Ever since Amazon and Ebay established themselves as two of the internet’s first true eCommerce titans, business leaders around the world have studied the trailblazers, looking for insights that can be applied to their own businesses. In recent years, particular attention has been drawn to the business model that serves as each company’s foundation—the marketplace.
Rather than focus on producing their own products or services to sell, businesses such as Amazon or Ebay build a marketplace as their offering, providing other businesses a place to sell their wares, and customers a centralized location for buying. While these original marketplaces flourished as a sort of general store of the new millenium, a place where customers could expect to be able to purchase nearly anything, a new wave of online marketplaces has applied the strategy to niche industries such as crafts (Etsy), home goods (Wayfair), and pet services (Rover). As these newer websites have managed to ride the marketplace model to household name status, more and more companies have been eyeing their own industries, wondering if they too are ripe for the online marketplace revolution.
In this article, we’ll take a closer look at this strategy, identifying considerations to make when considering your own marketplace engagement, offering tips for maximizing performance, and finally providing a few alternative ways you can receive some of the benefits of the marketplace without jumping all the way in.
Why a Marketplace?
Whether your business is year-old startup looking for an audience or a multi-billion dollar corporation considering options for gaining an even larger market share, investing in a marketplace might be just the thing to take you to the next level. Consider how key benefits of the marketplace—exposure, selection, profitability, and competition—will impact your ability to find success before making a final decision.
If you’re thinking about joining an existing marketplace, exposure is likely one of the biggest benefits you’re looking to gain. If the marketplace has been around for awhile, you can likely count on a built-in user base interacting with your product or service, many of whom may never have heard of your company or product beforehand. This can be especially crucial if you sell a very niche product, as customers will stumble onto your pages through related products or searches without needing to search for you directly.
If you’re on the other end of the spectrum, as a major player thinking about how building a marketplace could revolutionize your industry, don’t underestimate the benefit of this additional exposure. Not only can becoming the industry’s central hub contribute to a wider perception of your quality and expertise in the field, but you’ll be able to prioritize your own key products much more cost-effectively than you would if Amazon or another competitor beats you to the punch.
From a consumer’s perspective, there’s little question why marketplaces have become so popular. Who doesn’t love being able to make a single purchase and then have paper towels, new headphones, and a pet costume all arrive a few days later? The enormous selection and easy ability to compare offered by the marketplace are driving factors in their popularity, but consumers aren’t the only ones who benefit.
When you’re a small business trying to make a name for yourself, convincing retailers to take a chance on carrying your product is one of the biggest challenges you face. But by selling via a marketplace, you can avoid the gatekeepers. In fact, the presence of your innovative new product is one of the key benefits the marketplace offers, which means that you don’t have to worry about getting pulled because your first month on the shelf didn’t exceed expectations.
On the other hand, if you’re an established player with a limited or focused set of products, a wider selection of items might be just what your website needs to bring in a larger audience. By offering related products, not only can you turn a profit on a broader set of transactions, but you can help drive sales for your own products by piggy-backing off the success of complementary businesses.
Oh, we haven’t even mentioned the money yet, have we? Well guess what—marketplaces tend to make a lot of financial sense, all other considerations notwithstanding.
From the perspective of a business considering joining an existing marketplace, because most marketplaces don’t have to assume the risk of unsold product, the processing and transaction fees charged will likely allow you to recoup more of the final purchase price than you would selling via traditional brick-and-mortar retailers. Similarly, since you don’t have to make the investment in building and maintaining an eCommerce platform, profitability may even be higher than selling via your own website would be. Finally, some marketplaces (such as Amazon) will fulfill orders for you, allowing you to tap into the efficiencies of scale (such as cheaper shipping costs) that couldn’t be replicated otherwise.
If you run the marketplace, the math makes even more sense. Not only can you cut out the middleman on the sales of your own products, but you get to be that middleman for every sale that goes to a competitor. Think of it like this: if you could turn a profit on every product sold in the industry without assuming the risk or overhead of purchasing/manufacturing/holding that product, would you?
