Attending the Virtualstock Vision Summit 2024 was incredibly interesting this week and revealed the differences between trading on marketplaces vs a dropship proposition. The reason for the importance is due to the number of brands currently opening marketplace opportunities on their platforms, but both for the brand and the seller/supplier, there are advantages and disadvantages to both options.
Marketplace
We’re all very familiar with marketplaces, eBay and Amazon have been around for 30ish years, but new entrants including B&Q, Debenhams and Tesco in the UK are examples of great marketplace platforms offering access to different audiences and early results show promise.
Dropship
Dropship is where a brand acts a little like a marketplace in that the transaction occurs on their site and the supplier of the goods still ships as if it was a traditional marketplace transaction. However the mechanics and relationships behind the transaction are markedly different. UK examples include Curry’s, Robert Dyas and John Lewis to name just a few dropship platforms.
Curation / Range Expansion
With a marketplace there is often the expectation that you can list anything and everything that you have in stock. Certainly on the likes of Amazon and eBay that’s the case, although on retailer led marketplace some curation and product approvals may be in place.
When considering dropship, expect the brand to consider your products in terms of range extension on their website. They will select products to carry along more traditional retail lines and the big buzz word is ‘Permission to Sell’. Permission to sell means that customers would expect to be able to buy a particular product from that brand.
If a product falls too far outside their traditional range, it’s likely that they will decide they don’t have permission to sell that item, although some have had surprising results (At the Virtualstock Vision Summit two such examples were Curry’s selling hot tubs and Robert Dyas selling snooker tables! This is very much the exception to the rule however).
Rule of thumb is that generalist marketplace will let you sell anything, retailer led marketplaces will have curated categories within which you can list product more or less at will, and dropship brands will be the more curated.
Merchant of Record
A fundamental difference between a marketplace and dropship model is the merchant of record. On a marketplace it is the supplier, but on dropship it’s the brand owner of the website. This fundamentally changes the relationship between the consumer and the seller – on a marketplace it’s accepted that a third party owns and sells the goods, but on dropship it’s the brand or retailer who’s reputation is on the line. They are not only selling the goods, but any customer service issues (for delivery / returns / warranty / support) comes straight back to the brand.
Pricing
On a marketplace it’s simple – the seller sets the price. In a dropship world the seller sets their supply price and the selling price is entirely down to the brand. This is somewhat similar to being a direct supplier, the only real difference is that the brand doesn’t tie up cashflow investing in stock but they still have total control of how the product is presented and the price point it’s offered at.
Some suppliers might not like this, especially if they’ve come from a marketplace world and have their own D2C operation. Price fixing is illegal and while RRPs/SRPs are out there the brand is at liberty to ignore them if they wish.
Another issue for suppliers is that the flexibility of price control is removed in a dropship world. The brand may require a month or even a quarter before they update pricing, so if your cost model changes the price offered to the consumer may lag behind. If the price is going up, it might make your own website and other channels uncompetitive (a big issue on Amazon) before everyone’s pricing comes into line with your own.
Stock
Holding stock costs money and freeing cashflow is the big advantage of dropship for brands. A traditional retailer would purchase in stock by the pallet load and have the cost of carrying that stock on their books until it’s sold. But there are other costs as well – warehousing, picking, packing, shipping, returns etc and with dropship all these costs are carried by the supplier.
Margins
Margins for suppliers are easy whether selling on a marketplace or through dropship. You set the price you wish to sell at and you’re always going to make higher margins through D2C (direct or on marketplace) than you would through wholesale to a retailer. However, marketplaces charge fees and even your own website will incur paid promotion, so the lower margin a retailer will demand may not impact your overall profitability.
Brands running dropship operations need to be aware that they will operate a lower margins than if they carried the stock themselves. While their gross margin might appear less attractive, once you net out the warehouse/fulfilment cost, dropship can add more to the bottom line than traditional retail models.
Returns
Returns are always the biggest pain point in retail and that goes just as much for marketplaces as for dropship. However dropship adds in complexity – you can’t expect a consumer that purchased from a brand to want to return to the third party supplier. Indeed, they might even decide to return in store rather than via a carrier. The dropship model means that the brand and supplier need agreements in place in advance to decide if goods will be returned ad hoc as they come in, or returned in bulk perhaps once a month or once a quarter. It may be possible for the brand to resell returns by re-shipping the item to the next customer that makes a purchase, but this opens the question as to when a return is still in a saleable condition and when it’s no longer viewed as a ‘new’ product.
Promotions
One of the great things about dropship for suppliers is that the goods will be treated on the brand website in the same manner as if they were stocked by the retailer. You can expect the brand to promote them across marketing channels including performance marketing without any differentiation.
A challenge that may arise for suppliers if that the brands paid search campaigns might perform better than your own, and indeed the last thing you want is to compete to sell the same product – it shouldn’t matter (if you have your pricing models correct) whether the product sells on your own site, a dropship brand or on a marketplace. Don’t be throwing money away to win sales from your dropship partners!
Timescales
Marketplace are great – when you get a new product in stock you can literally list it and have it live within minutes.
With a dropship model you should expect longer lead times to get products listed and indeed you’ll probably have to pitch your products in a similar way to when a retailer stocks your product. It’s a much more traditional retail model and expectations are that product selection will be more seasonal along traditional retail patterns . It would be a mistake to think that as soon as a new product comes into stock that it will quickly be adopted, indeed some brands may decide they never want that particular SKU sold on their site.
Risk
Dropship enables suppliers to sell more product without the risk of heavy investments. You don’t ship the stock until it sells! However, due to brands naturally being protective of their reputation, expect the onboarding process to be rigorous and in-depth. When a brand agrees to carry your product, they become the face to the consumer so they’ll be wanting to check your financials, safety certifications, sustainable credentials and ensure your product supply chain is ethical. And that will extend to your partners, such as any 3PL you use for fulfilment.
Costs
Everything has a cost and so do dropship solutions. The good news for suppliers is that (at least for Virtualstock) there’s no cost to you – the brand websites that adopt Virtualstock pay for the technology so for you it’s free!
