The Three Laws of Successful Marketplaces

By: Jeff Nolan | August 7, 2018 | Marketplaces

Marketplaces, portals, and classifieds platforms – different words, that sound like they have different meanings, but in reality they’re all the variations of the same thing. The common thread between all of them is that they bring together buyers and sellers so they can easily exchange goods/services.

Here at Kahuna, we’ve been focusing on marketplaces for awhile now, which has enabled us to develop a unique understanding of how these businesses work. We consistently find that companies who view themselves first and foremost as retailers or e-commerce don’t think of themselves as marketplaces, but in reality they have the hallmarks of a marketplace therefore they are a marketplace. Curious to find out if your business falls under this category, then read on as we discuss the 3 laws of successful marketplaces.

Disparate buyers & sellers

One of the more notable attributes of marketplaces are that the platform supports an ecosystem of many buyers matched to a variety of sellers. By supporting an ecosystem, marketplace operators aren’t required to carry inventory – leading to higher margins, and flexibility in operations. An exception to this is when retailers choose to embrace the marketplace model. In these scenarios, the retailer offers their own inventory while letting 3rd parties sell on the platform.

Amazon is the most well-known example of an e-commerce site that allows 3rd parties to list and compete with Amazon-fulfilled merchandise. In Q2 of 2018, Amazon reported that more than 50% of the merchandise sold on Amazon.com was shipped directly from 3rd party merchants.

Retail properties that incorporate marketplace principles are referred to as hybrid marketplaces. Although in these cases the retailer (platform operator) is competing against their sellers, this is really a case of “if you can’t beat them, join them.” Retailers benefit by becoming a destination for buyers, while collecting fees off the transactions that occur on the platform. 3rd party sellers benefit from gaining eyeballs looking at their inventory that normally wouldn’t be considered.

The critical aspect of marketplace health is achieving a ratio of buyers and sellers that supports repeat purchases and cross-selling. Successful marketplaces measure retention and buyer:seller ratios.

Trust is the product

In order to get buyers and sellers to transact with each other on marketplaces, there needs to be an element of trust. This is one of the reasons we’ve seen an uptick in managed marketplaces across the globe. Buyers and sellers want the peace of mind that a neutral party can assist during the occasional times where something goes wrong.

Building for trust on the buyer side requires marketplace operators to ensure that product listings are accurate, goods/service requests are fulfilled in a timely manner, and that items are priced competitively. When customer service issues come up, churn increases. This sparks a deadly spiral for the marketplace. Keeping churn at low levels is essential to marketplace success because the cost to acquire new customers is higher than that of retaining an existing customer.

On the seller side, building for trust involves developing a fair and equitable dispute resolution process – something that’s often done via escrow accounts. Building an effective payment system also is essential so sellers are paid in a timely manner.

There is another dimension to seller trust worth discussing; the quality of the buyers the marketplace attracts. If buyers often raise questionable customer service complaints or engage in fraud, sellers will flock to another property.

Autonomous value

Autonomous value is the cornerstone of all sustainable marketplaces. It’s created when marketplaces offer services that enhance the value of the platform for buyers and sellers. Examples of this include providing shipping and logistics services; sales tax processing; APIs for third party application services; and buyer protections that fit within a complete customer service offering.

Although implementing value added services requires time and money, marketplace operators need to view it as an investment for long-term success. Failing to deliver value leads to increased leakage which can lead to the extinction of even the best marketplaces.

Making sense of it all

Marketplaces come in a variety of shapes and sizes – much so that you might be running one without knowing it. If you find any or all of these three laws apply to your business, chances are you’re running a marketplace.

 

To learn more about how the marketplace business model can help improve your profitability, check out The Kahuna Blog. Simply click the button below!

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Author: Jeff Nolan

Jeff Nolan is a proven Bay Area-based marketing executive with a track record of transforming marketing teams and strategy in enterprise software growth companies. Jeff leads the marketing team at Kahuna, which includes the four corners of successful marketing teams: content, product marketing, demand, and brand.

With extensive experience in security technology and CRM companies, and a founding partner at SAP Ventures, the venture capital affiliate of SAP AG, Jeff is well-equipped to manage the complex tactical and strategic marketing challenges facing companies today.

Fun fact:

Bay Area native, Jeff lives with his family on the mid-Peninsula where he has transformed his home into an urban farm featuring gardens, orchards, chickens, and a thriving beekeeping operation.

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