Third party selling is a very simple concept if executed properly and it’s benefits are significant, especially for Online Retailers who have an established customer base with strong data-marketing capabilities. This concept while not new, is gaining tracking with Online Retailers across a wide range of categories such as home DIY (Bunnings – https://www.bunnings.com.au/), Consumer electronics (Kogan – https://www.kogan.com/au/), Tools, Safety Equipment and Automotive (Tools.com – https://www.tools.com/), Fashion (https://www.theiconic.com.au/, Archive Place – https://www.thearchiveplace.com/).
Internet Retailing identifies third-party sales through marketplaces will be the largest and fastest-growing retail channel globally, adding more than $1.3trn in sales by 2027 and accounting for 38% of all global retail sales growth. First-party ecommerce sales will shrink from 44% today to 41% in 2027, adding $778bn in sales over the next five years. By then, third-party sellers through marketplaces will capture 59% of global ecommerce sales, up from 56% in 2022. (Source: https://internetretailing.net/marketplaces/third-party-marketplace-sales-to-account-for-59-of-all-global-ecommerce-by-2027/)
Now although these stats refer to “marketplaces” – with the right technology platform, any Online Retailer with an eCommerce store can incorporate Third-Party Sellers into their existing online catalogues to take advantage of the benefits that this form of online retail offers.
What is Third-Party Selling?
Third Party Selling is a business model where an Online Retailer enables third-party sellers – i.e. brands whom they do not carry or stock themselves, to list their products and services alongside their own, offering customers a much larger catalog of products from which to purchase, or affiliated services such as installation, delivery, insurance, complimentary products etc.
Fulfilment of Third-Party items may be through drop-shipping or cross-docking:
- Drop Shipping is a fulfilment process wherein the Vendor or Seller of the item ships directly to the customer. In the case of Drop-Shipping, the customer may receive multiple packages if purchasing from more than one Seller.
- Cross-Docking is a fulfilment concept wherein the Vendor or Seller of the item ships to your warehouse and the items are immediately combined for delivery with first-party items that the customer purchases from your catalog for consolidated shipment to the end-customer.
Benefits of Third-Party Selling to Online Retailers
As an Online Retailer, Third-Party Selling offers you the following benefits
1) Expand your Catalog and offer customers a much wider product range
Product range is a significant driver of GMV – the more you have to sell, the higher the potential value of your GMV. Especially when your first party catalog has obvious gaps.
2) Expand range, without increasing warehousing and holding costs
With Third-Party Selling, you as the online retailer, do not purchase or hold the stock. The stock is shipped directly to the customer or consolidated via your 3PL partners, or cross-docked prior to dispatch. This significantly lowers holding costs, thereby increasing your margin on these products.
3) Increase revenue through commissions or negotiates wholesale rates, depending on your preference and product range
Third-Party Selling offers several monetisation opportunities, discussed below. All of which deliver significantly better net-margin as compared for 1st party items, primarily because of the significantly lower holding costs. If priced correctly, commissions, rebates or margin from third-party products can offer significantly higher benefits.
4) Addressing range gaps and non-core products
Depending on the type of Online Retailer, addressing range gaps could either mean developing new product offerings, supplier engagements with new brands and distributors or development of own-brands. In many cases, these gaps could simply mean lost revenue potential as consumers look for products that aren’t being carried. The same can be said for stocking of non-core products – such as fittings, installation goods, assembly equipment, maintenance and repair items and operational commodities – customers would still need to purchase these items during the operational life of the product, but in most cases online retailers wouldn’t stock these items because the holding costs wouldn’t be worth it.
Third-Party selling offers a great strategic option to address range gaps, by simply identifying sellers who can list those products, without having to carry the associated stock or sink capital into inventory, coupled with marketing expenditure to drive sales and move stock.
The added benefit is that depending on the sales of these items, online retailers can then shift these products using trusted sales data, to first-party stock, or more efficiently. negotiate better rebate opportunities for sales targets on a monthly or annual basis.
