Marketplace Best Practices - New Book

(this book extract contains the Preface and Chapter 1: Platform Economy)

(full book available on Amazon )

Preface

"Disruptive innovation can hurt, if you are not the one doing the disrupting."

-Clay Christensen, Academic & Author, The Innovator’s Dilemma

Introduction

Over 50% of eCommerce happens on marketplaces—and not just on Amazon or Alibaba. Dozens of other marketplaces each sell over a billion dollars of gross merchandise value (GMV) annually, while thousands of additional product and service marketplaces are seeing rapid growth. Whether a company plans to operate their own marketplace, sell on somebody else’s marketplace, or compete against other marketplaces, they need a marketplace strategy.

Two decades ago, eCommerce started disrupting brick-and-mortar retail. One decade ago, marketplaces started disrupting eCommerce and became a major driver of the retail apocalypse. B2B distributors have also lost tens of billions of dollars of annual sales to marketplaces.

eCommerce has not changed substantially in the quarter century since secure credit card processing was enabled via SSL (Secure Sockets Layer). For the first 15 years, most eCommerce operators could easily be more profitable than their brick-and-mortar counterparts. But the marketplace platform model has proven to be far more profitable and scalable than the old linear pipeline model of eCommerce.

Outsourcing much of the traditional eCommerce responsibility to third-party sellers enables asset-light marketplace operators to offer more, sell more, and learn more while generating higher margins. They scale more quickly, minimize expenses, increase agility, and create a more robust supply chain. Jeff Bezos used the “flywheel effect” phrase to describe the virtuous cycle of marketplaces that continue building upon their success as they gain more sellers, products, sales, data, and customer satisfaction.

The platform economy (see Chapter 1) has enabled young marketplace companies that are just a decade old to displace century-old companies. For example, in about a decade the Airbnb marketplace has grown to offer far more lodging rooms than all US hotel chains combined (Marriott, Hilton, Hyatt, etc.). In the retail domain, compare Amazon to the fate of century-old retail stalwarts like Sears, Lord & Taylor, Hechts, etc.

This transformation is affecting both B2C and B2B organizations. If a major B2B brand is not selling their products on a marketplace, it is likely that somebody else is (either an official partner or a grey market seller). B2B distributors and manufacturers need a marketplace strategy for both offense and defense. A distributor that has to physically stock all goods it sells simply cannot scale as fast as one with a flexible network of third-party sellers. As marketplaces become the preferred customer shopping destination, many are selling private-label products and displacing name-brand manufacturers.

Marketplaces are enabling new business models beyond traditional B2C and B2B. C2C (Consumer-to-Consumer) and C2B (Consumer/Contributor-to-Business) marketplaces are enabling the “gig economy.” In C2C marketplaces like Uber, TaskRabbit, and Etsy, individuals sell their services (or goods) to other consumers. C2B marketplaces like Fiverr and Shutterstock allow individuals sell to businesses.

Marketplaces are disrupting and creating new business models in the commerce value chain. This book helps the reader be the disruptor, not the disrupted.

Book Organization

This book was written to provide an understanding of the what, who, and how of marketplaces. Chapters are organized into three major segments:

What is a marketplace? (fundamentals, economics, models)

Who operates a marketplace? (case studies)

How to operate a marketplace? (platforms, people, partners, processes)

While the bulk of the content is in the How segment, to be successful it is important to understand the fundamentals of marketplaces (what) and learn from successful case studies (who) in order to make an impact.

Qualifications of the Author

This book is based on 15 years of experience designing and building dozens of enterprise-scale marketplaces that cumulatively generate billions of dollars of GMV. McFadyen Digital has supported many clients from initial strategy definition to marketplace design and implementation to long-term support and growth.

Our experience includes both B2C and B2B clients, as well as marketplaces for products and services. Many of the solutions we have built have scaled to over a million products or SKUs. We have built marketplaces from scratch, and we have leveraged commercial marketplace platforms as a starting point. Many of these marketplaces are internationalized, global solutions deployed to a multitude of countries, languages, currencies, payment processors, tax calculators, fulfilment systems, etc.

McFadyen Digital employs over a hundred marketplace experts, many of whom shared their hands-on experience in the writing of this book. Our challenge was not creating sufficient content, but instead trimming it down to fit into a reasonably sized business book. Many of the chapter topics—Amazon, user experience, marketing, CRO, data, metrics—could fill a book by themselves.

