Marketplaces Make Money

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With growing consumer dependence on sites like Amazon, Uber and Airbnb, we are squarely in a platform economy. This means that a significant amount of buying and selling today takes place via an online platform or technology framework. Savvy retailers are shifting to digital-first transactions – and benefit from engagement and sales – by incorporating a marketplace strategy into their roadmap.

What is a Marketplace?

Online marketplaces offer almost every product and service category from travel and retail to household services. A marketplace is not exactly the same as a platform, but rather a subset of the platform economy.

A platform can power a retailer’s ecommerce website operation, but the providers that run these platforms typically step away when it’s time to finalize the sale. For example, Madewell may use a platform such as BigCommerce or Salesforce Commerce Cloud to engage with customers, but at the end of the interaction, Madewell monitors the transaction independently. Think: farmer’s market. The farmer’s market is the platform — it draws in people to shop — but it’s up to the individual vendors in the marketplace to handle each purchase.

A marketplace plays a direct role in the transaction itself, from managing payments to ensuring fulfillment and delivery of the product or service. For example, on popular sites like Amazon, Etsy or Instacart, you are buying a product from one seller, artist or grocer, but the entire transaction process occurs within the host marketplace. Think: grocery store. No matter how many brands are shoppable on the shelf, there is one seamless checkout experience.

What Are your Marketplace Objectives?

There are a number of motivating factors for embracing a marketplace approach. For example, are you looking to take advantage of new inventory management options? One benefit of a marketplace strategy is that retailers can utilize endless-aisle and long-tail expanded assortments because they are not developing or sourcing new products. The marketplace can add additional vendors as needed with no increases in corporate overhead. This also minimizes stockouts because a wide variety of vendors can source an item, rather than asking a single manufacturing chain to scramble to meet the heightened demand.

Or perhaps you’re looking to test new assortments. Marketplace strategies allow the host to easily bring on a vendor category and test the interest levels of the customer base without a long-term commitment. For instance, a retailer that typically does not sell in the beauty space can try offering beauty products through a vendor or two on the marketplace platform before expanding in a broader way. This also gives the host the opportunity to consider investing in the creation of an in-house item, or reworking brick-and-mortar assortments to include the category based on the success, or lack thereof, from the trial run.

Or are you looking to increase customer loyalty? Many customers prioritize products they can find available at a lower cost with high levels of ease or convenience. With a marketplace, natural competition between vendors helps to keep costs low for the shopper. Furthermore, by offering a wide assortment, customer cart sizes are likely to increase. When you can satisfy all a customer’s needs in one quick stop, they are more likely to convert into a loyal brand fan.

Truth be told, retailers may be looking for a combination of these objectives. That’s perfectly alright, as long as everyone on the team is aligned on the strategy and which objectives are to be targeted first.

What Are the Benefits of a Marketplace?

Regardless of your objectives, marketplaces offer tremendous benefits for retailers. By incorporating a marketplace strategy, retailers can benefit from multiple revenue streams from in-house brands and sellers. While margin rates are lower without ownership of the inventory, marketplaces bring in 13-15 percent commission on every sale, with only the cost of seller management to consider. Additionally, outsourcing ownership of inventory lessens risk in case of a severe shift in demand. Marketplaces also generate more search than traditional ecommerce platforms and therefore improve search engine optimization.

Marketplaces are highly scalable and extremely agile. With this strategy, retailers can add an unlimited number of products or services without investing time and money into development or sourcing teams. This creates room for flexibility based on customer demand, risk-free opportunities for product testing, and ultimately higher customer satisfaction and retention.

Is Your Brand Ready for a Marketplace?

When ecommerce was first gaining popularity, many brands and retailers created a new business segment and siloed team to operate the online platform. In retrospect, this was a mistake that can be rectified by a cross-function, systemic approach. To operate effectively, the marketplace must be a corporate strategy, not just a spinoff of the ecommerce platform. New marketplaces will only be successful if they are created from the top and incorporated down throughout the entire organization.

Next, the new strategy must be understood and accepted by members in all divisions and on all teams. If the benefits of the marketplace are not made clear, there will be resistance. Some team members may believe the new model is cannibalizing existing assortments and will rightfully push back because of their own priorities. Retailers that take the time to correct this misunderstanding and clarify the true benefits of a marketplace (strategizing with cross-functional teams such as marketing, finance, and supply chain) will have the best results.

Finally, the organization should dedicate a unique team to ensuring the success of its sellers. In a platform economy, sellers have a myriad of choices of marketplaces. Keeping sellers happy is critical to ensure the best variety of products and services for customers. Catering to sellers includes marketing to vendors directly and having a clear line of communication so that sellers are never left with unresolved questions or concerns. With a marketplace, keeping sellers happy is just as important as keeping the buyers happy.

Are You Ready to Participate in the Marketplace Revolution?

The marketplace revolution is upon us, and the benefits clearly resonate with profitable sales. But not every company or brand is ready for this up-and-coming strategy. As with any new retail strategy, aim before you fire and carefully align the marketplace with your overall goals and objectives.



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