The Basics of An Online Marketplace

Starting a marketplace can be hard as there are many moving parts. We have consolidated what we believe are critical to starting one into this article for you.

The Basics of An Online Marketplace

Introduction

Marketplace, or rather an online marketplace, is a platform that is becoming more and more popular with time. Although several online marketplaces like Amazon and eBay have been around for decades, e-commerce has never been more relevant than now. Especially considering the recent restrictions on conventional ways of selling and shopping caused by the global pandemic, a growing number of individuals have turned to e-commerce marketplaces, whether it’s as a vendor or as a customer.

So if you’re looking to educate yourself on the basics of online marketplaces, this is just the article for you.

Introduction To Marketplace

Before we get down to the nitty-gritty of how to start and run a successful marketplace, let’s talk briefly about what a marketplace actually is.

The basic definition of “marketplace” is a place where products or services are bought and sold. However, in this context, as you may have guessed, we’re referring to the e-commerce marketplace, or online marketplace, rather than the literal definition and concept of “marketplace” as in physical supermarkets or stores.

An online marketplace refers to a platform where vendors can come together to sell their products or services to a carefully selected customer base. So, the role of a marketplace owner is to merge the two demographics - the sellers (supply) and the buyers (demand), in order to sell through a multivendor platform.

A few examples of classic marketplace businesses include Airbnb, eBay, Postmates, Amazon, and Uber.

Global Marketplaces - Uber: Transport, Etsy: Handmade & Vintage items, Airbnb: Accomodation, Ebay: Second-hand items, Fiverr: Freelancers, Amazon: Physical Goods
Global Marketplaces - Uber: Transport, Etsy: Handmade & Vintage items, Airbnb: Accomodation, Ebay: Second-hand items, Fiverr: Freelancers, Amazon: Physical Goods

Let’s break it down a little. So we’ve got three parties in play, the supply/sellers, the demand/buyers, and the marketplace owner(s). Here is how a marketplace business is beneficial to each demographic:

  • Supply: sellers have a platform to gain recognition and sell their products or services.
  • Demand: customers have a curated platform where they can browse selectively and buy from.
  • Marketplace owner(s): owners earn a commission from each sale made on their platform. To put it in a nutshell, a marketplace business is essentially an e-commerce site that connects sellers with buyers.

Key Features And Benefits Of Marketplace Businesses

You may be wondering what is so great about online marketplaces and being a marketplace owner. To get you started, here is why online marketplaces are great businesses. These are a few key features and benefits, and why an increasing no. of people continue to pursue this as a business opportunity.

  1. High customer interest: Think from a customer’s point of view. Having a platform where you can browse through a broad range of products without having to limit your choice to a single provider sounds pretty convenient, doesn’t it? It’s not only extremely time-effective but it also makes lives easier. So if you run a platform where you offer this kind of service, it is more than likely that customers will be interested in your marketplace.
  2. Choice of revenue stream: As a marketplace owner, you can pick which revenue stream is most suitable for you. Commissions, listing fees, subscriptions, advertising, generation fees, and providing additional services are the most common monetization schemes. You do have the option to combine these different streams but it’s recommended to execute only one when first starting off. Successful marketplace businesses like Etsy, Uber, and eBay utilize the commission revenue stream.
  3. Accurate analysis: Being a marketplace owner, you can track the sales made on your platform with rigorous metrics. An example of this is, owners can assess and see which vendors are most preferred, and which products and services are in high demand, and as a result, owners will know which goods and services need to be promoted the most.

No Inventory: This is beneficial for multiple reasons; efficiency, scalability, flexibility, and less financial risk.

  • Efficiency: more cost-effective in terms of managing what's in stock
  • Scalability: a scalable business model
  • Flexibility: more flexible in terms of pivoting on certain features
  • Less financial risk: not having to invest in inventory means less or no capital required

Starting & Running A Successful Marketplace

Now that we’re a little more familiar with the concept of e-marketplace and the benefits of it, let’s talk business.

Are you convinced to start and run your own marketplace yet? If yes, here is how to get started when scaling a marketplace.

Crack the chicken-or-egg issue

What comes first? The egg or the chicken? / Source: clockwise.software

The chicken-or-egg issue is a common problem faced by numerous marketplace owners. When starting your own marketplace, you will ask yourself this question repeatedly; which one comes first, supply or demand?

Here are a few ways to tackle this problem and examples of how some of the world's most renowned companies did it:

  1. Acquire the more difficult side                                                             Depending on the kind of marketplace you want to build, figure out whether supply or demand is the harder side for you to acquire. Whichever demographic it is, focus on that and get that one on board first. Example: Airbnb got the supply side first. The supply side being hosts and homes, and the demand side being guests.
  2. Niche, subsidize, and automate                                                   Niche - Appeal to a niche market that is most relevant to your marketplace. Example: Craigslist started off by the founder emailing his friends that were in search of apartments and jobs.  Subsidize - Finance the most valuable side of the market; supply or demand. Example: Uber paid the supply side. They paid drivers in key cities to be on their app so that customers would have cars to book when using the app. Automate - Implement automation to make the supply look bigger by collecting as much data as possible. Example: Goodreads gathered all the relevant data and included it in their platform in order to create a useful supply side by generating perceived activity.
  3. Events & Interaction Host meet-ups and/or gatherings as they can really assist in generating community and gaining exposure. Example: Yelp was known for throwing parties when first starting off. This significantly helped the e-marketplace gain recognition, and formed “Yelp Elite”.
  4. Acquire a large customer Find a large customer for the initial supply or demand. Example: Candex supplies software to Siemens, and Siemens requires their supply vendors to use the Candex marketplace in order to get paid.
  5. Paid to complimentary It’s no secret that free goods attract customers. Use this to your advantage and turn something that costs money into something complimentary. Example: Skype made phone calls and video calls free.
  6. Geographic, time, and demand constraints Depending on which one works best for your marketplace, setting these constraints will help generate activity and attract customers.
  • Geographic constraint - Becomes easier to get activity going when the operation surface area is limited. Example: Lyft focused on a certain geographical area when first launched.
  • Time constraint - Programs excitement into the marketplace and gets buyers hyped up. Example: Tophatter limited the bidding time to an hour to generate excitement.
  • Demand constraint - Focuses your marketplace on carrying out a single value proposition well. Example: Fiverr constrained demand with its $5 limit.