What we are most proud of is that our clients have received awards for the great marketplace solutions that we have collaboratively designed and launched. Many clients have also presented their success stories at a dozen national and international conferences before thousands of attendees.

More information about McFadyen Digital is available at the end of the book and at www.mcfadyen.com. The website also contains many frequently updated white papers on the rapidly changing marketplace trends. For the latest marketplace updates, subscribe to our newsletter at www.mcfadyen.com/blog.

An annual report on the evolving marketplace platform vendor landscape is available in the “Marketplace Suite Spot” report. To read the most recent assessment of platform vendors visit https://www.marketplace-suite-spot.com/.

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Chapter 1 Platform Economy

• 1.1 The Platform Revolution
• 1.2 Pipeline vs. Platform
• 1.3 Network Effects
• 1.4 Flywheel Effect
• 1.5 Are Platforms Too Powerful?

"No matter who you are or what you do for a living, it’s highly likely that platforms have already changed your life as an employee, a business leader, a professional, a consumer, or a citizen."

Geoffrey G. Parker, Marshall W. Van Alstyne, Sangeet Paul Choudary,

authors of Platform Revolution

Introduction

The most impactful companies of the past decade have been platforms: Airbnb, Alibaba, Alphabet (Google), Amazon, Apple, and many more that do not start with the letter “A.”

Platform businesses have transformed entire industries: Amazon vs. retail, Airbnb vs. hotels, Apple vs. record companies, Uber vs. taxis, Instacart vs. grocers, DoorDash vs. restaurants, Craigslist vs. newspaper classifieds, etc. In just a decade, many of these newly formed platform companies unseated century-old incumbents as leaders in their categories.

Most unicorns (private start-up companies worth over $1 billion) are platforms. They are asset-light, so some can grow at 300% to 500% annually. On the other end of the spectrum, the seven most valuable public companies (Apple, Microsoft, Alphabet, Amazon, Facebook, Alibaba, and Tencent) are all platform businesses and also are growing rapidly. A decade ago only one of these public companies (Microsoft) was on the top ten list.

Marketplaces are a type of platform that promotes and enables transactions between multiple parties, such as a customer and a third-party seller. Marketplaces generally do not fulfill the products or services purchased. Marketplaces generally charge fees for enabling the transaction.

Many platforms are selling services (car rides, lodging, food delivery) not just products like traditional retailers. Services platforms have enabled an estimated 75 million American “gig workers” to earn a living without standard full-time employment. For example, roughly 1% of American household income comes from ridesharing platforms (Uber, Lyft, etc.), according to the Federal Reserve.

Platforms selling digital goods have also become very profitable. For example, the Apple App Store and the Google Play store respectively sell $60 billion and $30 billion in digital goods and earn roughly a 30% commission on each sale. That equals $20 billion and $10 billion in profit from enabling others to sell on their platform.

The monetization of some platforms may not be as visible as that of eCommerce marketplaces. For example, although most users of Facebook, Twitter, YouTube, LinkedIn, WhatsApp, etc. do not pay for those services, those platforms collect vast amounts of data and profit from very lucrative advertising revenue. The focus of this book is marketplaces which are platforms based on a clear system of payment (monetization) for goods or services.

Platforms have transformed how suppliers and consumers interact. A decade ago, before Uber, Airbnb, and DoorDash became popular, who would have felt comfortable getting into a stranger’s car to go stay in another stranger’s home, and then eating a meal prepared and delivered by other strangers?

1.1 The Platform Revolution

In 2016 the ground-breaking book Platform Revolution: How Networked Markets are Transforming the Economy—And How to Make Them Work for You defined the fundamentals of platform businesses and how they are transforming the world. The three authors, Geoffrey G. Parker, Marshall W. Van Alstyne, and Sangeet Paul Choudary, continue their thought leadership in association with the MIT Initiative on the Digital Economy (IDE). Further details on the concepts presented in this chapter are available in their book.

This book was a milestone in documenting how the platform economy is disrupting many legacy industries. Venture capital firms began focusing investments on platform business startups. The word platform started being used as a verb as business executives began asking how they can “platform their business.” Phrases like “the platformization of …” introduced new buzzwords. Investors often say, “Platforms beat products.”

According to Parker, Van Alstyne, and Choudary, a platform includes these characteristics:

• It is a nexus of rules and architecture.
• It is open, allowing regulated participation.
• It actively promotes (positive) interactions among different partners in a multi-sided market.
• It scales much faster than a pipeline business because it does not necessarily bear the costs of external production.

