Marketplaces for Retailers: Rationale, Business Models, Monetisation and Financials

In weeks 1 and 2, we have created the framework for understanding marketplaces.

Now, let’s take a look at why retailers should look at marketplaces, understanding the business model, the monetisation model and the financials.

?Let’s “start with why”. Here seven reasons why retailers should set-up marketplaces:

1. Monetising Existing Traffic: Retailers have a large demand-side shopper base already.
2. Flywheel Effects: The more users a Marketplace has, the more it is attractive to suppliers, more drives more consumer engagement, which, in turn allows for faster and more efficient fulfilment of orders for consumers.
3. 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.
4. Scalability and Flexibility: Not having any stock means a Marketplace can scale exponentially.?
5. More Data as an Asset: More sellers mean more data that they collect on products sales and buyer habits. This creates new opportunities for merchandise planning and forecasting. Data and insights can be monetized directly or or used to create supplier ‘stickiness’.
6. New Monetisation Opportunities: Marketplaces that have built a large demand-side audience have the opportunity to charge fees to the buyers.
7. Capacity: Constraints are fundamental to retail activity. How can they grow easily at low cost?

With this in mind, here is the framework for retailers to set-up their business case to create a marketplace:

1. Grow and expand: with a marketplace, retailers can improve their existing core offering, expand to adjacent categories and improve the opportunity for cross-selling
2. Scalability: there are no investments in direct sourcing, giving efficiency and scale when onboarding sellers—versus direct sourcing.
3. New Revenue & Profit Streams: Membership fees, transaction fees, retail media, fulfilment services, data monetisation all come together to create new revenue opportunities, aside from just the normal retail model of buying and selling products and augmenting income with trade funds.
4. Agility & Price Competition: The sellers set the price, but they need to competitive due to competition – good for shoppers. What is also good for shoppers – and retailers with a marketplace – is that they can use the sellers on the marketplace to reduce out of stock.
5. Traffic Acquisition: Lots more sellers mean lot more products, which means lots more listings. All of this comes together to boost SEO.
6. Innovation and Testing Demand: Retailer can focus on smaller, innovative brands and test demand before putting them in wider distribution. For example, Superdrug in the UK set up a marketplace which has a speciality in health and beauty diversity, for example, black-owned brands, female-owned brands such as . Truthbrush, who have created an award winning, biodegradable Bamboo toothbrush.
7. ‘Sweat Assets’: marketplaces improve productivity of existing investments.

Marketplace "Take Rate"

The “take rate” is the primary revenue generation method for many online marketplaces and platforms.  Take rate is a fee the platform charges for facilitating transactions between buyers and sellers.  This is expressed as a percentage of the transaction value. The formula to calculate take rate is:        

Take Rate = Total Revenue generated by Platform / Total value of Transactions on the Platform x 100%        

The take rate is popular as it straightforward and easy to understand. Marketplaces can also adjust the take rate to suit their requirements.

The Marketplace Business Model

Marketplaces follow a different financial model compared to ‘normal’ eCommerce models like D2C or Retailer.com or even B2B distribution.

In a typical consumer eCommerce business, the business purchases a product at a cost of $X, sells it for $Y, and the gross profit is calculated as $X - $Y.

An eCommerce business takes ownership of the product, stores it and sells it – no different to any retailer for the last 4000 years – or however long people have been selling in markets.

In contrast, a marketplace model allows third-parties, called ‘sellers’ to load up their products for sale on the marketplace, and set their own prices, denoted as $X.

The marketplace charges a commission, which is a percentage of the sale price, represented as Y%. Consequently, the marketplace's gross profit is $X * Y%.

This is the gross margin: the marketplace will have to subtract the normal business operations to get to the net margin, such as payment processing fees, marketing costs, and selling, general, and administrative (SG&A) costs.

Many marketplaces achieve profitable growth, while traditional eCommerce and retail models often struggle with low or negative margins.

Why is this?? Several financial factors contribute to increased top-line revenue and decreased costs. Simply put, a marketplace has a lot more ‘levers’ to pull from

Marketplace Monetisation Sources

Marketplaces do not just take a slide of the action as their main source of revenue. They also source revenue from:

1. Fees: for example, commissions, subscriptions, and listing fees - see 'take rate' above.
2. Advertising: sponsored products, sponsored display ads onsite and offsite – also called ‘Retail Media’)
3. ?Add-On Products like Financial Services: for example, in the world of B2B eCommerce, marketplaces can offer financing or specific data and insights. The data collected can also be provided free to sellers instead of charging for it to act as an acquisition and retention programme.
4. Services: some marketplaces charge for special tools to improve or prioritise for top sellers. Marketplaces also offers a range of applications that custom-built for their marketplace that sellers can use.
5. Logistics and Fulfilment Services: these allow sellers the ability to utilise the marketplaces storage and shipping capabilities to their advantage. For example, Amazon has close to 10m sellers globally, and 94% use Amazon’s fulfilment set-up called FBA (Fulfillment by Amazon). Sellers use FBA to take care of inventory storage, order fulfillment, returns management and customer service. In 2022, Amazon made approximately $118bn just from these logistics and fulfilment services.

