How do you start your own online business? This is the most important question a potential retailer must ask. Ecommerce can be organized in many ways. Dropshipping and online marketplaces are two of the most popular models for organizing online retail. Which one is best for you? Let’s explore it together.
This article will explain what drop shipping is and what an online marketplace is. It will also reveal the benefits and drawbacks of each.
Dropshipping: What does it mean?
Dropshipping has become a popular method of fulfilment and retail organization for growing online businesses. Drop shipping stores offer products for sale but do not store them in stock. Instead, they transfer the order to the manufacturer or wholesaler, who then deliver the product to the customer.
Dropshippers make their profits from the difference between manufacturer and retail price. However, it is not unusual for producers to negotiate for a percentage of commission to dropshippers.
Dropshipping: How does it work?
This is how dropshipping orders are processed step-by-step.
Step 1: The customer places an order at dropshipping.com and pays for the item. Step 2: The dropshipping company places an order with the supplier. Usually, the confirmation of payment is provided.
Step 3: The supplier ships your order to you, indicating the name and address dropshipper on the return label.
Step 4: Dropshipping companies notify the customer about shipment and send them tracking numbers if applicable.
Dropshipping is an option for your online shop.
Dropshipping has one major drawback: the merchant may not be able to physically or handle the merchandise they sell. This is in addition to the demo copy that can be shown customers in a brick and mortar store. Drop shipping’s greatest advantage is that customers won’t know you are an intermediary between them, and the merchandiser.
Dropshipping is a simple business model, but it has its benefits and drawbacks. It is wise to research all options before you make the decision to start this business model.
Dropshipping: Top 5 Benefits
These are five reasons to dropship Magento’s online store.
Requires minimum investment.
Traditional retail requires that the business owner purchases the items before selling them. This means they will have to spend thousands of dollars on inventory. Dropshipping is a way to make it easy to sell the item.
It is easy to set up and go.
You don’t have the products and you never touch them. This means you don’t need to worry about managing warehouses tracking the inventory, complex accounting shipping the items, and handling returns. This allows you to keep your expenses low while running your business.
Do you want to expand your product range and offer twice the number of products for your customers? You will only have to deal with suppliers to process twice the orders.
Your business does not need to be located in a brick-and-mortar shop, warehouse, or selling points. It can be wherever you want it to. Your business can be run from anywhere. As long as you have an Internet connection, you can handle transactions remotely.
There are no restrictions on the number of items you can offer for purchase, as you don’t need to maintain the inventory or storekeeping.
Dropshipping: Top 5 Challenges
However, there are some difficulties that can be encountered when you use dropshipping to build your online business. These are the main ones:
Low profit margins
To survive in the highly competitive dropshipping market, retailers must have minimal margins. The dropshipping store makes little to no profit for its owners and this causes them to be less concerned about customer support and service.
Drop-shippers are in some ways responsible for the actions taken by the merchandiser. If the supplier makes an error and fails to deliver the item ordered, the customer will be angry at you, not the supplier.
Working together with multiple suppliers.
You must keep track of all inventory and know the tax and shipping laws for multiple merchandisers.
Confusion in customer returns
Even if you have never dealt with the product, a customer will still be able to return the item to you even if they are not satisfied. This can cause confusion and conflict for the customer, retailer and merchandiser.
Dropshippers may not have direct contact with the manufacturer whose products you are selling. You cannot guarantee that these items were legally acquired.
What is an online store marketplace?
An online store marketplace (or virtual market) is an ecommerce site that sells products and services from multiple retailers or manufacturers. Although all marketplace transactions are handled in one place by a single operator, the delivery of the products is usually done by the sellers themselves. A marketplace is not responsible for inventory, logistics, product descriptions and pricing but serves instead as a platform to connect the seller and the buyer. Each multi-vendor webstore may have different capabilities such as auctioning or trade exchange.
Since the dawn of ecommerce, online store marketplaces have been around. Ebay and Amazon launched in 1995 and Alibaba in 1999, respectively. They are now multi-national ecommerce portals that handle millions of transactions every year. This is a testament to the success of online retail’s operational model. You can find marketplaces that cater to both the B2B and consumer segments.
What’s the value of online store marketplaces
Global research conducted in 2017:
- Marketplaces account for around half of all global online sales.
- Online store marketplaces are worth approximately $1.5 trillion.
- Over 90% of transactions are conducted on marketplaces through the 75 largest marketplaces.
What are the different types of online store marketplaces?
There are four types of online marketplaces:
- Horisontal – Sell the same items from multiple vendors
- Vertical – Sell different products with similar characteristics.
- Global – Offer all types of products without any principal restrictions
- Hybrids – can handle their own products and also sell products made by third-party vendors
Are online store marketplaces right for you?
Why are online marketplaces so sought-after and popular? Is there any downside to this model of retail? This article will tell you everything you need to know about online markets before you join one or start your own.
Online store marketplaces: Top 5 Benefits
These are the top five reasons to consider entering a market.
It takes less time and is more resource-efficient.
An online store marketplace is an established ecommerce site with well-thought-out design and navigation. Some marketplaces even offer a mobile app. As a vendor, you can now focus on your products and not worry about maintaining an online store.
Greater brand visibility
Acceptance to a market as a vendor is a stamp that can help a new company or start-up get noticed by potential customers.
Trust your customers.
Customers tend to trust online store marketplaces and will place orders with retailers they’ve never seen before.
Enter global markets.
Online marketplaces now cater to international customers, so being part of one provides business owners with rare opportunities to reach foreign customers and gain global recognition.
Financial risks are reduced
A marketplace allows vendors to set up online stores that are safer than setting up their own store. You can also take your business to another marketplace if you are not satisfied with the market conditions.
Online store marketplaces: Top 5 difficulties
Online marketplaces can pose some challenges for retailers. These are the five biggest challenges that you might face if your company decides to go online.
A marketplace can have many vendors, which creates fierce competition among retailers selling similar products. In order to withstand competition, merchandisers have to lower their prices or offer discounts. Sometimes, they even operate at a loss.
Online store marketplaces charge monthly or annual fees to vendors for their use of their platform. This is in order to make a profit. Online marketplace memberships may not be affordable for some startups or small businesses.
Every virtual marketplace has its own rules and regulations that vendors must follow. These policies are necessary to manage the marketplace, but for some, they can be frustrating.
Conflict in the product presentation
Because marketplaces are uniform, product owners rarely have control over how their products will be presented to potential customers. Online store marketplace administrators have the right to change product descriptions and images if they are not in line with accepted policies.
No Search Engine Optimization
You cannot manage SEO on your own and optimize your store to search engines. You are good if the marketplace where you sell has SEO capabilities. If not, it will do little to increase your brand recognition.
Dropshipping or Online Marketplace: Which one is right for you?
It is impossible to determine which online retail model is best or worst. Each business owner may need to know the pros and cons of dropshipping as well as online store marketplaces. Dropshipping is the best option for those who are looking to get into ecommerce but don’t have a manufacturing facility. However, if you’re an experienced retailer or producer, dropshipping can be a great way to get started.
It is up to you, however, to make the decision. We hope you will find our comparison helpful in deciding which model to use.