Platforms are matchmakers that facilitate the exchange of goods, services, or social currency which enables value creation for all participants. This accelerates growth by leveraging the assets or services of others.

Andreessen Horowitz, one of the venture capital firms focused on platform businesses, offers this definition:

A Platform is a network of users and developers; the multi-sided feedback loop between those users, developers, and the platform itself creates a flywheel effect increasing value for each of those groups. It can also be thought of as a network that can be programmed, customized, and extended by outside users—it often meets needs and creates niches not defined by its original developers at the outset.

1.2 Pipeline v. Platform

It may be helpful to understand what a platform is not: a pipeline. Platform models eliminate many of the constraints of pipeline business models.

Traditional eCommerce businesses are pipeline businesses. Through a labor-intensive sequence of activities, they must source each product, negotiate contracts with each vendor, negotiate a price for each product, merchandise each product (write marketing text), acquire images (often their own photography), set prices, order inventory, hold inventory, fulfill orders, provide customer support, and receive returns. This linear pipeline shown below limits business agility, scalability, and profitability.

FIGURE 1.1: Example sequential events in a legacy eCommerce pipeline

Unlike traditional eCommerce businesses (pipelines), marketplace platforms do not need to source, merchandise, and physically hold and ship merchandise. Most aspects of traditional eCommerce activities are outsourced to third parties, which enables the marketplace to scale much faster. The third-party sellers operate independently and in parallel performing these activities.

In a platform, the value creation (a.k.a. production) happens outside the pipe. For example, lodging happens outside Airbnb, tweets are not produced by Twitter staff, videos are not produced by YouTube employees, most iOS apps are not created by Apple, and most products sold on Amazon are from third-party sellers.

A platform curates and facilitates instead of producing. This enables platforms to be asset light. For example, Airbnb simply connects people who need a room with people who can offer a room. They do not need to build hotels like Hyatt, Hilton, and Marriott. Uber and DoorDash do not need to buy cars. Pinterest does not need to hire photographers. Spotify does not need to produce music. OpenTable does not need to prepare meals.

Platform Revolution uses the term “inverted firm” to describe the benefits of the asset-light nature of platforms. The main approach for traditional pipeline firms to scale is to add more internal resources, like employees, machines, and capital. The main approach for platform firms to scale is to add more external resources, such as drivers, apartments for rent, and third-party sellers. Platform businesses can scale faster since they require far fewer employees and expensive assets than their pipeline competitors.

Orchestration is prioritized over production and requires less closed vertical integration within one firm. The focus on value creation shifts efforts to resources outside the firm. This is a transition from the trend of disintermediation and vertical integration to reintermediation and market aggregation.

Platforms enable interactions that exchange value units—goods, information, services, money, etc. This enables value creation outside the firm. As a platform grows, it adds more interactions between parties and broadens network connections.

Early competition for eCommerce success was won by the most efficient pipeline beating the less efficient pipeline. Now it is the platforms, like Amazon, beating the pipelines, like brick-and-mortar retail, due to better marginal economics and value produced by network effects. Quality control costs can also be reduced with community-driven curation (e.g. Amazon or Uber user ratings & reviews).

The platform shift can also be tracked in three stages of focus:

1.????from resource control to resource orchestration

2.????from internal optimization to external interaction

3.????from focus on customer value to focus on ecosystem value.

1.3 Network Effect

The network effect is an important platform aspect that enables rapid scalability, efficiency, value creation, and competitive advantage.

A network can be a group of interconnected people (e.g. social network), a system of things (e.g. computers and printers), a collection of sellers and buyers, or other sets of relationships.

Platform Revolution uses a telephone network as an example and WhatsApp users are a modern equivalent. Two telephones only enable one connection, but five phones enable ten connections. A dozen phones enable 66 connections. The growth of connections is exponential, not linear. Imagine how many connections are possible between the billions of Facebook users.

FIGURE 1.2: Telephone Example of Network Effects. Source: Platform Revolution.

A network effect occurs when a product or service becomes more valuable to its users as more people use it. As networks grow, this effect helps build a virtual moat around a platform business that makes it harder for competitors to enter their market. For example, the vast number of Airbnb consumers and hosts makes it difficult for a new entrant to compete in the lodging marketplace. Amazon’s network of over a hundred FBA distribution centers provides a similar defensible moat.

