Online marketplace businesses: key benefits to starting oneNataly Palienko
Modern consumers and businesses have both moved their interactions online. According to Statista, in 2017 e-commerce sales worldwide amounted to $2.3 trillion, and this number is expected to grow in the coming years.
Marketplaces make interactions between customers and businesses possible. Over the last couple of years, the number of online marketplaces has increased. These newcomers are functioning alongside such giants as eBay, OpenTable, Uber, Airbnb, and Amazon. According to research by Internet Retailer, 35 of the current top 75 online marketplaces launched between 2010 and 2015. These include retailers that have been around for a while but just recently began allowing other merchants to sell on their sites.
What is a marketplace?
An online marketplace, or an e-marketplace, is a website or app that serves as a mediator between customers and companies or individuals offering products or services in the B2B and B2C sectors. Marketplace owners usually don’t offer any products or services themselves. Their task is to provide a platform where marketplace participants interact.
There are four main types of e-marketplaces:
Vertical marketplaces offer products of the same type from different vendors.
Horizontal marketplaces offer different products that have similar characteristics.
Global marketplaces have no limitations and sell all kinds of products from different suppliers.
Hybrid marketplaces offer their own products as well as products from other companies while providing a platform for participants to complete transactions.
Internet Retailer analyzed the top 75 online marketplaces worldwide as of 2017 and came up with the following statistics:
Top benefits of marketplace businesses
Considering marketplace growth and areas yet untapped by this technology, business owners can leverage the marketplace model and build their own unique solutions. Below are some key benefits of running your own marketplace.
The cost of releasing a marketplace application is almost the same as the cost of launching an e-commerce website. Although the logic behind an e-marketplace is rather complex, its functionality can cater to the specific needs of many different vendors.
Marketplace owners can choose a revenue stream that best fits their market niche and aligns with their business goals. The way marketplace owners derive revenue determines the success of their platform. The most popular monetization models are commissions, listing fees, subscriptions, lead generation fees, advertising, and providing additional services. You can use a combination of several monetization schemes, but it’s best to implement just one when you’re starting out.
For example, Craigslist and OLX make their money from premium listings. The most successful marketplace companies like Booking.com, eBay, Etsy, and Uber use the commission business model.
A marketplace’s primary source of revenue is usually commission, that it receives from sales. This requires a high degree of business process automation. There’s no need to do any major paperwork as everything is done automatically within the platform.
Marketplaces give companies a wonderful opportunity to handle their supply that doesn’t require any initial investment in a physical store. Suppliers can create a sort of business card with ratings and customer reviews so customers can make informed decisions. To attract product and service providers as well as customers, a marketplace can offer lower fees, greater earning potential, a superior user experience, a more appealing brand, and a safer app environment than limiting the reach to one physical location.
A scalable business model
A marketplace requires less financial risk than an e-commerce store as it doesn’t need to invest in inventory. Marketplaces are likely to expand quickly, however. And if traffic grows quickly, it may be necessary to add more vendors to meet the demand. The only challenge before a marketplace owner, therefore, is to balance supply and demand. High-quality vendors attract more customers, while a growing customer base attracts more vendors.
One of the major appeals of an e-marketplace is that it brings together offers from multiple suppliers or service providers. Customers are more likely to use an app with a broad range of options so they can choose exactly what they want without limiting their choice to a single provider.
Marketplace owners can track their sales with accurate metrics. For example, an owner can see which products and services are in demand and know which vendors are most preferred. As a result, the owner can promote goods and services that truly matter to its users.
Downsides of marketplaces
One of the difficulties on the way to marketplace success is a pre-launch promotion. In a different article, we’ve offered tactics you can use to promote your marketplace before its launch. It’s wise to develop an MVP version of your marketplace when you are just starting out and find a customer base if you don’t have one yet. After establishing a solid customer base, you can invest in improving your marketplace functionality.
“I think it’s very important to listen to both sides and create a product for your users...You’re not creating it for investors, you’re not creating it to look nice on a PowerPoint. You’re creating it for real people and you need to listen to them.”
— Adi Tatarko, Houzz CEO
Comparing a traditional retailer and an online marketplace
Party City is a traditional retailer, founded in 1986, that sells discount party paraphernalia and has over 6,000 full-time and 8,000 part-time employees. Etsy, an online marketplace for homemade goods, went public in 2015 and has only 685 employees.
Even though Etsy is relatively young, it saw annual revenue of $44.12 billion in 2017 according to Statista. Party City, on the other hand, had $2.37 billion in revenue in the same year according to MarketWatch. Etsy shows how business owners can get vast profits with fewer resources required to maintain the business.
Summing it up
Businesses and customers alike seek convenience and a reliable place where they can buy and sell things, and that’s what a marketplace can deliver. Marketplace platforms can cater to practically any niche and address any need. Marketplace software has great potential and is of interest to vendors who are looking for ways to promote their products and services through multiple channels.