Few retailers would argue that the greatest potential for sustained growth in the future is online. But online is tough, with consumers used to Amazon-type customer experiences which mean they expect a vast product choice at a competitive price. Meeting these expectations, whilst retaining brand values and remaining profitable are the main challenges facing retailers right now.
There are a number of options open to a retailer though. One which has become popular in recent years is drop shipping, where retailers do not keep products in stock, but instead partner with a wholesaler that stocks its own inventory. This is convenient, reasonably efficient and a fairly well-established option.
Yet the retail model with drop shipping is operationally complex and can drive up internal costs, as retailers attempt to integrate their order/customer management systems with those of third parties. Customer service can be a problem too, with the different parties involved working to their own differing standards.
This is why another option has emerged for expanding a retailers’ product range, the marketplace. Amazon has been the best example of this, with around 40 per cent of its business now conducted via its marketplace. But others are following suit, with Walmart, Best Buy, Galeries Lafayette and Fnac just some of the high-profile names to have launched their own online marketplaces recently.
Some vertical etailers such as arts & craft store Etsy, are based entirely on marketplace sales. But what has tempted these retailers to venture into the world of marketplaces?
Scalability, flexibility, profits…
A marketplace can be used to complement or replace the drop ship model, bring far greater scalability, flexibility and profitability. By connecting sellers and customers directly, online marketplaces build create value while reducing the chain and benefit all parties – the seller, the retailer and the consumer.
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.” Furthermore, Forrester noted a number of strategic benefits for retailers when adopting a marketplace, such as incremental revenue and margin, improved customer service, and a new way to test and feature products that are otherwise restricted.
Any retailer operating a traditional drop-ship model must absorb any costs and pain when adding new supply partners. This can be a significant commitment so the marketplace model, so the easy integration of back-end processes and systems with multiple suppliers that you get with a marketplace is a tempting proposition.
As it is so easy to bring new partners on board, retailers can offer greater choice for minimal additional cost. They can test out new relationships and product ranges without over-reaching and they even have the option to let the website only promote the best products and deals at a given time.
Crucially, the retailer retains control at all times over what products are offered, and how transactions and communications take place. This means they can offer customers the exact service levels they from their marketplace as their regular online store. The retailer has more control over after-sales care too, compared with a drop-ship scenario.
Because stock does not transfer to the retailer with a marketplace model, a commission is applied rather than a resale margin. The scope for expansion is much larger though, so the potential for profit growth is high, whilst at the same time the risk is much lower, with the retailer no longer processing inventory or investing in individual partner integr