Marketplaces and Internet Scale

Last week, I took a stance that brands and retailers who recognised and embraced the marketplace opportunity will grow faster than those who don't.

Today I want to lock in on what is called "Internet Scale". Because it’s one thing to know all of this ‘stuff’ about eCommerce platforms, the horizontal and vertical marketplaces, the networking effects etc etc, but its another to talk about an abstract idea like 'Internet Scale' and how marketplaces are 'democratising' access and are a game changer in terms of distribution.

Given I've been a senior marketer for over 25 years, with specific domain expertise in Strategy, Digital Commerce and Retail, I would say that.

But the reason I keep talking about it is that I meet so many CEO's, VPs and marketers who still don't 'get' marketplaces and are roll out the same cliches from 2019 or that they read on the Internet.

For example, "Quick Delivery eCommerce is not for us" is something I hear a lot.

The correct statement in this case is that "Q-Commerce has been bad news for VCs and investors who saw all their cash go up in smoke, but the consumers like them, and as a consumer brand, we can use Q-Com to tap into new CEPs" (category entry points - using Byron Sharp and Jenni Romaniuk / EBI parlance).

Access and Availability for SMBs/SMEs: 'Democratisation' in Action

One of the reasons I like marketplaces is they ease up access and availability for SMBs/SMEs. You could call this a 'democratisation' of access and 'economic empowerment' for SMBs. Marketplaces are now part of society’s wider trends in society such as entrepreneurship and the gig economy.

Let me explain: 25 years ago, if you were a hungry entrepreneur who wished to sell your wares, aside from the local Saturday market, you would have had to get a lease on a store (probably signed for 20 years), get the store kitted out, buy a load of stock to fill the store, get insurance, hire staff well before you opened the doors. You might have been in the hole for $250,000 before the sign saying 'Open for Business' was hung on the door.

Today, you can sign up to Shopify, set-up a dropship and be up and running in an hour for a couple of hundred dollars. Of course, you would still have to acquire and convert shoppers for your wares.

But marketplace provide you with the distribution and the tools to get those shoppers. Take the case of Etsy: back in their 2019 annual report, CEO John Silverman emphasised the platform’s role in economic empowerment worldwide, supporting millions of creative entrepreneurs globally.?

Here is what Silverman wrote in the annual report:

“At Etsy, we often say economic empowerment is our day job. Each day, our team acts with boldness and urgency to support the millions of creative entrepreneurs around the world who depend on us. We help them build thriving businesses while doing something they love, bring them loyal buyers, and enable them to compete in an ever-changing retail landscape. Our work has never felt more important or more relevant than it does in 2020”.

Silverman continues:

“Our sellers’ success has a ripple effect. As they make more sales, they invest more into their businesses, which creates opportunities for others. In 2019, the Etsy marketplace drove over $6 billion in U.S. seller economic output and created 1.7 million jobs”

What about the Etsy model?

“Our marketplace model allows us to scale our investments and respond to changing conditions more rapidly than traditional retail models, which have higher fixed costs, inventory liabilities, and cumbersome supply chains. This gives us the resilience and flexibility to build for the long term and achieve our full potential”.

The implications of Marketplace dynamics are impacting everything, so let’s do a deep dive on this to understand it more.

Marketplace Dynamics

Marketplaces are aggregators of products where the shopper can compare and buy goods from numerous suppliers online. Marketplaces are a sort of digital shopping centre or malls, where consumers can browse through thousands of products from many brands and in different categories.

Marketplaces match demand with supply for which the Marketplace gets a ‘cut’ of the financial transaction for finding and matching supply and demand efficiently.? Marketplaces generally do not own any stock and do not provide the product or brand directly. As noted earlier, there are two kinds of Marketplaces:

The Consumer Perspective

From the consumer perspective, it’s not hard to work out why they like Marketplaces: Marketplaces have a much wider selection of products, save a trip to a retail store, easy to compare similar products and check prices and find hard-to-get products.

The size and scale of Marketplaces mean that, from the consumer’s perspective, the competition between brands increases the value because the brand must compete to win the sale based on price and other seller quality metrics, particularly on the likes of Amazon with opaque ‘Buy Box’ algorithms.

For consumers, they get more options, more information and more convenience than ever before. The competition between sellers on price and quality helps their pockets and their customer experience.?

They enable consumers to browse the digital shelf to choose among thousands of brands and categories. Algorithms like Amazon’s A9 quite simply leverage an hugeamount of data to accurately match consumers with the products that they need based on their past behaviour.?

The Investor Perspective

From an investor perspective, Marketplaces are great businesses for six reasons:

Network Effects: The more users a Marketplace has, the more the value increases according to the number of people using it.? The ability to attract more brands, creates more selection in a Marketplace, driving more consumer engagement, which drives more sales for brands.

Economies of Scale: Once a Marketplace has a strong network effect, it is increasingly difficult to enter or replicate the Marketplace.? As more consumers use the Marketplace, their engagement increases, which increases Marketplace volumes, which means more revenue for brands, which, in turn allows for faster and more efficient fulfilment of orders for consumers.? The size and scale of Walmart as a retailer is small compared to the Amazon Marketplace, hence why Walmart are trying to replicate a Marketplace.

Increasing Brand Awareness: Because of network effects and economies of scale, this means even more brands and consumers.? As scale increases, the network continues to grow, which increases brand awareness of the Marketplace, which means that the cost of consumer acquisition costs to visit the Marketplace also decreases.

Cost Efficiency: Marketplaces do not carry stock, which means they are cheaper to operate that other channels. Think of the cost of running lots of stores versus running a website.

Scalability: Not having any stock means a Marketplace can scale exponentially.

Flexibility:? The lack of stores or stock, and a reliance on technology, means Marketplaces can change plans and tack very quickly.

Legendary Investor, Bill Gurly of Benchmark has written about the wider benefits of Marketplaces for society:

1.???? Wealth: Increase wealth distribution because we can all tap in Marketplaces

2.???? Assets: Unlock wasted potential of assets (Uber, Airbnb)

3.???? Matching: Better match of specific workers with specific opportunities (Upwork, Instawork)

4.???? Discoverability: Make specific assets reachable and findable (eBay, Etsy, GOAT)

5.???? Skills: Allow for increased specialization (Etsy, Upwork)

6.???? Flexibility: Enhance supplemental labour opportunities (Uber, Stitch Fix) where the worker is in control of when and where they work

?“A big mistake that brands make with marketplaces are thinking of them as a distribution channel only. If the first point you think of with Amazon is ‘it’s only a channel’ or ‘let’s think through the logistics’, you will fail. Marketplaces give access to customers – it’s where they are. With cross-border marketplaces such as Tmall, Allegro, Mercado Libre and even Amazon itself, marketplaces offer access to markets at a fraction of the cost than if you had to do it yourself. Marketplaces are not going away. Indeed, Silicon Valley is ploughing billions of venture capital into new types of marketplaces. They are going to continue to be a huge part of brand’s futures.”

Quote from Vinny O'Brien

Marketplace Distinctions

Some marketplaces have a monopolistic iron grip with market dominance.

Some are bigger and broader in design like Amazon while others are specific and niche like Etsy.

Another marketplace spectrum is geographic: Airbnb a global powerhouse while Lyft is only operating in the US and Canada.?

Some marketplaces are one-sided like Match.com where every user is a buyer and seller.?

Beyond eCommerce, the new creator economy is surging in momentum and is busting the ‘winner-takes-all’ status quo of traditional markets.

Marketplaces are ‘Internet Scale’

Part of the attraction of Marketplaces is the of ‘Internet Scale’.

This can mean different things to different people – both as a technical topic and a business opportunity.

Operating at Internet Scale from a Business perspective means:

- Global Opportunity: Any smartphone user with a 4G connection could be a potential market.

- No Barriers to Entry: Easy access for entrepreneurs to start selling.

- Direct Customer Relationships: Direct interaction with customers.

- Data Utilisation: Leveraging large amounts of data for continuous improvement.

- Rapid Scaling: Utilising cloud-based computing and other technologies to scale quickly.

From a Technical perspective, operating at Internet Scale involves:

- Massive Transaction Volumes: Handling thousands of transactions per second.

- Global Distribution: Reaching a worldwide customer base.

- Data Analytics: Using vast amounts of data for insights and predictive models.

- Scalability on Demand: Coping with peak times like Black Friday or Alibaba’s Singles’ Day.

- Always On: Ensuring continuous operation without downtime.

According to Investor Ram Parameswaran, marketplaces and eCommerce companies are the ‘front end’ of the Internet.?

Marketplaces and eCommerce companies are the ‘front end’ of the Internet.?

Ram Parameswaran

Ram explains his logic as follows: global spending on products and services, estimated at $100 trillion in 2024, could grow to $200 trillion by 2040 (he quotes McKinsey).?

If online penetration were to increase from its current 15-20% to even just 30-35%, eCommerce could represent $60 to $70 trillion of this total. This growth is conservative and suggests a 30-fold increase over the next 20 years (remember that construction, education, healthcare, the three biggest industries in most countries have barely started on digitisation).

Products and services are going to look very different in two decades.

AI capabilities will go to a level that is truly terrifying and will lead to a hyper personalised customer experience which will feel like something out of a futuristic movie.?

?Marketplaces are here to stay and will change the way commerce works forever.?

Thats it for this week. Now that we have set the scene, next week we are going to talk about we are Marketplaces: Business Models, Brands and Retailers.

In other words, we are really getting into the detail! See you then.