Introduction to online marketplaces
Marketplace goes online
A marketplace is a place where buyers and sellers meet for selling and buying products. Simple. It can be the old Grand Bazaar from Istanbul, the famous floating market from Bangkok, and nowadays the online marketplaces like Amazon or eBay. The roots are the same with the main difference that with online marketplaces customers can shop 24/7 from their couch by simply using their credit card and have the selected products shipped to their door.
Online stores or webshops are part of our lives for many many years now. Probably all of us have bought something online at least once in the past, or buy something weekly. Now that the pandemic rules the world, shopping online became a necessity.
The history of online marketplaces started in 1995 when eBay was founded. Marketplaces are another dimension of online shopping. The operator of the marketplace does not own any product inventory, their business is solely to present other companies’ and people’s inventory to a customer and facilitate a transaction.
We call a website an online marketplace if products and product inventories are being presented by distinct businesses (called vendors) and customers can not only browse the products but can also purchase the selected ones.
We can categorize marketplaces based on the participants involved as follows:
- B2C (Business to Customer), where companies are selling products to individual customers – for example, booking.com
- B2B (Business to Business), where companies are selling products to other companies – for example, made-in-china.com
- C2C (Customer to Customer), where customers are selling products to other individual customers – for example, alibaba.com
From a product variety perspective, we can divide marketplaces into another three categories:
- Vertical, where products are being sold from many sources but they are all of one type – example: only jewelry type products
- Horizontal, where various products are being sold but they all share a characteristic – example: football fans
- Global, where all kinds of products are present
So there are definitely different ways to approach this and different options to go with if you are planning to start your own marketplace. But is it worth it?
How widespread are marketplaces?
Marketplaces saw a big growth in the last few years. Besides all the big and well-known brands, more and more local businesses adopt this approach to broaden their supply.
Owners switch from simple e-commerce stores to marketplaces to bring increased traffic and a broader array of products to their websites that give consumers more reasons to stay on their sites.
Most visited marketplaces 2020
Based on webretailer.com’s numbers these are the top 5 online marketplaces and their number of visitors per month:
|4||Mercado Libre||South America||661.7M|
Furthermore, the top product categories sold by online marketplaces are:
Marketplace leaders by gross merchandise value
As per digitalcommerce360.com, the top list changes a lot if we consider the marketplaces’ gross merchandise values instead of visits/months.
These are the top 5 marketplaces by their gross merchandise value:
It’s interesting to see that more than half of today’s marketplaces have been launched in the last 7 years.
The statistics presented above and the fact that 62% of global online retail sales are accounted to marketplaces, surely raise everybody’s eyebrows. Let’s see now what are the advantages and disadvantages of running a marketplace and what are the main challenges we have to face.
The pros, the cons, and the challenge itself
Like everything in life, online marketplaces also have their advantages and disadvantages. Let’s see what are the main ones so everyone interested can decide if it’s the best next step for their own business or rather something for the future.
Every business is different. There are small businesses, large businesses, all selling various goods and having a different target audience from all around the world.
The pros listed below don’t necessarily apply to every business in every circumstance but can give a good picture of the most frequent ones:
- Increased popularity: more vendors mean more products, more products mean more customers, more customers visiting your website is a clear win in becoming more popular.
- Increase in sales: having more vendors doesn’t only mean more products but generally an extended product diversity too which will attract more people with different interests spending more money on your website.
- New strategic partnerships: the more partners the more possibilities to grow your business. Partners are a key factor in building a reliable business for the future.
- No inventory handling: there are marketplace models where the marketplace owner operates the shop and manages the transactions but handling the inventory is entirely up to the vendors which can unload a big burden from the marketplace owner’s shoulders.
- Lower risk: no need to run a physical shop, no need to rent warehouses to store products and no need for a team to run these. Less investment means lower risk. Simple.
- Analytics and marketing: running a marketplace is an easy and effective chance to get information and feedback about a huge number of users which doesn’t only mean an easy way to make your website better but can also result in well-targeted marketing campaigns.
Now that we are excited about online marketplaces, let’s see some of the cons which are worth highlighting to have a complete view:
- Need a good selection of partners to start with: without partners, a marketplace is worth nothing. You have to make sure you have a good partner base by the time you open up for your audience for the first time. Ideally not only in numbers but in quality (prestige) as well.
- Vendors drive product sales not you: while you influence how to visualize products and how to let customers filter them on your website, what products are being added are mostly up to the vendors.
- Meeting important vendors’ needs: after you become a well-known marketplace brand you can easily define your own rules, but in the beginning, you will have to accept special vendor requests if you want to win them. These needs sometimes can become overwhelming and need much focus from you and your team.
- Lower margins: since product prices are defined by the vendors and you generally take your cut based on the sales, a big number of transactions will be needed to fill your pocket.
- The difficulty of an integrated UX/UI: you will have a big number of products from various vendors from different categories and you should still be able to deliver a seamless customer experience with a standardized data format and purchasing workflow.
The biggest challenge
Extending your market presence with an online marketplace is a big decision. It needs more time to prepare it professionally but involves less risk because of the lower investment needs.
Like all changes, starting a marketplace has its own challenges. Here are some of the major ones:
- Ensure a higher level of trust to encourage both vendor and customer involvement and participation.
