Marketplace Trends

March 27, 2023

Dropshipping vs. Marketplaces: What’s the Difference?

Nicole Kahansky

It’s not a stretch to say dropshipping and marketplaces are taking over ecommerce.

Traditionally, growing a business meant adding products — and taking on their associated manufacturing costs, inventory management, and shipping logistics. But in this economy, it’s risky taking a chance manufacturing a product that doesn’t sell. Or leasing new warehouses when real estate costs are skyrocketing.

Both dropshipping and marketplaces enable businesses to:

Generate sales without the need to carry stock or ship inventory
Offer products outside of current fulfillment capabilities
Grow product catalogs with little risk
Attract and monetize new customers
Propel growth with fewer capital expenses

While both are great options for growing your business, it’s important to note that dropshipping and marketplaces aren’t synonymous. The term dropship is often used to describe any scenario where a company ships a product directly from a supplier. The reality is, there are more nuances than that. Understanding how dropshipping and marketplaces differ is essential when exploring asset-light approaches for your business.

In this blog post, we’ll answer the following questions:

What is dropshipping?

Dropshipping is an ecommerce fulfillment method used by merchants and retailers who want to add to their product catalog without holding inventory or establishing new fulfillment processes. Here’s how it works:

A merchant sells a supplier’s products to customers. With dropshipping, the merchant sets the prices, curates the catalog, manages listings, and has the option to handle customer service.

After a buyer makes a purchase from the merchant, the merchant purchases the item from the supplier. Merchants use a Just-in-Time (JIT) inventory management method, buying goods from suppliers only as needed. This way, the merchant doesn’t hold inventory or pay for more than they’ve sold.

The supplier delivers the product directly to the buyer. Suppliers handle fulfillment requirements, including warehousing, packaging, and delivery. From the perspective of the buyer, they’re not aware there’s a third-party supplier involved.

The pros and cons of dropshipping

Dropshipping pros

The dropship model can be a sneaky one for consumers to identify. It’s not always evident a company is dropshipping. For example, Wayfair and Overstock exclusively operate according to a dropship business model, but you may not know that as a consumer.

There are many reasons businesses choose to expand via dropshipping. Here are a few:

Inventory-light‍

With the weight of warehousing and distribution off their shoulders, merchants can grow product catalogs without the financial and logistics burden of inventory management and shipping.

For retailers with core product lines, dropshipping makes it possible to offer complimentary products that don’t fit existing fulfillment methods. Say, for example, you primarily sold small paper products. You could dropship office chairs and desks from a supplier equipped to package and ship large items.

Higher margins

Dropship merchants establish long-term relationships with suppliers, which allows them to secure discounts on products, reducing the cost of goods sold. Merchants can maximize their margins because they set pricing.

Low risk

Dropship merchants have the luxury of adding products with less certainty of demand. If the product doesn’t stick with consumers, the merchant can simply remove the item from the mix.

Merchants aren’t left footing the bill or scrambling to sell off failed stock to make room for something better. Instead, they can test products with little repercussions.

Consistency and control

Your business, your prices, their products. Under the dropship model, merchants make the rules and control the commerce experience. Merchants control product assortment, pricing, descriptions, imagery, promotions, and marketing— creating a consistent brand experience.

Dropshipping cons

Every rose has its thorn, and dropshipping is no exception. Here are a few of the challenges dropship merchants face:

Uploading products is a heavy lift

Merchants that dropship can have the branding and pricing they desire, but must do the legwork, including:

Uploading product information, photos, and descriptions
Gathering and understanding product specs
Providing customer service for the products
Updating accurate inventory information

By contrast, marketplaces put product management on the supplier, enabling their product catalogs to grow faster and with less operator effort.

Managing suppliers is time-consuming

Long-term supplier relationships have cost benefits, but they are also high maintenance. Dropship merchants must work closely with suppliers to establish contracts, communication systems, and effective workflows.

Less control over fulfillment

Merchants are the face of the sale. The merchant is at fault if a supplier’s product quality is poor or a delivery is delayed. What’s more, merchants are at the mercy of a supplier’s stock. If a supplier runs out of products, sales stop in their tracks.

What is the marketplace model?

Marketplaces are an ecommerce business model where operators sell products or services from third-party sellers through its website.

Here’s how it works:

The marketplace operator sells a supplier’s products through its website. The marketplace may hold all inventory, some inventory, or, taking a dropship approach, none-at-all.

The supplier is in control. The supplier sets the price, manages product information, handles the sale, and, in many cases, provides customer service. The marketplace operator will set commissions, terms of use, and brand guidelines. Their primary job is to manage the marketplace infrastructure sellers use and provide some level of oversight.

