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Pros and cons of running a marketplace model business

After the launch of eBay, the first company to use the marketplace model, 22 years have passed and if you count it in the Internet years, it’s been a few ages.

And it still runs pretty well, doesn’t it? So why don’t we draw some conclusions from its marketplace model? Of course a bit adjusted and modernized, since no one here wants to read about the ancient history of the Internet business. Companies that directly benefitted from eBay’s idea include not only similar businesses, offering the space for bigger or smaller product sellers. The growing number of large companies operate in such way, giving the others the opportunity to earn some good money by selling both their products services and unique experiences. Just take a look at Apple, Google, Uber, Airbnb, Etsy, or even Polish Allegro.

You can say that they’ve outgrown the master. They’ve developed, implemented cutting-edge technology, perfected UI and UX and here they are, enticing the growing number of online customers via their laptops and phones. The perfect business model, one could say. Well, as spotless as it may seem, marketplace cuts both ways. Let’s start from the rewarding one.

1. You make it big, you make it fast

Marketplaces are seen as front-runners nowadays since they possess the capacity for rapid growth. They rather pave the way for a transaction than engage into the transaction itself. Their labor force is not proportional to the number of transactions made. They are not brought into the manufacturing, packaging or delivering products or services, hence the only staff they need includes specialists keeping the platform rolling. So, practically speaking, a marketplace business has the potential of way faster growth than other businesses. What’s more, such immediate growth creates the advantage over other businesses searching for an investment. Cash infusion is more likely to go to the company of the next Facebook potential, not the next vintage boutique.

2. It’s cheaper

In contrast to online brands selling only their products to customers, marketplace’s users include both sellers and buyers. Of course in that case the business should satisfy both parties’ needs, which is a precise act not very different from balancing on a knife-edge. However, if you bring it off, soon you will reap the benefits of having allies in both user groups. If the stock is the most costly factor in a traditional model, then the marketing is not much further on the cost estimated. In traditional e-commerce, an unfair advantage have well-established players who can afford spending gazillions of dollars on ads. However, in an online marketplace, each deal involves a buyer and a seller. So, assuming that the parties are satisfied with your service, they spread the good news, which buttresses the promotion of your marketplace itself.

3. The majority of the risk is not on you

You are out of most issues related to delivery, warehousing, logistics or return policy. These are issues your sellers need to worry about. The essence of the marketplace is linking sellers with buyers, the dirty job of making the seller-buyer transaction happen is not on you. How sweet does it sound? No burning the midnight oil overthinking the perfect equilibrium of the supply and demand so your stock doesn’t waste on the shelves, no considering the best delivery option so it’s both cheap and fast and sends the goods to the buyer swiftly and timely. Literally you need zero stock or logistics policy. The business happens by itself while you can focus on developing the platform and trying out new technologies for your marketplace.

4. Win with the widest range of products

Whereas traditional model businesses are tapping into the market, they struggle to offer their top-tier talents and high-quality goods and conduct a successful purchase transaction. Despite all their efforts, they still can be overrun by the stiff competitor. Well, that is not a risk for a marketplace since the competition works for you. Having a broad choice of products or services underpins higher demand for them. Once there is a nice number of sellers offering whatever clients want, there is almost zero possibility they would go to an online shop with little products they cannot compare with others. Internet users today adore having a choice. They want to choose from far-reaching options to suit their needs best. And the marketplace has it all: multiple sellers, a variety of products and everything within one platform. Furthermore, the labor force doesn’t need to grow on pace with the number of deals made, that’s why marketplaces can painlessly expand the inventory and attract more customers.

5. Monetization options are more interesting

Here are several options to make a profit:

Just remember, how much your charge affects not only the profit you make and your marketplace business liquidity but also it’s a yes or no incentive in your marketplace ecosystem.

Do you want to start your own marketplace now?

Well, hold your horses since marketplaces are not only a boom but also a bust.

1. Building a marketplace resembles having several irons in the fire

Marketplace business is challenging because of the sellers and buyers problem. Who comes first? Who is more important for the business? If you decide, seller, fine, but who wants to join a platform with no buyers? And the other way round, how on earth the clients will come if there’s nothing to buy? This business is notoriously difficult to spark.

2. There are lower margins than in e-commerce

Obviously, it depends on you monetization policy, but generally it’s not you who decide on the price of an item, you host it and for that you can charge.

3. Loyalty is more difficult to achieve

You need to deal with attracting clients to your platform…and keep them there. Internet users have a perfect understanding that you are a marketplace, so you’re made up of different sellers. They can decide to shop directly at the seller’s site! And you lose their loyalty pretty fast.

4. The competition is not numerous but stiff

Traditional e-commerce faces a number of similar businesses competing with each other, but still, they have limited capacity of inventory. That’s why they can coexist in preferable conditions of high demand. But marketplaces are a different story. There are giants of that business model, like eBay, and you should be ready to compete with them, especially if your stock is similar to their scope of goods and services. And if you try to escape this fight, you can specialize in specific products, but then your share of the market would be smaller. Think it through.

5. You do not control the transaction process

Remember, a marketplace is solely the facilitator, the link between the seller and the buyer. You cannot directly influence the product or service quality. Flawed offers will build the image of your marketplace, which is difficult to restore. More often than not, one negative opinion crosses an item out from the list of desired goods and a seller who tries to palm something off on buyers would almost surely harm your marketplace. That’s why you should implement technologies, filtering systems for sellers acquisition and give support tools to both parties of the marketplace, which are intricate tasks.

6. It’s a challenge in terms of UI and UX

If something is difficult or takes a lot of time, it won’t happen in e-commerce, marketplaces included. People won’t buy anything if they need to overcome lots of searching and once they find something, there is a tiresome checkout process ahead of them. It just won’t happen. The same goes for the sellers. Having a selection of successful marketplaces ready to feature them, they will choose the one with swift, seamless process of displaying the content. Sellers are lazy and adding hundreds of products one by one or dealing with platform navigation will discourage them effectively. You must save them as much hurdle as it’s possible. And we all know, intuitive, smoothly running platform is costly and time-consuming. Remember, before launching the site, you need to have every single UI detail at once, ready to use.
In terms of user experience…we all know stories of Airbnb houses vandalized by some devil-may-care guests. You do not want that. Not only sellers need to be carefully chosen, the same goes for buyers. Again, your business image is at stake.

7. Tricky third-party payment processing

Some problems may arise with processing payments. Actually, it’s a tricky solution since it’s neither an easy job to find a trusted partner to process the money, nor to find seamless technology for such payments. It is even more complicated by the fact that this method is in some cases a breach of law since the party selling does not possess the item sold, so it has no control over it. That’s one of the reasons why Visa and MasterCard don’t authorize third-party processing. There is a separate entry on that topic, have a look: Third Party Processing.

 

There is always a hidden agenda when it comes to running a business, it’s also true in the marketplace model. You’ve been presented with its overwhelming advantages, however, you are also aware of the possible downsides. If you can overcome the latter, well, an online marketplace could be a ticket to building a successful, thriving company with lasting influence. Good luck!

E-commerce marketplace development

Infographic by: mobilunity.com

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PayLane's CEO with all kind of skills - programming, marketing, team leading and more. A movie lover and snowboard fan. @KarolZielinski

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