Written by Adrien Nussenbaum
At Mirakl, we get asked all the time: “what is the difference between dropship and marketplace?” Because the terms are often used interchangeably, there is an incredible amount of confusion about the important distinctions between dropship and marketplace. This post will clear up that confusion, succinctly outline the differences between the two models, and show how the models work together and why every retailer needs a marketplace (whether utilizing dropshipping or not).
For retailers, dropshipping has traditionally allowed them to sell items that are big and bulky (think: appliances) and don’t fit the retailer’s fulfilment capabilities. It has been more of a supply chain approach than a merchandising approach.
Much of the confusion around dropship and marketplace stems from differences in frame of reference. For example, some marketplace sellers (those that are 3rd party sellers on marketplaces like Amazon) may actually utilize dropshipping as their method of fulfilment. In the image below, you can imagine the seller – Agoodbuyforu2 – could be working with a wholesaler to dropship the oils on its behalf.
To examine the real differences between marketplace and dropship, it is best to take the POV of a retailer. With a marketplace, a retailer allows trusted 3rd party partners to sell products directly alongside its own. The retailer is essentially using its site to connect buyers and sellers. When the sale is made, the 3rd party seller is expected to ship the product and provide any customer service necessary. When the customer gets the product, the branding on the package and the contact info on the return slip is the supplier’s.
As a result, dropshipping tends to make sense for a smaller set of core products, while the marketplace model is the one that can scale far and wide and fast.
Given the speed and scale of the marketplace model, it is a critical component of growth opportunities for retailers. In the digital age, owned inventory and a small set of dropship products are not enough to capture the full revenue opportunity.
To put this into context, let’s look at the example of a familiar retailer that currently does not have a marketplace: Target. Target wants to expand its assortment of fidget spinners while the fad is hot because Amazon has it handily beat on selection (Target has 5 versus Amazon’s 135K+), and on price (Target’s best price for a fidget spinner is $14.99 versus $1.50 for Amazon).
If Target really wanted to capture revenue from this fad, it has three options:
For retailers, bringing anything into owned inventory takes time – negotiating bulk purchases from suppliers, gaining expertise in the product, coming up with a pricing and merchandising strategy, and working the product into the supply chain for logistics. Since time to market is critical for a fad item like this, owned inventory is not a great approach.
If Target were to add fidget spinners via dropshippers, it still has to do all that work minus the supply chain piece. That still adds up to weeks or months, losing critical time.
With a marketplace, Target could have thousands of sellers offering thousands of fidget spinners in a matter of hours, giving their customers the choices they expect and creating price competition that will ensure the fair prices today’s consumers look for. And, there is no risk; Target does not need to pay any upfront sourcing costs and does not need to hold any inventory. All Target does is make sure it pleases its customers by having available this hot product they are looking for.
Viewed through the lens of the retailer, the differences between dropship and marketplace become clearer. Both are important mechanisms for range extension and assortment expansion. The marketplace model, though, is ultimately more agile and more scalable.
Without a marketplace, retailers are limiting their opportunity to please customers in a risk-free way.
Without a marketplace, retailers are sure to lose sales and stay a step behind the competition.
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Adrien Nussenbaum, CEO and Co-Founder Mirakl
Adrien Nussenbaum co-founded SAS Mirakl in 2011 and serves as its US CEO. He has over 15 years of experience in business development and entrepreneurship with a strong emphasis on technology and retail. Prior to MIRAKL, Mr. Nussenbaum served as a Co-Head of FNAC.COM’s Marketplace Business Unit, focused on developing the seller program and content syndication deals to increase the product offering. He co-founded the marketplace SplitGames, growing the business successfully and leading to its acquisition by FNAC in 2008. Previously, Mr. Nussenbaum served as a Manager of Deloitte’s restructuring team where he advised many retailers in their turnaround process. He started his career as an Investment Banker with PARIBAS in Hong-Kong. He also worked for Lehman Brothers and L’Oreal. Mr. Nussenbaum holds an MBA from HEC School of Management in Paris and a Joint Degree from NYU Stern School of Business.