There’s no getting around it, the biggest risk of the marketplace is the introduction of competition. Your products will be listed alongside competitive products, and they’ll sell or not based on the merits. But doesn’t that just sound like…retail?
And besides, look at this way: you’re going to have to beat the competition on the merits, one way or another, especially considering how easy and common comparison shopping has become. And in fact, if you’re an up-and-coming product, your company probably exists because the ones that already did weren’t cutting it. Plus, one major competitive benefit most marketplaces offer is the ability to quickly and easily monitor price points, making it easier to know where you stand and make adjustments as needed. Finally, isn’t it better to at least be considered, rather than simply cede awareness to your competitors? You can’t escape competition, but in the marketplace, you have more of a fighting chance than you have anywhere else.
And if you happen to control the marketplace? Well, then you get to dictate the terms. Want to give preferential treatment to your products? Go ahead. Want to charge a higher margin on the products that are the greatest threat to you? That’s your call. And guess what, if one of your competitors builds their marketplace first, you better believe that you’ll be playing by their rules. Which would you prefer?
Alternatives to a Full Marketplace
Setting up a successful marketplace is a major initiative, and requires more than just internal buy-in to make it a success. Likewise, depending on your industry, it may not make sense to try to compete with Amazon or other existing marketplaces. However, there may be ways to utilize some of the components of a marketplace without the effort, risk, and overhead required to build one from the ground up.
In particular, we’ve worked with customers to help implement secondary suppliers into their existing eCommerce ecosystem. These secondary suppliers may be used to enhance product selection or supplement inventory, with the central goal of providing a better customer experience with less overhead.
For example, if your goal is to reduce out-of-stock scenarios, enhance the product selection offered, or improve the promised availability date on the web, the use of secondary suppliers could help. Rather than purchasing additional inventory to hold on hand in physical locations prior to purchase, you could set up your supply chain to pull stock from secondary suppliers only when a purchase has been made which cannot be fulfilled through the amount physically on hand.
Here are a few considerations you should make when thinking about adding secondary suppliers to your eCommerce site:
- What do you want to accomplish?
- Adding new supplier products to your inventory can improve selection on your site
- Supplementing your inventory with supplier inventory can reduce overhead by reducing the amount of product you have to hold on hand
- Secondary suppliers can reduce lead or ship times by assuring orders can be filled when out of stock, and by shipping from locations closer to the final destination
- How do you want to present sourcing information to customers?
- Does the customer get to choose where the product comes from? If not, what is the logic for how the order is sourced?
- Is pricing the same whether the order is fulfilled by you or the supplier? If prices are different, how do you include this in the experience on your site?
- Do you want to maintain secondary suppliers for your whole catalog?
- Focusing secondary suppliers on lower-volume or speciality products may prevent holding onto inventory that will never be sold
- What is the optimal balance between self fulfillment and secondary supplier fulfillment?
- How will you handle returns/refunds/exchanges?
- How might payment agreements or revenue allocations with your suppliers need to change, given that they will likely end up holding onto product for longer?
When considering the benefits of online marketplaces for all parties involved, and looking at some of the most successful examples, it’s no wonder the model has become one of the most desirable trends in eCommerce. But the list of businesses that have come to regret chasing trends is as long as the dictionary, which is why it’s critical to weigh your options carefully before you decide whether or not entering or creating a marketplace is the right move for your business.
If you’re curious how selling your product through a marketplace can impact your sales, consider starting small. Identify one or two key marketplaces that seem like the right fit for your product, and experiment. Carefully track your time and costs, and only once you’ve figured out how to make this initial effort a success should you start considering marketplaces to expand to.
On the other hand, if you’re looking to create a marketplace or incorporate secondary suppliers into your existing eCommerce platform, consider talking to an expert first. While the competition can be fierce, if you’re creative and strategic, it’s not too late to capitalize on this well-worn path. In particular, there are a number of eCommerce tools and software that can make the process easier, especially if you have an expert in your corner to assist with the integration/setup process.
No matter what your needs are, Avatria has extensive experience setting up and working within marketplaces on behalf of clients. Drop us a line if you have any questions, and be on the lookout for our future post on how to get most out of your marketplace presence.