Marketplace Model vs Inventory Based Model of E-commerce

Introduction

E-commerce brands worldwide have transformed how consumers shop today and redefine their business model wherever possible. Online marketplaces are considered the most preferred platforms by sellers to tap potential markets and maximize sales. According to Statista, worldwide 47% of digital purchases occurred via online marketplaces. 

Be it sellers, merchants, or buyers, e-commerce marketplaces have something for all. Sellers gain access to the untapped customer base, whereas buyers have the opportunity to choose a large variety of products from a single platform.

Walmart, Amazon, eBay, Wish, and Offerup are the top marketplaces that sold $3.23 trillion in products in 2021. Since the pandemic, consumers spend approx $2 trillion on online marketplaces in 2020. This shows the popularity of the marketplaces among sellers and how they have managed to bridge the gap between buyers and sellers and continue to create newer opportunities for sellers.

This blog will explain about two models of e-commerce order fulfillment i.e. inventory model and the marketplace model. Both models are significant and offer myriad benefits to sellers. However, the massive shift from the inventory model to the marketplace that eCommerce players are experiencing showcases the advantages of the latter over the former.

Inventory Model

Inventory based model of ecommerce refers to the model where e-commerce marketplaces store inventory from brands, merchants, and sellers and sell the products directly to the consumers. Marketplaces following the inventory model manage the stocks from their sellers, thus helping them in order fulfillment.

Sellers who prefer to opt for marketplaces following an inventory-led model get full-fledged fulfillment services. They get the benefits like faster delivery, better quality control, inventory management, and order fulfillment from the marketplaces. However, the seller needs to fulfill a few criteria whenever they send the stocks to the marketplace’s warehouses.

Examples:

The most common example of brands following the inventory model is Amazon FBA. Amazon FBA sources the inventory from the sellers and manufacturers, stores it, and dispatches the orders.

Other examples include Jabong, Yepme, and LatestOne, which aced on speedier delivery, enhanced customer experience, and better quality control.

Marketplace Model

The marketplace model of ecommerce refers to the business model where e-commerce marketplaces provide a centralized platform to multiple sellers where they can sell their products while connecting with potential customers. 

Irrespective of B2B or B2C operation, with a marketplace model, online retailers can increase their product assortments, expand their sales channels, and enhance profitability at lesser risk. Hence, sellers can focus more on their core competencies i.e. offering relevant products to the customers that will enhance customer experience.

E-commerce marketplaces using this model are not responsible for maintaining stocks and order fulfillment services. Sellers get control of the entire fulfillment process starting from managing inventory, pricing, and packing to shipping goods to the end customers. 

Marketplace Model of Ecommerce Examples:

Examples of brands following the marketplace model are Amazon FBM, Shopclues, eBay, Etsy, etc.

Policies of Amazon and Walmart on these two Models

Amazon Fulfillment Services:

More than 2.5 million sellers are active on Amazon and are using fulfillment services by Amazon. While fulfilling orders, the sellers must choose two options FBA and FBM.

Fulfillment by Amazon (FBA) is a service that allows brands to outsource their order fulfillment warehousing process to Amazon. Companies send products to Amazon warehouses and fulfillment centers. When a consumer makes a purchase, Amazon picks, packs and ships them to the consumers. Amazon also provides process returns and customer service.

The individual selling plan in FBA costs $0.99 per unit sold and the professional plan costs $39.99 per month no matter how many amounts a seller can sell. Referral fees for FBA range between 8 to 15% based on the categories of products. Sellers need to pay fees of $0.75 per cubic foot for inventory storage from January to September. Whereas it increases up to $2.40 per cubic foot during the peak season.

The fulfillment fees of Amazon FBA for Non-Apparel Items are as follows:

Merchant Fulfilled Network (MFN) or Fulfillment by Merchant (FBM) refers to the service where sellers list their products on Amazon marketplaces by managing storage, shipping, and customer service independently. FBM is right for sellers who have a lower volume of products, storage capacity, deal with minimal fulfillment requirements, etc.

Amazon charges shipping rates to sellers who prefer to fulfill their orders themselves. However, sellers also have to pay a referral fee which is calculated based on the item price, shipping costs, and sale price of the product. However, an individual FBM seller pays a $0.99 fee for every unit of products sold.

However, there are a few additional selling fees that sellers need to consider such as inventory fees, high-volume listing fees, rental book service fees, refund administration fees, etc. Hence, sellers could prefer a prep center for order fulfillment to make the process less hectic and cost-effective.

Walmart Fulfillment Services:

WFS refers to Walmart’s fulfillment service that takes care of order fulfillment, inventory storage, customer service, returns, delivery, and shipping to Walmart sellers. The fulfillment fees of Walmart start at $3.45.

However, Walmart does not charge any monthly subscription fee from the sellers willing to sell on Walmart’s platform. They have a small referral fee which is 6% to 20% of the selling price. 

The inventory storage fees of WFS are based on product length, height, width, and time stored in the inventory. The storage fee amounts to $0.75 per cubic foot per month. Whereas in peak season, additionally, Walmart charges $1.50 per cubic foot more for items stored for more than a month.

The fulfillment fees of Walmart are mentioned below.

Additional Considerations include:

For calculating final shipping weight, Walmart will add 0.25 lb for packaging materials.

Policy Highlights of Fulfillment Services of Amazon and Walmart

• Amazon’s FBA and FBM are for everyone, but WFS limits entry to the sellers that meet the specific requirements.

• Unlike Walmart, Amazon allows sellers to ship their inventory to multiple fulfillment centers.

