The Power of Online Marketplaces: Part 1
US eCommerce has grown tremendously in the past months; As a part of this economy, I would like to share my thoughts on the business value of marketplaces, both consumer and enterprise. Opinions expressed are solely my own and do not express the views of any entity.
What is a transactional online marketplace?
Transactional online marketplaces (AKA marketplace, e-marketplace, online marketplace) are eCommerce platforms connecting customers to third-party sellers. You may be familiar with Amazon as the largest consumer marketplace in the US. Amazon enables third-party sellers to provide their product listings on Amazon.com, and attract customers for online transactions through Amazon's sales channel. This setting will enable third-party sellers to go to market faster, in exchange for a fee.
Marketplaces exist in various industries, including commercializing goods, services, and software:
- Goods: Amazon, eBay, Walmart, Etsy, Wayfair, Houzz
- Entertainment: Youtube, SoundCloud
- Services: Uber, Airbnb, Groupon, Craigslist, Yelp
- Software: App Store, Salesforce, Claris, Atlassian
Marketplaces are generating significant amounts of revenue!
Amazon is considered as the top US consumer marketplace; Its global marketplace sales has surpassed its direct sales, first in 2017. In 2019, Amazon's marketplace sales accounted for 56% of its total sales ($129B/$229B) *.
Salesforce is considered as the top US enterprise marketplace; In 2016, Salesforce's AppExchange marketplace generated $1.5B in sales, which would mean an average annual sales revenue of almost $1M per app published on this platform! For companies on AppExchange, 38% of leads on average are generated from the Salesforce channels, potentially leading to revenue growth of at least 20% to 50% **.
Microsoft is the second top enterprise marketplace in the US. In 2019, it was announced that 95% of its commercial revenue flows directly through their partner ecosystem ***. Through the marketplace go-to-market services, their partners have achieved an average of 40% reduction in cost per lead, and a 2x lead conversion to sales rate compared to industry averages.
What are the business values of marketplaces?
Business values of marketplaces differ by the type and stage of the companies:
- Startup Stage: For companies just starting to commercialize physical or digital products, they could use available vertical marketplaces to go to market faster and test their product/market fit before investing heavily on their hypotheses. This frictionless market entry removes their need to technical resources for eCommerce capabilities and allows them to find an optimized strategy for the next steps. As an example, an iPhone accessory business can use Amazon to explore the market potential for its innovative iPhone frames, in exchange for a fee to Amazon. Once the product/market fit is shown, they can create their own eCommerce platform for direct sales and grow their brand.
- Growth Stage: For companies already delivering products on their own stores, either physical store or running their own online eCommerce setting, moving to a specialized (i.e., vertical) marketplace can 1) grow the customers base, 2) help with brand recognition, and 3) boost their revenue faster. This will enable faster market penetration, with lower marketing efforts including SEM.
- Expansion Stage: For companies in expansion stage, creating a marketplace of their own would empower their partner community to grow within their ecosystem, leading to additional sources of revenue with minimum risk. A well-known example is Walmart; once their retail and eCommerce businesses was growing, they introduced their marketplace to enable third-party resellers create "stores" on top of walmart.com and reach Walmart customer community. The business values of this platform to Walmart was: 1) Catalog enrichment through vertical product diversification, where walmart catalog could grow to hundreds of millions of SKUs and include vast variety of product categories and types. This will also improve ROI through SEM. 2) deep customer connection leading to enhanced loyalty, where customers are provided with an improved experience and are able to discover relevant products in one place instead of leaving to a competitors' platform. This will ultimately lead to getting a bigger share of wallet from walmart customers, and achieving their loyalty and increased return rate. 3) increased revenue as a result of high margin nature of marketplaces. Apart from these four business values, creating online marketplaces introduces new challenges; 1) the main challenge would be market entry when parter community does not exist. 2) the second challenge includes quality control on third-party products.
Overall, the most important business impact of marketplaces could be summarized in its network effect. According to Harvard Business Review, once marketplaces reach a critical inflection point, network effects kick in and growth follows an exponential trajectory. In this case, more buyers are bringing more sellers, and vice versa. It will also create a barrier to entry for competitors. Additionally, insights generated through customer behavior and transactions enables the marketplace owner to discover additional business strategies and target markets. Examples would be a discovery of vertical need in manufacturing or eduction, or horizontal need in CRM or Invoicing.
Marketplaces can have multiple monetization strategies!
Marketplaces could offer a combination of multiple monetization strategies on their platform. Examples of three common strategies include the following:
- Revenue Share: This is the most common strategy currently being used on App Store (30% to Apple) or Walmart (~15% to Walmart).
- Advertising: This strategy could easily be combined with other strategies. Amazon, Yelp, and Walmart are all utilizing this model.
- Listing Fees or Subscriptions
What is next?
In the next parts, I would love to share thoughts on advantages of marketplaces and the technologies (open source/SaaS solutions) commonly used for implementing online marketplaces.
References
* https://www.statista.com/statistics/882919/amazon-marketplace-sales-usa/
*** https://blogs.microsoft.com/blog/2019/02/05/inspired-and-powered-by-partners/
Co-founder & CEO Momentum Ex-Director of Product at Walmart Lab
4 年Very insightful and well written. I think successful marketplaces are the ones who are able to leverage technology in order to reduce cost for themselves and vendors and eventually price for customers.This is a key challenge for the marketplaces that were built on excess capacity model. Uber's type of businesses will be profitable and sustainable when they use automation and technology to reduce their variable costs.