Common Misconceptions About Dropship & Marketplace

“Avoiding stupidity is easier than seeking brilliance.” — Charlie Munger

Launching a successful dropship or marketplace program comes down to avoiding some common pitfalls. When picking a Dropship Platform or a Marketplace Platform, consider the following misconceptions that retailers often have during an evaluation:

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Misconception #1: "I can sell everything, so why not?"

The idea that you can sell anything just because there's no inventory cost can lead to a brand identity crisis. Imagine a luxury store suddenly selling everyday items – it's confusing, right?

Just because you can sell it, doesn’t mean you should. A better starting point is having a clear definition of your customers and committing not wavering. It’ll be tempting to chase trends that stretch your customer definition but hold back.

You want to put yourself in a position to catch the waves that are important to your customer definition.

Trends disappear, customer definitions are meant to last.

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Misconception #2: “Marketplace is easier. Vendors do all the work!”

Oh, the sweet lullabies of salespeople. They'll have you believe that marketplaces are a cakewalk, where vendors do all the heavy lifting. I guess this could be true in the limit, but what will happen if you kick “the work” down to your vendors?

• Vendors will struggle to see the ROI on effort to onboard
• You’ll get product information in a “mosh pit” of taxonomy and quality
• You’ll have to transform product information into a useable/consistent state anyway
• It’ll be harder to justify more than a small commission to vendors

You’re better off working backward from your customer definition, then focusing on the ideal end experience you want to create and curate. Then don’t settle — even if it means accepting that you (the retailer) will take on more of “the work” from your vendor partners.

The retailers that lean in and support their vendor partners end up performing much better than the rest. You want vendors raving about the experience of selling through you to other vendors. The community of relevant brands is small, so blowing them away with how easy it was to onboard is the first step.

Speaking of vendor onboarding…

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Misconception #3: "Onboarding? Just a few meetings!"

This is usually the result of applying the wholesale onboarding process to a new model. If you’re buying $100,000 worth of inventory for stores on a new vendor, sure, go slow and steady. Do accurate forecasting and market testing — it’s worth doing to mitigate the risks of holding inventory on a new vendor partner.

But we’re seeing others get it done much, much faster.

In a 30-minute call, you can go from “Who is {Retailer}?” to negotiated margins, signed agreement, and vendor onboarded. If each of those steps requires a separate meeting and a month of email tag, you’re doing it wrong.

The other issue with splitting this process into multiple calls is it requires the retailer to wait on the vendor to respond. They are busy running their own business, so when you have them on the first meeting, aim to do the necessary steps to sign them up then everyone can move on.

How fast you can onboard a vendor is the single biggest lever for success.

Hold your process accountable to key metrics:

• Vendors: Time to Onboard
• SKUs: Time to Site

The ops process can be so much more dialled in than a chain of hand-offs and meetings to reach the same outcome.

Also, vendors want new channels as wholesale diminishes. They want to move fast — but your process and tech need to support their preferred speed and ease of onboarding.

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Misconception #4: "It's all about the percentage margins."

Historically, merchandising teams get bonuses for how many points of margin they can negotiate from wholesale vendors. The problem is that model doesn’t scale to Dropship or Marketplace where more margin needs to be returned to the vendor to convince them to participate.

The thing to focus on is profitability. Use margin dollars as your yardstick to evaluate profitability of a vendor after costs rather than percentage terms. If it isn’t profitable to work with a vendor based on the margin they are demanding, then consider walking away.

An entire post can and should be written about the benefits of measuring vendor performance in terms of margin dollars as opposed to margin percentages. We just see so many retailers getting hung up on applying hard percentage constraints to vendor negotiations. These are usually just the result of applying wholesale process to something that’s entirely unique and more scalable.

Once you prove that your channel performs for vendors, you can increase margins over time. The most successful customers of ours start low (while still being margin-dollar profitable) then increase their average margins over time.

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Misconception #5: "My platform partner is my forever vendor matchmaker!"

I get why businesses that are new to either Dropship or Marketplace want to rely on their platform partner for sellers. The thing is, this is usually short-sighted and zero-sum:

• What happens when the pond dries up?
• Are mass/open directories of sellers teeming with high-quality sellers?
• Will my platform partner sell-out the sellers I've worked hard to source?

It is tempting to go into these projects wanting your supply-side to be seeded by the marketplace platform partner. But that usually doesn’t end well.

The most underrated reason is the last one on the list. If your marketplace platform partner gives you leads, they are going to solicit the sellers you have recruited and sell them to your competitors. At Modern Dropship, we draw a hard line — if a retailer sources a vendor, it’s theirs. We can’t solicit them for marketing. This approach protects the relationships that our customers (retailers) have with their vendors.

For seller recruitment, it is much better to invest in building a high-velocity seller recruitment function internally. This probably only requires one person initially to email and call vendor prospects. You can get contact info on any brand for super cheap. With the right messaging, smooth onboarding process, and compelling offer, it should be reasonably easy to close vendors. You’re giving them something they want (customers).

We have built the playbook for Dropship and Marketplace for curated retailers that want to sell highly relevant products, without inventory. Reach out if we can help.