5) Complimentary Products and Services
For online retailers of consumer electronic goods, furniture, outdoor goods, home installations, business furniture or electrical goods, industrial equipment, electricals, floor and wall coverings etc, their products would usually entail associated services including installation, insurance, accessories and fittings, measure and quote or the purchase of additional fittings.
By enabling Third-Party sellers of these products or services to be listed and purchasable alongside the main catalog items, retailers can offer their customers a more integrated and seamless buying experience, while also developing an ecosystem of products and service providers.
Monetising Third-Party Selling
Third-Party selling can be monetised several ways:
- Commission-based model: The most common method is the commission model, where the platform charges sellers a commission on the Gross-Value of the sales. It is recommended that any shipping fee NOT be included in the commission fee, as this may negatively impact your ability to secure Vendors on the marketplace. Commission itself can be split into several types including:
- Seller Commission – Based on the sales value of the order
- Category Commission – Based on the product category
- Wholesale model: In the wholesale monetisation model, the retailer effectively negotiates a price per product that is being listed (List or Cost Price). This price is stored on the platform along with the retail or sale price. When the item is sold, the Vendor or Seller receives the agreed List Price x Quantity purchased. This model is great for online retailers with significant customer base in a specific niche category, where they prefer to offer pricing discounts and promotion offers without impacting the value agreed with the Vendor.
- Rebates: Rebates are another “add-on” monetisation model, alongside Commission or Wholesale Model. Rebates are extremely powerful and offer significant price competitiveness to the online retailer. A Rebate is effectively a percentage of total sales value generated for the specific Seller, paid-back to the Online Retailer at the end of a specific period, whether it is monthly or annually. Usually combined with marketing budgets, promotions and other channel incentives. When setting a rebate, Sellers would look to establish an agreed sales quota for that period, and the rebate is based on that quota (e.g. 5% rebate for total sales over $2m for the year, and 3% if less than $1.5m). Rebates should be flexible as they have a high degree of correlation with the product type and Seller.
- Subscription-based model: Third-party sellers pay a monthly or annual fee to be able to list their products on the marketplace. Subscription models are a good “add-on” monetisation model for most online retail platforms, but tend to be the main monetisation option for Service Platforms.
- Advertising-based model: Third-party sellers pay to have their products highlighted or promoted in certain areas of the marketplace, or to have their products appear at the top of search results.
- Value-added services: The online retailer charges additional fees for value-added services such as order fulfilment, customer service, and shipping.
- Transactional fees: Third-party sellers are charged a small transaction fee for each sale made through the marketplace.
Getting Started with Third-Party Selling
So what do you need to get started with Third-Party Selling? We’ve compiled an exhaustive list of the most crucial platform aspects required to turn your existing eCommerce store into a third-party sales rocket ship!
The Business Model
Ensure that you have clearly articulated the goals and business model of your Third-Party Sales Strategy – this includes:
- Target vendors within the first 3,6, 12 and 24 months
- Target Third-Party Catalog – specifically the categories of Sellers that you’re looking to onboard and the product ranges
- Establishing a clear product category taxonomy to ensure that your Seller Acquisition team knows precisely the product range that you’re looking to establish via Third-Party Sellers while also making it easy for your Sellers to integrate existing stores and map data between their systems and yours.
- Establishing a clear fulfilment strategy – offering Sellers the option of Drop-Ship or Cross-Dock depending on your business’s capabilities and the shipping efficiency and associated costs.
- Determine your shipping cost strategy for Third-Party items, will you be passing on the shipment of items to your customers for third-party items, absorbing the costs, consolidating shipments etc?
- Monetisation strategy
- Payout / Disbursement process and timeframe, as this is one of the most commonly asked questions by Third-Party Sellers – When and how will I get paid?
