GUEST COMMENT Drop-ship 2.0: Online marketplaces

For any retailer today, the greatest potential for future business growth is online. But capturing a profitable share of the action today means expanding in a way that is sustainable, scalable and economically viable. Consumers have been spoilt by their experiences on Amazon and now expect greater choice, competitive pricing and a high level of service from everyone they deal with. To satisfy these demands without sacrificing core brand values or profitability, retailers need to think laterally.

As attractive as it might seem to use drop-shipments as a way of broadening a product range, this retail model is operationally complex. It can drive up internal costs, as retailers try to integrate their order/customer management systems with those of third parties. It can also be hard to maintain customer service consistency if each party is working to its own standards.

This is where the ‘marketplace’ option becomes interesting. This can be used to complement or replace the drop-ship model, introducing greater scalability, flexibility and profitability as retailers expand their portfolios organically. By putting sellers and customers in direct contact, online marketplaces build on core Internet DNA, creating value while reducing the chain – with benefits to retailers, suppliers and consumers.

Keeping good company

Amazon, Walmart, Best Buy, Galeries Lafayette and Fnac are just some of the high-profile names to have launched their own online marketplaces in recent years. In some cases, associated activity already accounts for more than 40% of products sold and represents the mainstay of profitability. In the case of other, vertical marketplaces that have been created from scratch, such as Etsy (arts & crafts), Farfetch (fashion) or Foodzie (artisan food), marketplace activity represents 100% of sales, in some quarters exceeding the billion Euro mark.

Respected market analyst firm Forrester Research extolled the benefits of online marketplaces in a paper for e-business professionals back in early 2012, claiming that “The time is right, as consumers have become comfortable buying from marketplaces and execution is easier than ever.”

While product selection is widely cited as the primary driver for retailers adopting this strategy, the marketplace model offers several other strategic advantages to retailers, Forrester notes. These include incremental revenue and margin, improved customer service, and a new way to test and feature products that are otherwise restricted.

Encouraging experimentation

In the traditional drop-ship model, retailers must absorb cost and pain to add new supply partners – taking up to over six months to bring processes and systems together. This is a considerable commitment and isn’t conducive to experimentation. In the marketplace model, retailers can integrate their back-end processes and systems with multiple suppliers very easily – even if they don’t display all of the options to customers at once.

Because it is much easier to add new partners, retailers can offer greater choice for minimal additional cost – potentially holding some options back so that the website only promotes the best products and deals at a given time. It also means they can test out new relationships and product ranges without over-reaching.

Crucially, at each step of the way, the retailer retains control over what is offered, and how transactions and communications take place. This means customers don’t have to worry about a degradation of service if they select something from the expanded product range. The retailer has more control over after-sales care too, compared with a drop-ship scenario.

Economics

In the marketplace model, stock does not transfer to the retailer so a commission is applied rather than a resale margin. The scope for expansion is far greater however, so the potential for profit growth is high. The risk is much lower too, as the retailer is no longer processing inventory or investing in individual partner integration. This significantly reduces the cost of sale – and removes barriers to new relationships or innovative new ventures. So if a supermarket wants to experiment with offering toys or stationery online, it can do so without over-extending itself.

Still a relatively young proposition, marketplace solutions for online retailers have much to offer. They are readily accessible too, because the technology is typically harnessed through the cloud on a software-as-a-service basis. Among the value-added features to look for in a good solution are private messaging systems. These help keep the retailer in the loop during customer interactions, and can prevent fraud – ensuring that sales, follow-up and any returns take place in the secure space of the retailer’s online marketplace.

All of this ensures that the overall experience is safe, secure and of a standard that customers expect. In this way, retailers retain complete control over the integrity of their brand – and their relationship with the customer.

Catching the wave

Since the mid 1990s, ecommerce has grown to become an indispensable sales channel. Yet until the current marketplace movement, ecommerce’s promise to provide the biggest catalogue in the world had remained unfulfilled.

That changed with the arrival of the online marketplace, which is opening new doors for all sorts of businesses – particularly retailers that have their eye on controlled growth and the onward development of the customer experience. For traditional bricks & mortar retailers, this doesn’t mean a death knell for physical stores, but it does offer a new way of expanding customers’ horizons and of driving traffic between the different sales channels.

Whichever way you look at it, there is everything to play for.

Adrien Nussenbaum is co-founder of Mirakl