The seller ships the item to the buyer: The operator then provides shipping information to the supplier. Unlike dropshipping, the marketplace doesn’t purchase the supplier’s product. Instead, the marketplace pays out the supplier and takes a commission from the sale.

The pros and cons of a marketplace

Marketplace pros

Network effects, SKU-depth, increased customer reach — the benefits of the marketplace model revolve around infinite scale. When compared to dropshipping, the marketplace model excels because you can:

Quickly add vendors

Dropshipping supplier relationships resemble traditional business relationships. They take time to establish. There’s negotiation involved. They’re in it for the long haul. Dropshipped products are typically core adjacent, so the first goal when onboarding suppliers is quality.

With marketplaces, the ultimate goal is product depth. This means, the more suppliers, the merrier.

To ensure quality and trustworthiness, marketplaces establish stringent vendor onboarding methods that enable them to take a one-size-fits-all approach to vendor participation. Contracts, terms of use, and SLAs are universal. Typically, vendors are pre-vetted with Know-Your-Vendor checks to ensure trustworthiness. Once onboarded, many marketplaces give vendors full ownership over their corner of the marketplace.

Quickly add products

On a marketplace, sellers are responsible for managing their own products and sales, not the operator. Operators provide the template and infrastructure for sellers to sell. Sellers use the marketplace platform as a sales tool, giving marketplaces the power to scale faster.

Offload customer service

Many marketplaces hand off customer service to sellers. The marketplace may provide customer service oversight or step-in as a second line of defense, but initial requests go to sellers.

Tap into exponential growth

Since marketplaces can quickly add vendors and products, they’re able to grow much faster than dropship companies. A marketplace’s ability to provide incredible product assortment leads to search engine traffic, new customers, new vendors, and a snowball effect toward exponential growth.

Marketplace cons

When marketplaces surrender customer service to sellers, they relinquish some level of control.

Since marketplaces can grow to enormous proportions, subpar sellers will inevitably fall through the cracks in vetting systems. And when buyers have a bad experience, they’re directed to the seller as the first line of defense instead of the marketplace operator. How that seller handles the interaction impacts the marketplace’s reputation, even if the seller was at fault.

The differences between marketplaces vs. dropshipping (and which one's right for you)

Dropshipping and marketplaces have a lot in common: They connect buyers with third-party products, run asset-light, and remove logistics barriers to growth.

So which model should you choose? Below is a side-by-side comparison.

Dropship:

Products are marketed under the merchant’s brand
Margins are higher
The merchant manages products for brand consistency
More control over pricing and low product costs
Supplier relationships are higher maintenance
Customer service is the responsibility of the merchant

Marketplace:

Products are marketed as the vendor's brand
Sales volume is higher
The vendor manages products for product depth
Commission based with no product costs
Vendors can be added quickly with standardized contracts and SLAs
Customer service is the responsibility of the supplier

Having trouble choosing one over another? The good news is you don’t have to. You can have control and infinite scale too.

Building a dropship marketplace

Dropshipping and marketplaces aren’t mutually exclusive. You can fuse the dropship model with the marketplace model to create one comprehensive win-win ecommerce strategy.

A dropship marketplace gives you the best of both worlds: control of core dropship products and the endless scale of a marketplace.

So, what exactly is a dropship marketplace? It takes on two forms.‍

Retailer Dropship Marketplace

Who it's for: A retailer that wants to strategically expands its core offering using both dropship and a marketplace.

How it works: A business sells its core offering, dropships core products that don’t fit its logistics infrastructure, and efficiently expands into new categories using third-party marketplace sellers. Essentially, you’d dropship products that have higher margins, align with core products, or are hard to ship. Then, you use a marketplace for products in new categories.

‍Dropship Marketplace

Who it's for: A dropship business that wants to grow faster using a marketplace.

How it works: A business dropships core products and expands into new product categories using the marketplace model. You keep your existing dropship model and strong supplier relationships, but add on a marketplace to efficiently expand assortment.

Key to building a dropship marketplace? A multi-vendor marketplace platform that can easily enable both business models.

Learn about Nautical’s dropship & marketplace platform

Nautical’s dropship & marketplace platform gives operators the automated tools to manage dropshippers and third-party sellers in one platform. With Nautical, you can quickly onboard sellers, enable them to share product information in a consistent way, and push orders back to ecommerce systems using our API-first architecture.

Expand your inventory without the risk: Learn about Nautical’s dropshipping capabilities

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Learn More →

Dropshipping vs. Marketplaces: What’s the Difference?

What is dropshipping?