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Marketplace vs. Dropship: How to grow sales without growing inventory

Kristin Schepici
Kristin Schepici January 3, 2022
Marketplace vs. Dropship: How to grow sales without growing inventory

Whether you’re expanding your business or opening for the first time, inventory is one of the biggest concerns you will have. Storing it, organizing it, minimizing waste, maximizing space, theft prevention, the list goes on. So what are some ways to increase profits without adding more to your inventory?

One popular solution is to start dropshipping. With dropshipping, all you have to do is make the sale and have a third party fulfill the order. Alternatively, you could transform your ecommerce website into an online marketplace and invite 3rd-party vendors to sell on it. You will make approximately a 10-20% profit on your sellers’ sales without having to be involved in the delivery process at all unless you choose to offer that option.

There are many benefits, but although dropshipping is simpler and lower-risk, marketplaces have a leg up in almost every aspect, from profitability and scalability to competitive pricing and time-to-market. Essentially, dropshipping is the entry-level of 3rd-party fulfillment whereas the marketplace model is more advanced and scalable.

The basics of the marketplace vs. dropship dilemma

Even within these two models, you have several options. The dropship model can take many forms; you may own the inventory but use another company’s fulfillment center, or you can simply “sell” another company’s products and take a cut of the profits. It’s estimated that you’ll earn about 50% more profit by dropshipping than holding your own inventory.

One leader in guiding retailers of all sizes to optimize their online presence, VTEX, promotes marketplaces under the idea of “collaborative commerce”. In other words, you’re not simply letting other merchants sell on your website — you’re creating powerful connections with other growing businesses. Whether your marketplace sells B2B, B2C or some combination, forging partnerships will allow you to elevate other brands even as they lift you up.

Ways to make dropshipping work for you

Dropshipping can be used to help start-ups and individuals get a little extra cash flow or can be tacked on to an existing business for the same purpose.

The balance you have to find with dropshipping is locating unique products that fit your brand, while not contracting too many separate dropshippers to handle. Maybe you just want to add a couple of products to your lineup and only need to partner with one or two dropshippers, or perhaps you’re trying to double your ecommerce store’s product assortment. While doable, you run the risk of your site becoming too cookie-cutter by selecting many products from one dropshipper, or connecting with an unsustainable number of 3rd-party sellers.

Considering your increased responsibility paired with your decreased control while employing dropshipping into your store, if you want to do it on a larger scale, you may as well take the plunge and convert into a marketplace. This enables more transparency with regard to who is actually selling the product, while your ecommerce business still makes a profit.

What about marketplaces?

Operating a marketplace essentially means, to start, you can replicate the benefits of the dropship model as many times as you want. Whether you have a curated marketplace, where vendors are vetted beforehand, or an open marketplace, where anyone can sell, you’re open to exponential growth by simply hosting this hub of ecommerce.

According to Forrester, at least half of online shopping happens in a marketplace, and 97% of online shoppers browse marketplaces before purchasing an item. Customers prefer to see all their options laid out and easily compare them, rather than browsing multiple websites with numerous tabs open. One wishlist, one shopping cart, one experience. 

Be specific

Marketplaces can also take many forms and have many different purposes. Amazon is so popular because consumers know they can find just about anything on it, whether sold directly by Amazon or by one of its almost 2 million sellers. However, Rome wasn’t built in a day, and Amazon was once a simple online bookstore. The best approach when starting your own marketplace is to partner with brands that complement your own and expand gradually from there.

Don’t let the idea of launching your future empire intimidate you; it’s easier than you think. Creating a marketplace through VTEX means that not only will you get help building your marketplace website, but you will have access to its network of over 2,500 sellers and be able to find businesses to partner with. The VTEX platform is highly customizable, and you can even tap into multi-currency and multi-language options to reach consumers on a global scale.

When to consider dropshipping

It’s best to consider dropshipping when you already have a small business, or you’re looking for a side gig. Although you will have low, if any, overhead costs, your profits will be minimal as well.

You always have the option of demanding a higher profit, but competition is extremely high in the dropshipping game, so to have a chance of conversions, you’ll want your markups to be lower to make your brand more competitive. The problem is, larger companies already have the upper hand, because they’re able to dip into profits to offer the best price, whereas a smaller company may be unwilling or unable to offer the same.

Why marketplaces are tipping the scale

With dropshipping, you have to negotiate a separate contract with each company, while marketplaces are significantly more scalable because it’s much easier to continuously add new sellers. When you host a marketplace, you will be able to set your own standards in place that every seller will follow. 

There are many other elements to consider if you want to try one of these solutions. When dropshipping, since you’re the seller and the face of the company, you have to keep customers pacified while having little to no control over the quality of the product or the delivery. With marketplaces, on the other hand, you can also lose power over your customer service experience since you’ll most likely redirect your customers to your sellers. 

The low-down

Both of these distributed product supply strategies save you time, energy and costs — marketplaces with marketing and dropshipping with shipping — but they have their own prices to pay for that prize.

If the growth you’re looking for is on a more short-term basis, give dropshipping a shot. If you want to see growth on a larger scale, consider starting a marketplace.

Give yourself options

There is a lot to consider when looking for ways to grow your business. You can even try dropshipping as a trial before deciding to operate a marketplace. Although running a marketplace is a significant commitment, you’re already committed to the success of your business and, with the help of companies like VTEX, you will be ready to take the leap.

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