Having worked in retail e-commerce for more than two decades, I’ve watched it grow and evolve into the giant it currently is. Retail e-commerce is a very competitive industry today, and this competition is largely driven by the huge volume of suppliers, vendors, and sellers in the retail space. The silver lining is that consumer demand and product consumption are equally rising. However, with e-commerce giants like Amazon and existing brand leaders already dominating the retail e-commerce space, how do other, relatively smaller, and newer retail companies tap into this rising demand to increase sales and ROI?
The answer is by leveraging modern solutions like technology and different selling models that allow companies to reduce setup, execution, and day-to-day costs while increasing revenue through sales.
The crux of this article is about different selling methods that can help retailers reduce costs and increase revenue, while also allowing them to augment their store assortments. Two types of selling methods, in particular, are Dropshipping & Marketplace Selling. Both these methods allow retailers to sell without the need for additional warehouse space or storing products in-store. They also allow retailers to increase their product catalog and ergo to increase their audience, leading to increased sales.
But first, it’s important to understand *why* some retailers are facing problems with sales growth. While the demand for a product can be estimated through methods like trend analysis, the final location from where a buyer will make the purchase is more difficult. This is simply because consumers today have multiple options to purchase a given product. Your retail e-commerce store is one of many stores from where a consumer can buy the same product for the same price. Consumers may stay loyal to the brand they are buying, but not necessarily to the retailer they are buying from. It is this uncertainty that creates an inherent risk for retailers who store products within their own warehouse.
What selling methods like dropshipping and marketplace selling do is to eliminate the need for a retailer to store products altogether. These methods also allow retailers to list more products in their catalog. Technically, they can list any product they may want as long as they can procure a supplier.
What is Dropshipping & Marketplace Selling
The traditional selling model involves a retailer creating a product catalog, manufacturing or buying all products within the catalog from a wholesaler (thus assuming ownership and its inherent risk), storing it in a warehouse, and shipping products out when an order is placed. I am not discrediting this method of selling because it has its own pros as well as cons, which we will discuss later. For now, let’s understand two other methods of selling that are available to retailers today – Dropshipping & Marketplace Selling.
They can be best understood by understanding the relationship between the seller (wholesaler), the retailer (you), and the customer:
In dropshipping, the retailer does not stock any inventory internally. The process followed is:
- The retailer negotiates with suppliers/wholesalers.
- The retailer builds an e-commerce store and lists the supplier/wholesaler products with associated availability on their website as their own.
- The customer visits the retailer’s website/app and places an order.
- The retailer contacts a wholesaler/supplier who has the stock to fulfill the order.
- The wholesaler packs and ships the product to the customer directly.
- The branding and return address on the package belongs to the retailer. As far as the customer is concerned, the product has directly come from the retailer in which the order was placed.
How do you (the retailer) benefit from this model? Let’s keep it as simple as it is… you set the selling price on your website at a higher value than the cost charged by the supplier. Of course, packaging and delivery costs should already be built into the model if free delivery is going to be no additional charge. The consumer pays the retailer (you), and you pay the wholesaler, earning the margin difference.
This model works well for retailers who have an established brand (or who want to establish a brand) and who want to sell niche products, but do not want to own a warehouse and assume the risk of storing products.
Just like in dropshipping, the retailer does not stock any inventory internally. The process followed is:
- The retailer creates a platform and lists products by multiple suppliers – wholesalers, vendors, mom-and-pop shops, local stores, individual sellers, etc.
- The customer visits the retailer’s website/app and places an order.
- The order is relayed to the 3rd party – the product owner (wholesaler, vendor, mom-and-pop shop, etc.).
- The 3rd party product owner packs and ships the product to the consumer directly.
- The branding and return address on the packaging belongs to the 3rd party product owner, so the customer knows the seller is not the retailer.
An example of this model is Amazon. The retailer (you) can collect a convenience fee from the consumer or take a share from the seller (or both) in order to create the revenue stream. This model works well for retailers who are not looking to brand themselves as product owners, and for those who want to sell a wide range of products already widely available on other platforms.
Choosing Between Owning a Warehouse, Dropshipping and Marketplace Selling
As a retailer, you have to consider the pros and cons of each method (including the traditional method of owning a warehouse and storing the products in-store) when deciding how to augment your assortment.
What Model Should You Pick?
What are your long-term plans? If they are to build a brand with niche products, and you want complete control over quality and processes, owning a warehouse and the inventory is likely the better option for your business. If you want lower operational costs and your risk tolerance for brand identification and reputation is low, dropshipping may be more ideal. However, if you want to build a platform that lists multiple buyers and your business is to create internal pricing competition, marketplace selling is perhaps for you. Ideally, a multi-faceted company would leverage all three models, allowing products to graduate from Marketplace to Dropshipping as demands increase and retailer branding for the product increases. Ultimately, when a given product reaches high levels of demand, allowing the product to graduate to an internally-stocked item could produce an overall higher profit for your business.
In short, your business goals play an equal role in choosing the selling method. List them out and map them to the advantages and disadvantages of each selling model, and you will be in a better position to decide on the solution.
Lastly, it is important to leverage modern digital mediums to support your business. Choosing the right technology partners for digital transformation will play a pivotal role in growing your business and maintaining brand reputation. If you’re looking for technology partners in the retail space, I’ve worked with two very savvy technology companies, and they come highly recommended: