Customers must be at the heart of every business decision a retailer makes. Consumers’ minimum expectations have been increased by Amazon and now include a wide array of choice, convenient and high-quality buying experiences, and competitive prices. To compete, retailers must look for ways to increase their assortments quickly and give customers more options and even more convenient service.
Many retailers have turned to dropshipping as a less risky way to expand assortment. Dropshipping allows retailers to expand their offerings without stocking inventory and shipping products. Dropship is a convenient, reasonably efficient and a fairly well established option because it fits naturally within the existing organisation: buyers still buy, merchandisers still merchandise, marketers still market and finance still records sales. As a result, retailers stay in their comfort zone and feel the additional assortment is a success. But the real question remains: is this really enough to exceed customers’ expectations today and tomorrow? Is Dropship a retailer- or customer-centric strategy?
The main driver for dropship business models remains solving supply chain pains for very few large retailer-supplier relationships, such as for core products that are difficult to fulfill, but closely fit the retailer’s omni-channel strategy. Dropshipping, though, has limitations when it comes to scalability, integration speed and customer experience, all of which are critical in today’s retailers fight for the customer:
Dropshipping allows retailers to add new products to their online offerings. However, the model won’t allow a retailer to expand quickly beyond relationships with known suppliers and familiar product universe. This stops them being able to respond to customer demand or quickly introducing new products and categories. All the more, dropship leaves the retailer highly dependent on a single source of inventory to ensure product availability and never miss a sale.
A makeshift dropship operation won’t allow for the easy integration of back-end processes and systems with multiple suppliers, driving up costs and complexity. Worse yet, dropship often involves more complex EDI (electronic data interchange) technology, limiting the reach of the model and slowing down integration time. All of this leads to constraints that puts customer centricity behind solving day to day internal pains.
Perhaps most importantly, dropshipping can lead to a disjointed customer experience, creating confusion for a retailer’s loyal or newly acquired shoppers. When things go wrong, the customer will ultimately pay the price in a disjointed customer experience. Differing customer service standards can lead to additional confusion. Dropshipping also limits the retailer’s control over and visibility into the post-purchase experience. To be successful, the retailer must maintain control over the entire customer experience, including how transactions and communications take place.
Is it either or both?
With a marketplace, it is clearly visible to the customer that third party partners sell, fulfill, and service the products. The retailer simply takes a commission for connecting the seller and buyer. Because the retailer does not have to stock, service, or fulfill the product, the commission is very close to pure profit. With dropshipping, the retailer is still the seller of record, and responsible for any fulfillment or customer service issues that may arise.
Because dropshipping and marketplace both increase assortment while lowering risk, many retailers think of them as competitive projects. The reality, however, is that the two approaches are not mutually exclusive. Dropshipping is an approach that makes sense for a very specific set of products, whereas the marketplace model is a more agile, scalable, and profitable approach to expanding assortment.
As for speed, dropshipping supplier agreement still take months to negotiate; months where customers will be frustrated by the lack of choice. In contrast, marketplaces allow retailers to access the full breadth of innovative sellers and suppliers in order to provide the full spectrum of products that customers want. As such, retailers can increase choice faster and wider than ever before, and do so in a profitable way that achieves the endless aisle and captures the long tail. The Marketplace model’s profitability is why Amazon’s third-party Marketplace sales continue to grow at a 3x faster rate than Amazon’s direct sales (Source: ChannelAdvisor Blog, Quarterly Analysis of Amazon’s 1P v 3P sales).
The reach, scale, and agility of the marketplace model make it an obvious complement to dropshipping. Dropshipping will always have its place in retail for the select products where it makes sense. But to limit assortment expansion efforts to dropshipping would be to ignore a huge opportunity to meet customers’ requirements and capture even more share of sales and wallet.
The dropshipping and marketplace models both provide value to retailers. The marketplace model, well implemented, really provides the scale and profit that retailers need to compete in a world where customers come first. So the answer is ‘And’, by taking the next step from dropshipping and adding a marketplace, the real opportunities open up for retailers.
Adrien Nussenbaum is CEO & co-founder of Mirakl