A marketplace has historically been a place where interested parties can buy or sell goods and services.
What does that marketplace look like today?
This is the key question
Online services like Shopify and Etsy, which make it easier for people to launch ecommerce websites and online businesses, and the Internet allows more consumers to purchase multichannel products online have created a gap in the market that needs to be filled to match supply and demand.
What is an online market?
A digital or online marketplace is a website that facilitates ecommerce transactions between parties. Online marketplaces consolidate sellers and their inventory onto one website, facilitating the economic transaction.
Bill Gurley, an investment in B2C B2C marketplaces like Stitch Fix and GrubHub as well as Zillow, believes that marketplaces are “connective tissues” which enhance the markets in which they operate. It allows them to create communities around their product and achieve network effect with little or no physical limitations on scale.
Multivendor marketplaces make up the majority of online marketplaces. Multivendor Marketplaces are digital storefronts where products and services of a wide range of third party sellers can be displayed. The marketplace’s integrated platform allows it to manage and share customer and order data with its sellers.
Venture capital firm Version One identifies 3 metrics to measure the success of an online marketplace: GMV take rate and liquidity.
GMV is Gross Merchandise Value and measures the value of transactions on a market in dollars less returns. GMV can be calculated by aggregating retail sales, buyer GMV or cost price.
Online marketplaces are available in different types
Markets can be classified into three types based on the participants
P2P marketplaces are private platforms that allow individuals to trade products and services. Marketplaces such as eBay and Uber harness the power of community and allow consumers to also become sellers. These marketplaces are prone to use the overall usage of their platform as a measure for growth. At scale, P2P markets tend to have trust and security issues.
Marketplaces that are aimed at consumers allow businesses to sell their products and services directly to them. Marketplaces such as Amazon and Mercado Libre measure their success using GMV and charge a ‘take rate’ to sellers who do business with them.
Airbnb is an example of a marketplace that started as a P2P model, where people rented out their homes to earn extra money. A successful P2P platform can become a B2C marketplace as it attracts businesses and sellers who want to improve their services.
Marketplaces for business-to-business transactions allow businesses to purchase and sell goods or services. B2B platforms like Alibaba and Faire are dominated by bulk transactions, wholesale purchases, or orders that must meet a minimum or threshold.
Digital Commerce 360 discovered that 42% of purchasing manager spend significantly more or more time on B2B marketplaces by 2020. The study also revealed that B2C marketplaces will grow by 300% from 2018. B2B marketplaces, however, are expected to grow over 400%.
Tech Crunch has pointed out that the B2C model of charging a margin or taking a take rate might not work well in a B2B market. B2B marketplaces must therefore find innovative ways to generate profit.
What about vertical marketplaces & curation?
Although their business models might look similar, niche and vertical marketplaces work very differently than their aggregator equivalents.
In an interview given to the US Chamber of Commerce by the founder of a design studio that specializes in marketplaces, he said: “The best niche markets speak directly and clearly to their communities and are thoughtful and intentional with their presentation.” They are not like Amazon, and they do not try to compete with Amazon.
Aggregators such as Amazon and Walmart strive to serve as many customers as possible, and compete on the breadth and quality of their offeringsnertical marketplaces, on the other hand, serve a niche or industry and compete based on their depth and quality.
Niche marketplaces are still a part of the wallets of consumers, even though an “everything” store like Amazon is their first choice for commodities like toilet paper and salt. Internet Retailer reported that 35% consumers shop vertical marketplaces for apparel, sneakers and home goods.
In a curated vertical market, it is important to have quality brands and products which cater to the customer. This applies regardless of the size of their actual selection. They compete on the basis of community and values. They help their customers discover brands they would otherwise not be aware of. The result is that buyers select themselves and engage more deeply in the community.
Underrated supply & sellers unlock the growing marketplaces
Whether they’re vertical marketplaces or aggregator-conglomerates like Rakuten or Amazon, marketplaces grow GMV by increasing the number of economic transactions on its platform. Buyers are the ones who drive economic transactions and they are drawn to marketplaces which deliver what they need, when they need it.
The right product and seller supply will attract demand
Anand Ayer is a former Head of Product for Threadflip. He advises marketplaces that they should put as much emphasis on supply as possible once they have reached a certain threshold in terms of demand.
The network effects of the Internet may increase demand for online shopping, but they don’t necessarily translate into an increase in supply.
Although API-first platforms and marketplaces have made it easier to sell online, few people are aware of how to set up an online store, implement an SEO or Social Media Marketing strategy, or optimize prices for profitability.
Angela Tran is a general partner of the venture capital firm Version One. The next step in scaling a marketplace involves supporting your power sellers – those who make a living from your marketplace. A marketplace must have a good supply to be able to scale.