Case Study: The Faire Marketplace

Faire is a wholesale marketplace that connects independent “brands” to independent boutiques. Faire was created in 2017 helps retailers find and buy unique wholesale merchandise for their stores. Retailers can order online wholesale and get flexible payment terms.

Today, Faire has 600,000 retailers on its platform and 85,000 brands available and is the largest marketplace in this sector with $1 billion in GMV (Gross Merchandise Value)

?The Faire Monetisation Model

• 25% commission on orders from new customers.
• 15% from orders made by repeat customers.
• Solves ‘Inventory Risk’:? small fashion retailers must shell out the cash for inventory, which carries several risks to it given it is unknown how much the products will sell.
• Faire takes the 60 day credit risk: Faire’s net 60 arrangement with retailers means that brands get paid immediately, and the risk of any retailer not paying falls on Faire, not the wholesale brand.

Case Study: The Walmart Flywheel - Built on a Marketplace +Retail Media

Walmart has transformed itself over the last few years from a ‘standard’ retailer to a new type of business with five different segments of opportunity:

1. ?Walmart Connect, their retail media advertising network.
2. Membership fees.
3. Marketplace transactions.
4. Walmart Fulfilment Services.
5. Data monetisation.

?Each of these are fast growing with high margins, and are key drivers in the underlying transformation of the what was essentially a ‘big box retail’ business.

?Walmart has successfully monetised its fulfilment costs through Walmart Fulfilment Services, following in the footsteps of Fulfilled by Amazon (FBA). Walmart Connect is its retail media business, now turning over close to $3bn a year.

?Walmart have flagged this approach over the years and called it a ‘flywheel’, echoing the Amazon Flywheel that they have been talking about for years.?

?Their marketplace is a key constituent of the flywheel.

?The CEO of Walmart Inc, Doug McMillon describes it as follows:

“Our ecosystem is made up of omni-channel capabilities, stores, service offerings, eCommerce and marketplaces as well as our supply chain combined with 2.3 million associates. Together, we believe these elements produce a flywheel effect which creates relationships where customers view Walmart as their primary destination.

?Our flywheel is accelerating through offerings such as the Walmart Connect advertising business, Walmart Fulfillment Services, Walmart Health, and our financial services business. These offerings represent mutually reinforcing pieces of our flywheel centered around our customers.”

The Marketplace Financial Model

Marketplaces generally operate as asset-light businesses – hence their attraction to retailers.

The main invest set-up costs for marketplaces can be categorised into capital expenditures (CapEx) and operational expenditures (OpEx).

• CapEx includes costs related to fulfilment centres, delivery vehicles, and physical stores.
• OpEx encompasses per-item fulfilment costs, merchandising staff, payment processing, marketing, and general staff costs.

The typical marketplace revenue model is can easily be built out as most are made up on the same inputs. Revenue inputs include GMV (Gross Merchandise Value), AOV (average order value), number of orders, number of sellers, catalogue size, customer traffic, conversion rate, and commission rate.?

Marketplaces use the term GMV (Gross Merchandise Value) which the total sales of all goods to a shopper. However, the actual, net revenue to the marketplace is just the commission fee percentage of the sale.

For example, a marketplace sale of a $100 item with a 15% commission fee would result in $15 of revenue to the marketplace operator.

Metrics that Matter for Retailers with Marketplaces

There are many metrics that matter with marketplaces, and I’ve listed many of them below. These are regular metrics like GMV, number of users, average order value and CAC vs LTV.

However, the most important metric is liquidity: liquidity shows the likelihood of a transaction occurring in the marketplace. It is the efficiency with which a marketplace matches buyers and sellers on its platform.

Defining liquidity: the probability of selling something you list or of finding something you are looking for. (James Currier, NFX)

A liquid marketplace has enough buyers to attract sellers and sellers to attract buyers as it influences the platform’s appeal ?Liquidity is relatively easy to understand, however, measuring it is much trickier.

A good representation of liquidity should usually capture both buyer liquidity and supplier liquidity.

Buyer liquidity is the likelihood that a request or a search leads to a transaction, for example, the number of searches that result in a sale.

Supplier liquidity is how much is delivered, sold or used in a given period, the percentage of stock sold or bookings made.

Navigating the business case, the monetisation models and the metrics for marketplaces is a challenging but essential task for any retailer who wished to set up a marketplace.

Retailers are good at retailing, but marketplaces are a different "beast" to everyday retailing. In many respect, marketplaces are about an ecosystem creation: they are not just products but a hub that connects complimentary offerings -> data, financial services, logistics and adjacent industries.

Next week, we will look at marketplaces from the perspective of the sellers - the brands who can use marketplaces.

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