According to Marketplace Pulse, in 2021, Amazon generated $390 billion GMV (Gross Merchandise Volume) through third-party sales, compared to $220 billion selling directly to customers. This is a staggering amount and illustrates the power of a marketplace.
As enterprises look towards their post-pandemic future, they are asking how their businesses should evolve. The commercial landscape they are trading within has also changed. Consumer expectations have expanded. Retailers have witnessed these changes accelerating for several years. Focusing on your own business, products, and customers, offering a marketplace experience could lead to increased market share, superb customer experiences and a platform that can be adapted as your business changes.
What is a digital marketplace?
It can sometimes be hard to distinguish between an online retailer and a marketplace. Amazon has somewhat blurred this line where they sell and deliver their own inventory. They also hold and deliver other sellers’ inventory; and sell other retailers’ products which the seller then delivers directly to the customer.
Like many terms within e-commerce, there isn’t an official definition of a digital marketplace, but you can easily view it as an e-commerce website that allows multiple third-party merchants to sell their products or services through it.
This may be open and relatively uncontrolled, such as eBay, where almost anyone can create a store and start selling, or curated, such as Zalando, where a seller must be vetted or invited to sell through the platform so that the marketplace operator can dictate which brands are sold through it.
Crucially, marketplaces are not restricted to retail. Brands selling to other businesses can benefit from building a digital marketplace too. For example, Amazon Business is expected to generate an annual GMV (Gross Merchandise Value) of over $50 billion by the end of 2023. In addition, the way businesses purchase digitally is evolving – arguably faster than retail. Therefore, B2B brands can potentially generate substantial growth through digital marketplaces.
Marketplaces put customer needs at their heart. Customers want a frictionless buying experience. If they can find all the items they need in one place, this is a significant differentiator and will lead to increased levels of loyalty and advocacy. Long-term customer spending can be massively enhanced with a marketplace, but only if the marketplace is constructed on well-defined foundations.
Why your business should build a marketplace
While the pandemic caused a massive increase in online revenue for many businesses, we now see that growth falter. As a result, companies must work increasingly hard to gain or maintain market share.
Many brands with established digital platforms are now looking at building marketplace capability into their e-commerce websites to enable them to scale quickly, appeal to more customers and increase their AOV (Average Order Values).
The business case for building a marketplace is to evolve your existing e-commerce platform and sell a carefully curated group of products your customers would appreciate being able to buy in one place.
While there are multiple reasons why a business may look to build a digital marketplace, there are some that apply to almost every business, no matter their industry or market sector:
1. Expanding your range
A key driver for building a marketplace is to quickly and easily expand the range of products your business sells digitally without the typical cost and effort of sourcing, stocking, and delivering those products.
Consider the example of a bed retailer with both physical stores and a good-sized e-commerce business along with an existing and established supply chain for beds and mattresses.
Several product lines, such as bedroom furniture or home accessories, are naturally complementary to the products they already sell, but the effort and cost involved in sourcing, purchasing, manufacturing, and stocking these products are very high.
They also will be constrained by the size of their stores and, therefore, may be unable to display the additional product lines. However, if that retailer adds marketplace capability into their digital offering, they could sell these products to their customers with a lot less effort, cost, and risk. This approach has many examples of retailers doubling their product range overnight.
2. Test new product ranges
Launching a new product line can be an expensive business for a brand and fraught with risk. For many reasons, the brand may not be able to sell the product at an acceptable margin and could be left with inventory that they struggle to sell.
Testing new product lines through a digital marketplace is a way to reduce potential risks. Also, using the marketplace approach can also reduce the investment needed. If the tests are successful, the brand is much more likely to invest in selling that product line directly themselves as they have proven that they can sell at an acceptable margin.
3. Drive traffic to website and stores
By offering an expanded product range, a retailer will have the opportunity to drive more traffic to both their website and physical stores. For example, suppose a customer visits a retailer’s website to purchase a third-party marketplace product. In that case, the retailer has the opportunity to sell additional products to that customer, including those that it sells directly. In addition, one of the great benefits of click and collect is that it often involves the customer visiting a retailer’s physical store. So, again, this represents an opportunity for the retailer to sell additional products or services to the customer.
4. Complementary services
Marketplaces are not just about products. There is often an opportunity to sell complementary services to customers, but this may be challenging for a business to do directly. These could be services such as installation, insurance, training, and many others. While the brand may not make as much margin on the service as they would if they provided the service themselves, they could offer the services to customers without the significant investment and risk required to provide the service themselves.
Change is hard but can be rewarding
While marketplaces offer a great deal of opportunity to some brands, building a marketplace (as opposed to selling through an established marketplace) is a more significant challenge but one that could ultimately transform your business.
Building a marketplace for your e-commerce business is not just a technical IT project but can also involve making fundamental changes to your business processes.
Like any business initiative, doing it badly or half-heartedly can be very costly. Therefore, a strategic approach to a new marketplace deployment is essential. Taking the time to understand the mechanics of your marketplace and how this will integrate into your existing business is critical to ensuring the development of your marketplace platform is successful.
Building a digital marketplace involves a fundamental change to the way a brand engages with its customers. The way products or services are delivered or supported will change as it is common for third-party sellers to provide and help the products and services themselves. As a business and brand, you will need to consider whether or not to allow sellers to offer competing products and, if so, how these are presented to the customers.
The brand also needs to recruit, support, and manage its third-party sellers – a ‘build it and they will come approach is bound to fail. Managing sellers is vitally important as poor service from a seller can cause damage to the marketplace operator’s brand. It is also likely that sellers will provide data for the products they sell. Again, the marketplace operator will need to carefully manage this, especially if multiple sellers offer the same products.
To succeed, the marketplace operator should consider building a dedicated team, including marketplace managers, merchandisers, and seller account managers. The development of a digital marketplace can be expensive and will not achieve the potential return on investment if it is not managed effectively.
The future of digital marketplaces
Over the last year, we have started to see a race toward marketplaces emerge. At KPS, we are engaged in multiple digital marketplace projects.
Many are now investing in marketplaces in areas where it is becoming increasingly challenging for brands to gain market share, improve KPIs such as AOV and conversion rates. In some instances, we have seen the top two retailers in a specific market race to launch a digital marketplace before the other through the fear of being the one left behind.
This potential is illustrated in the recent valuation of marketplace technology leader Mirakl. In September 2021, Mirakl completed a round of funding that valued the company at $3.5 billion (up from $1.5 billion the year before). Mirakl technology supports over 300 marketplaces, many of which are businesses that sell to other companies. This valuation illustrates the vast opportunity within this area.
While building a digital marketplace is not suitable for every brand, there is a significant opportunity for many enterprises to radically evolve their current e-commerce platform. The rewards can be enormous if the implementation and required business change are managed well.