The telephone, WhatsApp, and Facebook user examples are homogenous networks: all nodes are the same. Heterogeneous networks match different types of nodes. For example, eCommerce marketplaces have sellers and buyers. The full Facebook ecosystem includes users and advertisers (business customers). Uber has drivers and passengers. Heterogeneous networks are also called two-sided or multi-sided networks. Instacart is an example of a four-sided platform that connects consumers, grocers, personal shoppers/drivers, and CPG brands, like Coke and PepsiCo.

Successful platforms focus outside the firm (not internally) to scale the network effect. A solid community-building strategy is a valuable asset for growth. For example, Houzz focused on building a strong community with quality user-generated content before starting heavy monetization via home remodeling contractors and merchandise vendors. Successful heterogeneous platforms coordinate a harmonious ecosystem of different types of participants. Platforms must enable the ecosystem in which they operate.

Network connections can be unidirectional or bidirectional. For example, a LinkedIn connection is bidirectional (each person has equal access to the other), whereas a follower is unidirectional (different rights for each person). In some cases, a single user may fall on both sides of the equation, such as an Airbnb user could be both host and guest.

Heterogeneous networks and those with unidirectional relationships are presented with the chicken or egg question: Which should be the priority? Should a marketplace spend more energy finding sellers or finding buyers? The answer often varies by industry, stage of maturity, and other factors.

Generally, there is a critical mass inflection point at which the network effect kicks in and helps build a defensible market position. The network effect compounds the inverted firm efficiency as the platform user count grows. Rapid user-base expansion is also often referred to as “going viral.”

1.4 Flywheel Effect

As the network effect builds, a platform will benefit from the virtuous cycle of the flywheel effect. Jim Collins coined the term “flywheel effect” in his 2001 book Good to Great. He explained the concept to Jeff Bezos, who built on the analogy at Amazon. As the marketplace flywheel momentum builds, it creates a virtuous cycle that increases the number of sellers, which increases the selection of products available, which improves customer experience, which drives more traffic, which drives more sellers, etc. Another beneficial factor in this cycle is reducing cost structures, which lowers prices, which improves the customer experience, etc. The sketch below comes from Amazon.

FIGURE 1.3: The Amazon Virtuous Cycle Flywheel Effect

This self-enhancing cycle is more efficient than the legacy pipeline model of investing in marketing, then investing in sales efforts, and then getting customers. Scaling the linear pipeline approach generally requires an investment proportional to the results. In other words, marketing and sales investments have to double sales. Platform business does not require this level of investment to scale.

The virtuous cycle can be expanded to include additional virtuous elements of the marketplace flywheel. Additional stages include data collection and the positive impacts on physical store assortment and foot traffic for omnichannel merchants.

FIGURE 1.3: McFadyen Digital expansion of the marketplace flywheel virtuous cycle

The eight stages of the expanded marketplace flywheel summarize three benefits at each stage:

1.????More Products

1. Existing categories
2. Adjacent categories
3. Fast catalog expansion by nimble third-party sellers

2.????More Customers

1. Better organic SEO to drive traffic
2. Larger brand footprint
3. Greater customer mindshare

3.????More Sales

1. Fewer sales lost to out-of-stock
2. Cross-sell & upsell capabilities
3. Better alignment with customer expectations

4.????More Profits

1. Reduced or no inventory and logistics
2. Free organic SEO instead of paid SEM
3. First-party v. third-party mix optimized for margin

5.????More Sellers

1. More interest from third-party vendors
2. Faster and easier vendor onboarding
3. Seller competition improves value for customers

6.????More Data

1. Gain insights from marketplace activity
2. Identify market trends before competitors
3. Automate seller management and UX based on data

7.????More Store Assortment

1. Bring top sellers into physical stores
2. Move low margin products to the marketplace
3. Offer third-party products in-store via kiosk, QR codes, etc.

8.????More Store Foot Traffic

1. Buy online pick up in-store (BOPIS)
2. Buy online return in-store (BORIS)
3. Optimize in-store inventory

Platforms have access to large volumes of data which further accelerates the flywheel. There has also been a surge in the tools available to manage large volumes of data. With better tools, the data can be converted into insights and intelligence. Successful platforms build and manage a common data layer.

1.5 Are Platforms Too Powerful?

Is Amazon responsible for the retail apocalypse that has caused the decline or bankruptcy of hundreds of retailers? Is it unfair for Apple to charge $20 billion of fees to let applications be downloaded from their App Store? Should Twitter and Facebook be able to block the main communication channels of the US president? Did DoorDash and Uber Eats charge egregious fees to restaurants during the pandemic? Does it make sense for 43% of all venture capital raised to be spent on Facebook and Google Ads (source: Clearbanc 2020)? What are the risks of Alexa, Siri, and Google Home listening in on so many conversations with their growing AI capabilities?