• Amazon FBA accepts international shipments, whereas WFS accepts only U.S shipments.

• Sellers can sell products of all sizes with FBA, but WFS has limited weight and product dimensions.

• Storage fees for both fulfillment services are the same, except last quarter, Amazon increased their fees more than WFS.

• Setting up a WFS account is quite a cumbersome process as it requires more details like an EIN verification letter, U.S business tax ID, and many more.

• Amazon provides shipping labels to their sellers, while WFS doesn’t.

• WFS doesn’t have a monthly fee for their sellers, unlike Amazon, which charges a recurring monthly fee in order to join the FBA program.

Advantages of the Marketplace model vs Inventory Model

The marketplace and inventory based model are both vital parts of the e-commerce sector. But it plays different roles altogether in the market. Adopting a suitable business model means unlocking the ways of offering enhanced customer experience to drive business growth.

The e-commerce sector has witnessed a tremendous shift from the inventory model of ecommerce to the marketplace model of ecommerce. The sole reason behind this is that companies boost profit by reducing financial risks. The marketplace model has gained immense popularity among sellers globally within the digital landscape.

Broader Reach

The level of control for the sellers is better when they opt for platforms using the marketplace business model because they can connect with their customers directly. These sellers can also offer a seamless customer experience using a reputed marketplace. As online marketplaces have a customer base, sellers and individual brands can focus more on product development and increasing the shopping experience.

They also have partnerships with third-party sellers to provide delivery services to the end customers efficiently. Modern WMS software work well with the marketplace model so that brands can not only manage inventory efficiently but also 3PL companies can easily manage their logistics smoothly.

Better Margins

The cost of opting for a platform using a marketplace model can be negotiable as per the business requirements. Whereas, in the inventory model, sellers need to pay a fixed monthly fee for selling their products.

In this model, sellers have the option to control the profit margin through negotiation as well as design the process as per the business need. If the platform pricing does change some time down the line, it will be minor which will not affect the profitability of the seller.

Boost Brand Awareness

Brands prefer online platforms using marketplace models as they can not only fulfill customer demands but also go the extra mile to enhance the customer experience. However, in the inventory model, sellers have lesser control over the fulfillment process, as everything is controlled by the marketplace itself.

As per a recent study, 44% of product journeys start on e-commerce marketplaces. Retailers also get better brand visibility and product positioning as they can connect with vast target audiences and expand demographics. They can manage their inventory and create products based on customer needs that enhance the brand value.

Cost-effectiveness

Brands becoming bigger tend to opt for marketplaces to sell their products. Compared to the inventory model, the marketplace model charges lesser monthly subscription fees or referral fees from the sellers. Thus, they can achieve cost-efficiency in no time and get an established platform for selling goods and services while targeting a wide range of customers.

There are no hidden costs in this model. The sellers are aware of the finances at every step. Sellers also tend to experience consistent sales, brand credibility, global reach, better product positioning, and visibility while selling products in these marketplaces. The cost might shoot up if the retailer wants to perform these activities individually.

Complete Control of Inventory

When sellers connect with the platform following the marketplace business model, then they can get full control of their inventory. It is the responsibility of the sellers to check the availability of the products and fulfill the demands as per customer demand. Merchants have more flexibility in inspecting their stock and replenishment schedules.

Compared to the inventory based model, where the sellers need to fulfill multiple complex criteria before sending the product to the platform’s warehouse; here sellers can store their stocks with ease and convenience. There are no such criteria especially in stock management while selling products on the designated platform.

Hybrid Model

The hybrid approach refers to the mix of both marketplace and inventory-led models. Those sellers, who want to embrace the benefits of both marketplace and inventory models, can go for the hybrid model. A merchant may go for hybrid model at different consumption cycles like holiday seasons when the order demand is at its peak.

When the demand is high, then it is difficult for the retailers to fulfill the order on their own. In this scenario, brands choose to go with the platforms using marketplace models to sell certain categories of products based on demand. Sellers often find optimal fulfillment costs while using a hybrid model i.e. the mix of both models.

Conclusion

Multiple reasons showcase that e-commerce brands are shifting towards the marketplace model and the primary reason behind it are scalability and profitability. By 2024, online marketplaces are expected to exceed their sales by $7 trillion. Brands and customers are looking for convenience and a reliable online platform for selling and buying products. As the leading e-commerce business model, the growing sentiment of brands improves the overall shopping experience. And this is the case where the marketplace model of ecommerce is gaining more popularity than the inventory model of ecommerce.

Ways Hopstack Solves Marketplace Model Challenges for Sellers

Digital warehouse platform like Hopstack provides 100% visibility in inventory and manages warehouse operations smoothly which helps the sellers and brands. Sellers need a transparent and centralized platform that ensures data visibility and management from all marketplaces.

Hopstack digital fulfillment platform offers multi-channel inventory synchronization that syncs inventory across all marketplaces and all sales channels (online, offline retail, wholesale) at every stakeholder level.

The real-time inventory visibility ensures sellers do not accept excess stocks from different marketplaces. And the updated stock status and demand forecasting help in offering optimal customer experience.

Hopstack’s warehouse order management suite manages order shipping and gets the best prices by synchronizing order and inventory data efficiently while prioritizing orders.

Hopstack automated warehouse system also helps in the efficient warehouse management of receiving, putaway, storage, shipping, order, and return management with accuracy. It connects with carrier partners, e-commerce integrations, and ERPs that help sellers in uplifting fulfillment accuracy. To learn more about how Hopstack WMS helps in mitigating marketplace challenges, get in touch with us.