At first glance, it may appear that marketplaces are more complex than other eCommerce businesses due to thousands of SKUs supplied by diverse vendors. But when you dig deeper, you’ll find the marketplace model is surprisingly lean and scalable for new startups.
So how do we really define an online marketplace? And how do marketplaces differ from online stores and other online businesses?
Online Marketplace vs. Online Store
An online marketplace is a website or app that connects buyers and sellers, where products and/or services are brought together to a curated customer base. Because marketplaces aggregate products from a wide array of providers, selection is usually broader and availability higher than in vendor-specific online retail stores. Examples of well-known marketplaces include Amazon, Overstock, and Newegg.
In an online marketplace, consumer transactions are processed by the marketplace operator and then delivered and fulfilled by the participating brands, manufacturers, retailers, wholesalers, or service providers.
The role of a marketplace owner is to bring together the right vendors and the right customers to drive sales through targeted marketing and exceptional user experience.
The role of a marketplace owner is to bring together the right vendors and the right customers to drive sales through targeted marketing and exceptional user experience. Sellers have a place to gain exposure and sell their products or services, while the marketplace owner earns a commission from each sale.
Unlike online store owners, marketplace owners do not own the inventory their platform sells. The marketplace owner leaves the operational side of the business to vendors, while focusing mainly on promoting their marketplace brand with a view to driving traffic to the platform and converting site views into sales.
An online store, on the other hand, is typically a sole vendor who wants to sell their own inventory of products exclusively to their target audience. Good examples of online stores include Nike and Apple. Online stores control every aspect of their brand (the 4 P’s), and the store supports the company’s long-term brand vision. Their online presence is only one aspect of their business.
Online stores control every aspect of their brand (the 4 P’s), and the store supports the company’s long-term brand vision.
All sourcing, manufacturing, marketing, inventory storage, and distribution of the product is managed by the company that owns the website and products. They also receive the full purchase price of the product.
Top Features of Online Marketplaces
To help entrepreneurs decide which model suits them best, we have highlighted some of the features of marketplaces that make them different from online stores, and that make them attractive to startups.
An Online Marketplace Has No Inventory
An online store owner manages their own stock and inventory. They need to invest heavily in product development, inventory management and logistics / supply chain management when starting the business.
On the other hand, the products offered in marketplaces are inventoried by the vendors, so the investment in inventory is non-existing (though hybrid models do exist).
Marketplaces might be the easier and more profitable of the two models when it comes to managing sometimes large and varied inventories. But, you are reliant on others for quality control, cost, in stock, delivery, etc.
Online Marketplaces are Customer-Focused
When operating an online store, there is so much to think about: product development, inventory management, site management, customer service, marketing, sales, social media, content, and so much more.
In contrast, the main focus when running a marketplace is to offer the best user experience to the vendors and customers to whom they sell. The focus is on adding value to the customers you target and optimizing the marketplace to meet their needs (vendor and customers).
No one is saying running a marketplace is easy. A great deal of work goes into product / service curation and vendor sourcing. But it is highly customer-centric around a specific niche. With so many vendors selling under one roof, a well-run marketplace can become a destination for customers to find new alternatives and cost-effective solutions. A successful marketplace builds a large community of highly satisfied customers.
A successful marketplace builds a large community of highly satisfied customers.
Marketplaces are Efficient & Scalable
Marketplaces offer their owners a cash-efficient, scalable business model. While marketplaces need to sell a higher amount of goods or services to break even, their focus on marketing and user experience makes economies of scale easier to achieve.
In contrast to other digital businesses, marketplace owners can achieve scale with a relatively small team. They can even manage with a small engineering team due to the highly efficient and malleable SaaS marketplace platforms now available. This allows marketplaces to stay lean and adaptable to the changing and competitive eCommerce landscape.
Don’t get me wrong; there are downsides to the Marketplace model vs. online retail, primarily centered around control.
The overarching risk of running a marketplace platform is limited control over the goods and services provided via your website / app.
Making a marketplace work smoothly means drawing on many suppliers simultaneously and making it seamless for consumers.
The owner of an eCommerce site knows exactly what merchandise is being moved through the site. A marketplace owner runs the risk of customers receiving substandard goods, or worse, sellers setting up fraudulent accounts to mask illegal transactions.
With products coming from many and varied sellers, the information about them is often not comparable, and the delivery speeds of sellers are not consistent. This can surprise consumers in a bad way.
Making a marketplace work smoothly means drawing on many suppliers simultaneously and making it seamless for consumers. This can be hard to do and takes a very different skill set than other online businesses.
Marketplaces – Moving Forward
VCs are investing in marketplace business models because they are highly cash efficient and scalable.
VCs are investing in marketplace business models because they are highly cash-efficient and scalable. A marketplace can also be combined with other business models to create powerful online communities. Walmart has adopted this approach and created The Walmart Marketplace for online sellers to compete with Amazon.
One thing is for certain; marketplaces are and will continue to be successful online.
As outlined, there are many benefits to this business model for startups. However, there are also challenges around scaling, revenue recognition and forecasting, and cost efficiencies. Many of the CFOs in Burkland’s Consumer Practice have experience with marketplaces and can help with these challenges.