advantages and value propositions, and it is important to undertake a thorough analysis and audit of all factors before choosing a model.

The core differences between the two models are as follows:

Dropship - The Retailer itself sets the pricing. The retailer also has more control over how the products are displayed on their site, such as product and catalog descriptions to customer service and care. This can allow for greater control of the entire customer journey and ensure a more consistent brand experience, from discovery to delivery.

Marketplace- The brand or end manufacturer sets the price. This means the brand can retain more control over how its products are displayed and sold and the entire customer experience, including the ability to brand as itself for the delivery and not having to brand as the original marketplace. Under the marketplace model, the responsibility is generally placed on the brand to deal with customer services.

Both models may choose to carefully curate the brands and vendors that are listed on their platform, however, it is more likely to be a greater concern for those operating a dropship model who wish to regain more control over the customer journey end-to-end.

It can be confusing to understand the difference, considering that you can operate a dropship marketplace i.e a marketplace which uses dropshipping as its primary inventory management process. Hopefully this article has helped to clear up some of the confusion you may have.

Onport - Powerful Marketplace & Dropshipping Infrastructure

Onport is an ecommerce marketplace and dropshipping platform enabling companies to centralize the core areas of backend marketplace dropshipping operations using next-generation composable technology - inventory syncing, order routing, shipping workflows, payment automation, and returns management.

The Onport Platform can accommodate both those seeking an out-of-the-box solution and, through an API with +3.000 endpoints, those who require a more flexible implementation.

“With Onport, we were able to launch in less than three months, which we just couldn’t have done, had we built the system ourselves.”

Frank A. Ricciardi | Founder & CEO at Maavee

From growing SMBs to well-established enterprise-level companies, its composable and adaptive infrastructure was designed to be a reliable partner for the growth of any company operating in the e-commerce marketplace and dropshipping space.

Over 200+ companies in the e-commerce space are future-proofing their business with a solution trusted by brands such as Stadium Goods, Cupra, Ivalo, and Naduvi.