- Create sufficient liquidity on both sides (selling and buying) of your marketplace.
- Create a flexible system with quality customer service to help with issues between the marketplace participants.
How to approach the promising world of marketplaces?
Let’s see the summary of the recommended steps of entering the marvelous world of marketplaces.
The first step of your journey towards a successful online marketplace is to understand your users’ goals. Your target market should and will define your decision-making process.
The more you know about your future audience the better you can prepare to deliver an ecosystem that is as close to their needs as possible.
As part of the research step, you should try to collect information about your competitors too. Learn about their market strategies and business model. Don’t forget just to learn from their successful decisions but also look out for their mistakes and try to avoid them in your own business.
A major advantage that you already have compared to your competitors from the very beginning is that you can directly build a system that answers customers’ current needs. You can prepare a solution that is built on very recent data. The bigger a competitor is, the harder is for them to keep up with the continuous change in clients’ needs. Turn this to your advantage!
A well-planned strategy and a clear cash flow for the short-term and long-term future are must-haves if you want to own a business. Make sure these are well-thought-out and are clearly written down so you will have something to adhere to when deep-diving into the business.
There are different models to start with as described below:
- Subscriptions: the subscription-based model is the most common one. Until you can grant a higher profit than the subscription fee vendors will be happy to become your partners. See more details in the payment solutions chapter.
- Selling fees: these are your shares from your partners’ sales. The more customers buy your partner’s products the more fees you can collect. Simple. Its drawbacks are that until your business is small your shares stay low too, not to mention the technical difficulties of automating the payment distribution between the parties.
- Sign-up fees: sign-up fees are flat payments vendors pay you once they become your partners. It’s a straightforward and easy-to-calculate income solution with the drawback of not scaling as your platform scales.
An online marketplace is a complex system with multiple parties involved, meaning that transactions are also more complex. Automating fee distribution is a must. To achieve this you must add at least one more level of complexity to your system: a payment provider who is capable of handling your needs in a quick, transparent, and cost-efficient way.
In the case of a subscription-based business model, Stripe can be a good solution to manage your needs.
If you are into the selling fees business model PayPal’s solution will fit you even more. It has a credit card-based solution that accepts all types of credit cards and can automatically distribute the incoming payments based on predefined logic.
An extra which PayPal has is the so-called delayed payment solution. Delayed payments mean that you can ask PayPal to transfer the payments to vendors only after a certain period of time which can be very useful if you want to handle product returns with the possibility of letting customers ask for a full refund. This means that sending the money back to customers becomes much easier since you really can send back the money you got directly from the customers without the need of involving the vendor where the money was already transferred to.
Our pace of life is getting faster. People are more and more used to quick and easy solutions, or even solutions that come for free. That’s the line-up you have to fit in with your shipping solution. And it’s not necessarily easy to do well.
Earlier people were happy to get their orders in a week. Statistics show that expectations keep on rising. Now people are getting used to having their orders shipped to their doors the next day. Tomorrow they will prefer having a same-day delivery, or even 2-hours delivery.
Resolving the contradiction of having a quick shipping solution while keeping the costs low – or even free -, is a real challenge.
When planning out your own marketplace solution make sure you take care of the shipping aspects and their associated costs from below:
- Physical shipping
- Carriers & couriers
Furthermore, don’t forget to think about 3rd party integrations. Your platform must be able to connect to external services to be able to automate the different processes.
Building an e-commerce website with or without a marketplace solution from scratch is a brave decision. Not impossible, but pronouncedly brave. The suggestion would be to keep this option for the future after you learned the best practices from others – the big players, who already have years of experience in how to provide flexible solutions for various needs.
The recommendation would be to choose a system based on your needs and see what marketplace solutions are available for it.
WordPress is one of the best-known and ready-made solutions which you can easily start with and it has a mature and famous marketplace plugin: WooCommerce, which will fit many of your needs.
A similar feature set can be achieved through a different approach, by using Shopify and its own multi-vendor marketplace extension.
If you need a more complex solution both from an e-commerce and a marketplace perspective, the next step can be using CS-Cart or BigCommerce. These both have decent features and more flexibility.
If you have special needs and are looking for a future-proof, robust solution, you can go with Magento and choose one of its well-known marketplace suits. Magento has its own advantages and disadvantages, but generally, the more custom and flexible solutions you need, the happier you will be about your choice.
When choosing a marketplace extension for your business it’s not enough to get a nice list of features. As time goes by it will become more and more important how easily you can integrate your marketplace with new external systems and how easy it is to customize it or add new features to it.
There are a larger number of online marketplace extensions available for Magento. Some of these are available for many years and are evolved enough to confidently start working with them. If I would have to name my top three, these extensions would surely fit my list: WebKul, CedCommerce, and Unirgy. All these solutions will have an answer for your needs and even more. Sit down, check their demo and choose the one you like the most.
Get a team
No story becomes a success story without having a good team in the background.
Owning a marketplace is a big task where you can be sure there will always be a battle to fight. Every day. Make sure you recruit the right people who will follow you to this war.
Also, don’t forget about all the technical challenges from the background which need to be managed in a reliable way to ensure an uninterrupted functionality of your environment. Recruit IT and DevOps engineers, find the right developers, or search for an agency that has enough experience to help you build and support the online marketplace of your dreams.