Creating an E-Commerce Marketplace: a Good or a Bad Idea?

In recent months, creating e-commerce marketplaces has become something of a trend. Many e-commerce sites seem quite unhesitant in changing their approach to their business and offering the products of other sellers alongside their own. But if we look a little closer, a few factors exist that easily explain this situation.

First of all: Amazon does it. Yes, this alone is enough to start a trend. How many times have you heard people say that “if Amazon does it, there must be a good reason?” Indeed, many e-traders, small and large, copy that giant with some success.

Secondly, there is the simple race for scale – the principle that the more products your site contains, the more chance it has to make a profit for all who trade there. Amazon and Cdiscount have shown the principle to be good – other sites are still seeing if they too can replicate it.

Certainly, the possibility of expanding your product range without having to make huge investments in stock makes the idea of a marketplace seem attractive.

But before we get too carried away, let’s rewind a little!

What is a marketplace?

An e-commerce marketplace is simply an e-commerce site that lets several different sellers offer their products to online customers.

On Amazon, for example, not all the products on offer are sold by Amazon itself: some are sold by specialist clothing, DIY, entertainment and other retailers, who use the Amazon site but send items that they sell directly to the customer themselves. Amazon gets a commission for each thing these traders sell.

(In fact, Amazon now also offers traders the option that it takes care of delivery for them – but that’s another story.)

Sales_process

In a ‘classic’ e-commerce site, it is just you, the site’s owner, who sells products to your clients. But in a marketplace, many other sellers will conduct trade with the help of your platform.

The great advantage for them is the visibility you offer them – you put them in touch with their customers. Think of it as a kind of ‘shopping mall 2.0’.

And marketplaces don’t just let businesses sell to consumers. They can also let consumers sell to each other (‘C2C’, or ‘consumer to consumer’), and businesses sell to other businesses (‘B2B’).

So, are they a good idea?

Marketplaces can certainly be a great way to quickly expand your product range without the need to invest in more stock. This alone has sent many e-traders down the marketplace route – after all, stock is expensive and increases your working capital requirement (WCR).

A marketplace means other people pay for the stock, so you don’t have to dip into your cash reserves.

More products on offer from more sellers also means more content on your site, in terms of pictures and product descriptions, and this of course brings more traffic. More traffic in turn brings more buyers and sellers, creating a virtuous circle.

(Naturally, you must ensure that you trust your sellers to create accurate content.)

Of course, the tastiest part of the marketplace equation for e-traders is commission. Instead of going to all the work of sending out products, they can sit back and watch a percentage of the sale price roll in for each transaction made by the sellers they host.

On top of all this, the barriers to entry into the marketplace business have lately fallen dramatically. Off-the-shelf plugins like Magento, Prestashop, and Woocomerce make developing your e-commerce site into a marketplace much less costly than before, while complete solutions like Izberg Marketplace, CloudCommerce Factory (formerly Marketplace Factory), and Wizaplace have made starting from scratch more accessible.

OK – but what are the downsides?

In spite of all the attractions, opening a marketplace does naturally present some challenges.

The first is the learning curve that e-traders must face in understanding the change of business model. The job of a traditional online seller is to source the best goods at the lowest price and then to send them out to customers as and cheaply quickly as possible.

Becoming a marketplace manager certainly takes away some of that legwork, but it brings in new challenges: you must find reliable sellers, and then you must evaluate, manage, and motivate them.

Then there is the challenge of finding a cost-efficient way to keep traffic flowing into your site – and if this is already important in regular e-commerce, it becomes crucial for marketplaces. Why? Let’s look at a little simple math.

Market_Sales

First, the ‘classical’ e-commerce site. It costs you €1 to bring each visitor to your site. For every 100 visitors, one become a customer, and of those the average spend is €200 – of which half is profit. To make this €100 you have spent the same amount on customer acquisition – in other words, you have broken even.

(Of course, these numbers are just examples)


If we run the same numbers for a marketplace, something discouraging happens: from your €200 sale, which cost you €100 to acquire, you make a commission of 15% – €30. Hey presto, you are €70 out of pocket.

This demonstration is, of course, simplistic – but the problem is real. To make a profit, a marketplace needs much higher volumes of traffic than does a ‘classical’ e-commerce site. Accordingly, your traffic acquisition strategy needs to be extremely solid – putting all your bets on SEO is probably not a smart move.

The final important problem is the technical one. Though the minimum technical requirements for setting up a marketplace have fallen dramatically, we’re still at an early point of the journey of developing platforms for marketplaces.

A such, any new marketplace will require a healthy technical budget if it is to keep up with its competitors in the years to come – indeed, for most, remaining competitive will mean continual innovation in the services and features they offer.

What’s the verdict? Should we create a marketplace?

Setting up a marketplace represents a very interesting opportunity for e-traders – but it’s not a silver bullet. Anyone who thinks that marketplaces are a magic way to grow their profits while cutting their workload definitely needs to take a reality check.

Building a profitable marketplace requires an investment of time and money, and will fundamentally change your business model. But if you’re prepared to put in the effort, then its a project that can, indeed, reap dividends.

(And, if this sounds like you, we suggest you take a look at this article, which asks Why Most Online Marketplaces Fail to Build a User Base and Never Turn Profitable, as well as this list of special KPIs for marketplaces.

And what about you, are you planning to create a marketplace?

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