Why retailers should become multi-vendor marketplaces

Wait, Allbirds doesn’t sell products from other vendors, do they? Good catch. They don’t.

In this post, I am going to explain how online retailers can lay the foundation for unlocking Digital Native Vertical Brand (DNVB) growth without becoming one.

For starters, what is a DNVB? A DNVB controls both online distribution and inventory of self-branded products. Typically, they source and/or own the entire supply chain all of the products that they sell. Whereas a Direct to Consumer (D2C) brand slaps their brand on a manufactured good.

DNVBs have been in the news a lot lately. Warby Parker, Harry’s, Allbirds, Recess, Everlane, Soylent. Many of the world’s fastest growing brands didn’t even exist 10 years ago. The secret to achieving DNVB growth is in product catalogue expansion.

As a retailer, curating products from third-party vendors can supercharge your growth without the need to raise millions of dollars from venture capitalists in order to spin up a scalable manufacturing operation and open Upper Fifth Avenue retail locations.

This is what Amazon got right in their very early days. They aggregated product selection. You may have heard of Net-a-Porter, Farfetch, or The Grommet. Same strategy: own your distribution channels and offer a wide product catalogue.

In addition to just being able to offer a broader selection of products, retailers who transform themselves into multi-vendor marketplaces can obtain better data on the preferences of their customers and upsell them through the path to purchase. You can pinpoint customer preferences and actually service them.

Unless you are a Digital Native Vertical Brand (DNVB), like Away or Allbirds where you make and own the end-to-end distribution and manufacturing of your catalogue, ecommerce stores can and should differentiate on the basis of product selection.

DNVBs have learned that curating a larger product catalogue leads to growth.

Away, for example, recently raised a whopping $100M to “…add to Away’s portfolio of merchandise with an eye toward expanding into generic travel gear.”

Photo Credit: Away

Photo Credit: Away

It turns out that selling one kind of product — suitcases — isn’t necessarily enough.

To be clear, brands like Away and Allbirds aren’t multi-vendor marketplaces themselves.

They make and sell their own products exclusively. But they are leveraging the same strategy that many successful ecommerce retailers are turning to and unlocking the same kind of growth.

While it would seem ideal to own the manufacturing stack and grow through self-branded products, for most retailers, this just isn’t feasible nor is it the smartest move. It isn’t necessary either.

That’s because the formula for ecommerce growth hasn’t changed:

Curated product selection times distribution times lifetime value equals sales growth.

Curated product selection is the coefficient that makes the equation work.

You can grow your audience to an extent. And you can try to create loyalty from thin air. But if you don’t have interesting products to sell, then you will still be at the starting line.

So, what do you do if you haven’t raised millions in venture capital and can’t afford to take a manufacturing gamble on a new product that you think would be complementary to your current offering?

The secret to unlocking DNVB growth is to integrate and onboard third-party brands and vendors who can fill the product demand gap on your behalf.

Working with multiple suppliers horizontally is a more cost effective way to achieve the same goal.

That’s the magic of transforming your retail business into a digital multi-vendor marketplace.

Since every online retailer is looking for growth and customer loyalty, then the option to become a multi-vendor marketplace should be considered.

Here are a few reasons why you should consider becoming a multi-vendor marketplace:

1) Grow alongside your partner ecosystem.

A partner ecosystem enables you to readily pull products from a collection of trusted vendors. A trusted partner ecosystem also creates a halo effect around your brand.

Being associated with certain vendors will lend more credibility to your brand. As a partner gains traction, so will your marketplace simply by being associated with them and their products.

The only way to ride the wave of your partner ecosystem is to own one in the first place. If you don’t have an ecosystem of partners, then you could be missing out on organic growth.

2) Expand your product catalogue and increase your average order value (AOV).

Perhaps the most obvious benefit of transforming your ecommerce business into a multi-vendor dropship marketplace is the ability to diversify your product portfolio. You can go deep or wide.

Depth (vertical product expansion) is inherently more expensive than optimizing for width (horizontal product expansion). Width of the product portfolio accomplishes the same goal as a depth product strategy but with the added benefit of iterating on customer demand and zero risk of running a manufacturing risk.

By increasing your product catalogue, you can provide more opportunities to personalize the path to purchase with upsells and cross sells, leading to a higher average order value (AOV). Plus, you can reap the SEO benefits by having search engines index your site for keywords and meta data contained within product descriptions and images.

3) Own the customer relationship (and their data).

Rather than handing off the customer to the vendor, you will be able to own the customer relationship directly. Capturing the sale without the hand-off process enables you to remarket the customer in the future in order to increase their customer lifetime value.

Having data around the kinds of products that your customers are interested in allows you to give them more of what they want so they return. In an age of Google and Facebook Ads saturation and ad block, bringing customers back for repeat purchases is the most profitable way to grow long-term.

Once you have built out your partner ecosystem and developed your product catalogue, you will want to explore how you can continue the customer relationship and entice them to return.

4) Eliminate inventory risk.

The goal in transforming your ecommerce business into a multi-vendor marketplace is not to procure inventory on day one. It’s to test product demand by outsourcing everything except for distribution. For an ecommerce business, product curation and distribution are the highest leverage assets. Moving to a dropship model enables you to focus on what you are best at — marketing and selling — by outsourcing and manufacturing and fulfilment.

Vendors (suppliers) are increasingly looking to grow their dropship distribution channels but, in many cases, they don’t know where to start. Offering a turnkey way for them to onboard, integrate, sync, and start selling through your storefront will make you an attractive partner.

5) Online retail is about survival.

The tastes and needs of your audience will change rapidly. In ecommerce, you either quickly enough to stay ahead of ever changing consumer preferences or you fade away.

In order to survive as an ecommerce retailer, you will need to accurately understand how these desires will change and how you can meet them with new products and shopping experiences. The multi-vendor dropship marketplace model gives you the kind of flexibility you’ll require in order to navigate and manage shifts in consumer preferences. Physical retail is inherently challenging because of the inventory requirements and inefficient lead times. You are always one bad forecast away from going out of business.

In the world of online selling, you are competing on a global scale but can leverage modern technology to dodge the major pitfalls of physical retail. Those survival strategies could be testing new product offerings, not rushing to procure inventory on an unvalidated product, and increasing customer lifetime value.