When you think of marketplaces, what comes to mind? If you’re like most, you probably think of companies such as Alibaba, eBay, and Etsy, but those are far from the only types of companies that fall under the marketplace classification. Consider the fact that AngelList lists close to 9,000 marketplaces within their directory, and it becomes clear that marketplaces are far more common than you would expect.
Maybe your company is a marketplace. It’s important for you to know whether it is so that you can run it properly and track the right success metrics. It differs greatly from operating a typical e-commerce business.
Here are 3 quick ways to determine if your company is a marketplace:
1. Your business doesn’t directly carry inventory and/or brokers services from third parties
Marketplaces don’t directly house inventory or manage service providers. They instead aggregate goods and services provided by third parties, acting more like a middle man or intermediary.
By not carrying inventory or managing things like shipping and returns, marketplaces aren’t encumbered with the overhead facing traditional e-commerce businesses. This results in less liability and better margins, which is why the marketplace business model is becoming more and more attractive to new entrepreneurs as well as those who already have an e-commerce business.
Larger margins and a wider selection of inventory are just a couple of reasons marketplaces are dominating the e-commerce landscape today. In fact, many retailers are turning into hybrid marketplaces, one of many types of marketplaces.
In a hybrid marketplace, the retailer is technically competing against the sellers within its marketplace. In exchange, they attract a broader audience by offering a larger selection of inventory, while also collecting a commission on sales through their platforms. Hybrid marketplaces such as Rakuten and Walmart are successful because they offer their goods/services alongside those of third parties.
2. Your business success depends on network effects
The notion of a network effect applies to a marketplace in circumstances when a product or service becomes more valuable as the user base increases. Put another way, it occurs when more demand translates into increased usage, and that results in greater value to the marketplace.
Take Airbnb for example. As more people use their service, demand for their type of accommodations grows and that increases the value of the platform. Contrast that with Marriott or any other hotel chain, where there’s little to no increase in value for the guest if there is increased demand for hotel rooms.
Businesses that depend on network effects are unique because once they’ve staked their place, they’re difficult to disrupt. The strength of this position makes for category leaders (Airbnb, Uber, etc.) and only a few other secondary players fighting it out for what customers are left.
3. Your business removes friction from transactions
When we say, “removing the friction from transactions,” we’re referring to making it as easy as possible to get tasks done. Just look at marketplaces such as Uber and Lyft which make it easy to hail a ride with a few taps. Consider platforms such as Upwork which make it possible to easily hire peer-rated service providers across the globe.
Even within marketplaces, certain functionality can be critical to remove friction. By processing payments on behalf of the buyer and seller, users don’t have to worry about transacting with strangers. They feel more confident and are more willing to conduct the transaction, which leads to repeat business.
Another way in which businesses remove friction is through policies that promote transparency. Guarantees and return policies create a level of faith that users won’t lose their money. Ratings systems add to user confidence about the quality of goods or services they are going to acquire. Finally, direct user feedback offers yet another data point that helps address underlying concerns of first-time users or users of a new marketplace.
Making sense of it all
As you can see from this article, you don’t necessarily need to be an Alibaba or eBay clone to be a marketplace. The underlying thread of successful marketplaces is that they take a fragmented space and make it more efficient.
Although it can be overwhelming trying to go up against established companies, remember one thing; don’t be afraid to start small. Just look at Amazon, which focused primarily on books. Today they sell virtually anything you can think of. eBay started out selling Beanie Babies, but soon became an auction house for a variety of goods.
Starting within a specific niche doesn’t hinder growth. It works to the advantage of the marketplace operator because it helps the entity gain traction and, with some luck and lots of hard work, things snowball from there.
To learn more about how the marketplace business model can help improve your profitability, check out The Kahuna Blog. Simply click the button below!