This blog post started as an e-mail conversation between @henlaub and myself about Marketplace, and whether or not Marketplace could reduce the margins of a retailer, and/or compete directly with an online retailer’s primary business.

The answer is, of course it could, but especially as the retailer running a Marketplace you have ultimate control over how much you let it affect you.

As I see it, there are about 5 ways to improve product selection on your eCommerce site.

1. Build it.  Generally this means work with someone to create a product under your own private brand. This offers the highest margin of any option because you are going directly to the source.  Because this is your own brand, you now have to advertise it!  Good on Google (brand keywords!) bad on consumer perception (starting from scratch). 
2. Buy product from a manufacturer.  Work directly with a manufacturer, negotiate units and buy in bulk.  You can trade on the reputation of the manufacturer (for instance, Samsung if you are in electronics) and offer good products if you are willing to take the inventory risk!
3. Dropship via distributors.  Here you can negotiate with your dropshippers in advance, and in most cases the retailer retains control over pricing and promotions.  However, you are generally one level removed from the manufacturer and the distributor needs margins as well.
4. Dropship via running a marketplace.  This allows improved selection and price competition on your site, increasing perceptions of consumer value at the same time.  Because the marketplace participants themselves set the pricing, and your rate card is generally fixed across all your merchants, your margin is setup ahead of time.  More selection here because there are many more retailers than distributors.
5. Link to other sites CPC-style. Instead of offering checkout on your own site, you could take a cue from Progressive insurance or other online retailers and offer links to other retail sites on your site.  This is the lowest margin of all because you are adding the least value in the equation.

Essentially the top of the list offers the greatest margins but the lowest amount of selection.  The bottom of the list offers the lowest margins but the highest selection opportunities.

In my mind, the retailer with the most options has the most flexibility and as a result opportunities for growth.