- Returns and RMA process for Third-Party items
- Invoicing, Tax-Withholding (if applicable) and Cross-Border disbursements
Selecting the right platform to drive your Third-Party Sales Solution
- Choose a platform that provides a comprehensive API suite or connector for your existing eCommerce store. At the minimum you will need to ensure that the following is supported:
- Product Catalog sync
- Pricing and Inventory sycn
- Order sync
- Fulfilment / Shipment sync
- Vendor / Seller communications (if you would like your buyers to have the ability to communicate directly with sellers)
- Promotions sync
- Seamless vendor onboarding with the ability to customise vendor onboarding forms to enable your platform to connect the data and information required to review and approve the seller to your eCommerce store
- An approvals process to review and Approve / Reject potential sellers
- A seamless online payout process whereby your Sellers can be onboarded for payout of their orders
- A platform that supports a wide range of monetisation options (as listed above) to provide you with the flexibility to create a monetisation plan that suits your business
- A robust, automated and accurate solution for calculation of payouts based on the range of monetisation options selected
- Comprehensive Vendor Dashboard and Seller Portal to allow your vendors to manage their profiles, catalogs, orders and shipments and to receive notifications of orders via the platform
- Robust connectivity options for your sellers to connect their existing eCommerce stores, PIM systems, ERP’s or product feeds
- Connectors to allow your Vendors to receive order fulfilment information directly from your eCommerce store, without having to login to manage their orders on your platform. The majority of Vendors already have several sales channels that they’re managing and they’re not interested in having to login to any more channels to manage orders. They expect centralised order sync and management from their existing eCommerce systems.
- Connectivity to retrieve shipment and tracking information directly from your Sellers, to update the order information on your platform with ease, so that customers can track their third-party orders
- Automated invoicing management taking into consideration partial fulfilment, order cancellations, refunds and other edge cases – ensuring that your customers are properly compensated while managing Seller payouts seamlessly.
- Seller assessment is vital for success, so ensure that the platform you select has processes to monitor seller performance including reporting for:
- Time to fulfil – ensuring that Sellers ship their items within a certain timeframe of receiving the order
- Vendor Review and Ratings
- RMA processes with the ability for customers to leave detailed product reviews and reasons for returns etc
- Comprehensive customisable reporting built in – to give you the data you need to operate your Third-Party sellers.
What to be aware of when establishing a Third-Party Seller Strategy
When executed correctly , Third-Party Seller Strategy can deliver significant value to Online Retailers. The following points highlight the potential risks and things to be aware of when planning to execute this strategy.
- Quality of Quantity at launch: Assess your potential Sellers carefully, especially in the first two years of operation. Poor customer experiences with Third-Party sellers can affect confidence and review quality of your first-party items as well, especially when cross-docking, as delays in Third-Party fulfilment may affect when customers receive their overall packages.
- Establish SLA’s for fulfilment with Sellers and ensure that this is part of your onboarding contracts
- Track and monitor Seller Performance and Ratings / Reviews from customers to weed out low-performing Sellers
- Do not support back-orders, especially for consumer marketplaces and ensure that your Sellers are ideally providing near-real-time inventory as it is essential that customers receive the items they purchase rather than being notified of it being out-of-stock after they place their orders. This leads to dissatisfaction and loss of trust in the store.
- Be realistic and set expectations with your Sellers: Many Online Retailers who initially go down the path of Third-Party Selling over-estimate the value of their revenue potential and over-promise sales to their Sellers. Sales and industry data are good indicators, but temper and be conservative with expectations and build slowly.
- Establish a monetisation strategy that makes it easy for new Sellers to say “Yes”: From a Vendor / Seller acquisition standpoint, new Third-Party Channel platforms are usually risky for Sellers – they have to put in the effort to sell, manage their catalogs etc, so make it as easy as possible for them to say yes – do not charge a fixed / subscription fee for them to join your platform especially as it is unproved if it is a cold-start. Offer realistic commission agreements and focus more on rebates, if you are confident of driving sales, as this is the monetisation method offers the best cost/benefit mix for new Sellers.