Should George Orwell’s ‘1984’ book have been titled ‘2020’ with big tech as the omnipresent overlord?

There are many reasonable claims that platforms have become too powerful. Justifications include limiting competition, controlling narratives, restricting privacy, undue influence, and self-promotion.

Counterpoints can be posed for the platforms. Amazon’s Small Business Report states they helped small businesses sell 3.4 billion items in 2020 including enabling a half million small sellers with FBA services. The Apple App store delivers $40 billion in net revenue to businesses, many of whom would not have other distribution channels (Google Play Store has the same 30% fee). Twitter and Facebook have enabled billions of people to connect and provide an avenue for free speech. Many more restaurants would have been shuttered during the pandemic had it not been for delivery service marketplaces.

It is difficult to say that these big tech firms are violating antitrust laws which require proof of causing consumers to pay higher prices. Most complaints from retailers are that they can’t compete against Amazon’s low prices. Amazon certainly has undercut competitors, but is this truly predatory pricing when most prices are set by third party sellers? Amazon may control a majority of US ecommerce sales, but they claim they represent less than 10% of US retail sales so they are therefore not a monopoly.

The case of Big Tech platforms versus the government will be unfolding over the coming years. In 2020 Capitol Hill called CEOs Jeff Bezos of Amazon, Tim Cook of Apple, Sundar Pichai of Google and Mark Zuckerberg of Facebook to testify on anti-competitive activities. China has begun an anti-monopoly probe into Alibaba whose marketplace controls the majority of Chinese ecommerce. The European Union has been proposing new regulations for big platforms.

While the top platform giants face government scrutiny, that should not dissuade other organizations from leveraging the platform model which helped them scale successfully.

Key Takeaways: Platform Economy

• Many start-ups, unicorns, and most of the largest fast-growing public companies leverage the platform model. Marketplaces are one form of platform.
• Most legacy businesses rely on a pipeline model of sequential activities performed within the company. Conversely, the platform model outsources many of these activities (production) to multiple third parties that work in parallel. The platform efficiently connects producers and consumers.
• The network effect is a critical element of the exponential growth of platforms. Much like telephones, the more nodes (e.g. sellers and buyers) on a network the more valuable it is.
• A platform is a combination of rules and an open infrastructure that enables value-creating interactions between external producers & consumers.
• Jim Collins and Jeff Bezos used the flywheel concept to show how continuous small improvements build momentum. This growth powers a competitive differentiator that builds a defensible moat around a business.

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TABLE OF CONTENTS

Preface

Part I: WHAT is a Marketplace?

• Chap 1 Platform Economy
• Chap 2: Marketplace Maturity Model (MMM)
• Chap 3: B2C v. B2B v. C2C v. C2B
• Chap 4: Marketplace Features
• Chap 5: Marketplace Financial Model

PART 2: WHO Is Capitalizing On The Marketplace Model?

• Chap 6: Marketplace History
• Chap 7: Marketplaces of Today & Tomorrow
• Chap 8: Services Marketplaces
• Chap 9: Horizontal Business Case Study – Amazon
• Chap 10: Grocery Business Case Study – Instacart
• Chap 11: Services Business Case Study – Uber
• Chap 12: B2B Technical Case Study – AB InBev (Z-Tech)
• Chap 13: Loyalty Technical Case Study- Livelo
• Chap 14: B2C Technical Case Study – Best Buy Canada

PART 3: HOW Can You Profit From The Marketplace Model?

• Chap 15: General Architecture
• Chap 16: Build, Buy or Rent a Platform?
• Chap 17: Payments & Taxes
• Chap 18: Seller Acquisition & Management
• Chap 19: Data: Catalog, Offers & Orders
• Chap 20: Organizational Structure
• Chap 21: Key Performance Indicators (KPI’s)
• Chap 22: User Experience (UX)
• Chap 23: Marketing an Online Marketplace
• Chap 24: Conversion Rate Optimization
• Chap 25: Customer Service
• Chap 26: Advanced Technical Features
• Chap 27: Advanced Business Models
• Chap 28: Marketplace Enablement Steps
• Chap 29: Implementation Methodologies & Tools
• Chap 30: Ongoing Operations
• Chap 31: Best Practice for Sellers

APPENDICES

• Appendix A Vendor List
• Appendix B Top Marketplaces & Retailers
• Appendix C About McFadyen
• Glossary