The Differences Between Dropshipping & Building A Marketplace

Sometimes I get asked questions like - if dropship is higher margin than marketplaces, why do people like setting up marketplaces?

Some of this can vary widely depending on what kind of marketplace you are talking about so YMMV.

First, as a retailer, you own fewer costs than dropship. Shipping and returns are completely on the seller. The cost of discounts to your margin are also on the seller. Product data is often on the seller - although this can vary widely.

Second, advertising can become a big source of margin if you have enough competition. Sponsored listings are a big deal. They have a consumer benefit too - a consumer might discover a new brand that they were not yet familiar with.

Third, product and vendor is much more scalable under marketplace than dropship. Often a brand dropshipping provides very little product data - particularly if they are not a DTC brand. This data is instead provided by the retailer's merchandising team. Marketplace sellers are trained to provide the kind of product data needed for buyers to make a purchase. This means less operational overhead from the retailer.

Finally, pricing is managed by the seller in a marketplace. Whereas in a dropship situation, it's managed by the retailer.