October 10, 2018
The State (and Future) of Digital Marketplaces
Marketplaces. They’re the original e-commerce vendors and have been around since the dawn of history, yet only recently have they become the darlings of their industry. What do companies such as Uber, Airbnb, and Alibaba all have in common? Aside from being some of the world’s most valuable companies, they’re also examples of successful marketplaces.
But what’s special about marketplaces that enables them to thrive beyond their e-commerce roots? The short answer is they make more money. How? By driving commerce, providing greater efficiency and offering an unparalleled growth opportunity.
The most obvious reason why digital marketplaces are thriving is because they easily facilitate commerce. Forrester reports that 50% of all B2C online retail spend came from marketplaces in 2016.
It’s really a fundamental change in the way buyers buy. Buying has moved from going to physical stores to purchase one item, to shopping online, to visiting a “one-stop” shopping store that allows you to consolidate all your purchases to buying from your neighbor or someone across the country in direct consumer to consumer model. Oh, and you get free shipping, too. It’s a no-brainer for the buyer.
That evolution of buyer options has facilitated a paradigm shift in buyer behavior. And true to any economic model, where the buyer goes, the seller shall be, and that’s a recipe for growth. That explains why, according to Digital Commerce 360, 97% of U.S. online shoppers browse on marketplaces.
Another critical factor in the rise of marketplaces is the efficiency they bring to e-commerce. Marketplaces are the quintessential middle man. They inherently provide a model and structure that improves the efficiency of the processes that drive commerce.
For example, marketplaces can sustain higher margins than traditional retailers and even some e-commerce vendors because they don’t bare the burden of housing inventory or hiring in-store associates.
Next, they tend to be self-regulating in the sense that scores or comments help rid the market of poor performers that might otherwise bring down the quality of the marketplace as a whole. Marketplaces leverage the power of social media with its product reviews and sharing functionality, giving the entire model this inherent quality control aspect while exploiting the potential for viral growth.
Lastly, marketplaces offer diversity. Many marketplaces aggregate an array of similar products, many more than one could find in a physical store or an e-commerce provider. Thus, the marketplace allows the buyer to shop price, quality, vendor, and address a host of other needs a non-marketplace business can’t address.
All of these factors together create a more efficient model.
Marketplaces also create a unique organic growth opportunity where buyers and sellers can evolve beyond their initial roles. Unlike traditional retailers where the buyer can only purchase goods, marketplaces empower buyers to become sellers.
In a role reversal, sellers are free to purchase goods and services from others via the same platform. This transition and opportunity to change roles creates a sort of virtuous loop, where buyers and sellers become members of something more dynamic.
When you add the intangibles of people successfully selling items, buyers successful getting a good deal on a purchase, there’s something that’s happening that goes way beyond any traditional commerce model. That energy creates growth opportunities.
This is the second of a five part introductory series on marketplace businesses. You can find the first part of the series here.
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