CTO's Guide to Marketplace Platforms: Build or Buy

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Technology has fundamentally changed how brands and marketplaces collaborate. The rise of software platforms has accelerated this change and marketplaces are experiencing the impacts of accelerated digital transformation. Consumers increasingly expect a compelling assortment in line with their values. They also want fast shipping in a few days or less and competitive prices. And if their shopping experience fails to meet their expectations, then they won’t come back.

The digital transformation shift has also given rise to Direct to Consumer (DTC) ecommerce. Not convinced? Look no further than the meteoric growth of Shopify. In 2019, Shopify generated approximately $60 billion in GMV across 1 million brands in 2019. The DTC wave is here to stay, and with the right decision-making, you can provide an on-ramp for DTC brands to sell through your channel. For marketplace startups, success in ecommerce is predicated on how your assortment, margin opportunity, customer experience, and brand can benefit from the rise of DTC. DTC brands are saturating advertising channels right when they reach broad appeal, that’s an excellent time for a strong retail brand to partner up and continue growing.

At Convictional, we believe that the modern marketplace stack hinges on two very important technology decisions: your commerce (customers) platform, and your marketplace (sellers) platform. Convictional’s team spent time at Shopify (an ecommerce platform) before leaving to form Convictional (a marketplace platform). The purpose of this guide is to walk the CTO of a startup or scaleup through the build or buy decision as it relates to your marketplace stack.

What is a Marketplace Platform

A marketplace platform enables a marketplace to easily source, onboard, integrate and grow with your sellers. It could involve legacy technologies, like EDI, or modern ones, like APIs, in order to connect and partner with more sellers. The business benefit is that you can more easily accomplish all your seller facing jobs to be done as a business, without having to build it yourself. As time has gone on, Amazon pioneered building their own marketplace stack, which led startups to attempt the same. Most startups that build their own marketplace stack end up on an off the shelf marketplace platform 9-18 months later. If it’s strategic for your business, it may be necessary in order to enable sellers that aren’t already selling online. It can be a significant project and risk to undertake though if you’re in a space that is already online able.

Some of the things your marketplace platform should be able to do for you:

  • Provide easy to set up, inexpensive integration paths with classic and modern sellers
  • Give sellers a variety of ways to manage listings in your marketplace (integrated or manual), as well as manage orders and share invoices for payouts
  • Act as the sole source of truth for seller information, including both commercial and technical partnership requirements, educational and support resources
  • Integrate with your existing and future systems through an API or existing apps
  • Reduce the time burden on your technical and commercial teams focused on sellers
  • Allow you to scale your marketplace past the point of full time vendor management (usually around 100 sellers).
  • Enforce compliance service level agreements to ensure your customer expectations are upheld by sellers and problematic sellers are delisted
  • Provide reporting and insights relating to seller performance

History of Marketplace Platforms

The first generation of marketplace platforms weren’t intended for marketplaces at all. Prior to the advent of passive retail (marketplaces), most retail was active. It involved people with the role of merchant sourcing, curating and preparing products for the market. It involved carrying your own inventory of seller’s products in order to deliver the best possible customer experience. As time went on, Amazon, eBay and others pioneered a more passive approach to the marketplace. They focused on the tech enablement pieces of the problem, and let buyers and sellers reach a natural state of balanced supply and demand through sellers setting pricing.

The first generation of true marketplaces had to build all of the things we covered earlier themselves. The whole buyer and seller facing stack becomes a significant technology problem. This is why the first generation of marketplaces were viewed squarely as technology companies. While the customer’s experience is mainly defined by the sellers they’re able to work with, the provider of the marketplace is focused almost entirely on tricky technical challenges. This is still true of the giants, like eBay and Amazon, but less true of the startups.

The reason that the next generation of marketplace startups focused less on technology, and more on customer experience, is the advent of marketplace platforms. The first generation of marketplace platforms focused on helping existing offline and legacy retailers have their own dedicated way to onboard sellers to their website. It mostly resulted in a low accountability for the retailer to enable selling online, but the customer experience and seller experience tended not to be as good. Sellers preferred when those retailers bought wholesale, and the customers wanted the retailer to at least make sure the products came through on time. Because the platforms were dedicated and customized to retailers, sellers had to repeat setup with each.

The second generation of marketplace platforms, emerging in the last few years, solve for the problems that the first experienced. The focus is on seller experience, and service levels. Combined, you end up with a highly automated experience where sellers can onboard once and sell to any marketplace, and marketplaces can avoid having to rebuild their own stack. The marketplace benefits from automated compliance through seller SLAs, requiring sellers to maintain ship times and rates of product returns below thresholds the marketplace defines. This solves the integration and education problem the first generation of platforms did, and makes it easier to manage the program on an ongoing basis like none of the prior options have provided.

Marketplace Platform Responsibilities

The best marketplace platforms are responsible for all aspects of the seller experience. Typically the focus is on two important parts of the life cycle: initial setup, and ongoing service. To solve for the initial setup challenges that sellers tended to historically experience, technology is developed that allows easy connection to modern or classic systems. The goal is to provide an integrated (not manual) onboarding path for as many sellers as possible (ideally all or close to all of them, depending on the vertical). This enables the second lifecycle stage: ongoing service. The goal is to keep service levels (e.g. ship and close times) high, and negative customer experiences (e.g. fill accuracy, returns rate) low. If you can do that and sustain it, it means a virtuous reinforcement loop of good customer experiences, and more repurchases.

Some of the things that marketplace platforms are typically responsible for:

  • Providing user level support to sellers who have trouble onboarding
  • Maintaining integrations with the marketplace and all your sellers without issues
  • Escalating any integration issues for resolution within defined SLAS
  • Providing user (support) and technical (API) documentation for sellers onboarding
  • Providing recommendations for policy, pitching sellers, legal terms and more
  • Integrating into existing systems on the marketplace side to avoid duplicative effort
  • Providing easy to use onboarding paths for modern and classic sellers
  • Providing SLAs reporting for buyers and sales reporting for sellers
  • Providing a way for manual sellers to upload products and ship orders
  • Handling payouts to vendors in an automated and compliant manner

Building your own Marketplace Platform

A lot of startups raise venture capital in order to build their own marketplace stack. This often involves raising oversized ($3-8M seed rounds) amounts of money prelaunch. The challenge with this approach is twofold: it limits the kind of marketplaces that can exist to those that appeal to investors with high expectations of cash on cash returns, and it introduces significant risk if the marketplace turns out to not resonate as much with customers as was expected. So you face a situation where millions of dollars are spent before a single dollar is made. It is critical to consider whether owning your own seller facing marketplace platform is going to be strategic. There are industries where this is the case, and if so, there really isn’t another option. We still see companies doing this in industries where the advantage to existing platforms is clear.

Typically, the marketplace platform has to meet current and future needs:

  • A team has to be retained with knowledge of modern and classic seller tech
  • Another team focuses on the commercial aspects and documentation of onboarding
  • You’ll need someone to handle onboarding for around every 100 sellers
  • The team will scale linearly with the introduction of new sellers
  • The integrations and automation must remain stable through growth

Costs to Build Marketplace Platforms

Building a marketplace platform may be a necessity in your industry, or you may feel it is strategic despite being in a vertical with existing options. In either case, it’s prudent to go into a marketplace platform project with eyes wide open, in order to do right by customers and investors. The decision is up to each business, but we have seen a trend in startups trying to build marketplace platforms themselves and more often than not failing to even launch. This is an unfortunate reality of the marketplace space that we think can be prevented with off the shelf platforms like Shopify and Convictional. We exist to enable this, and we have spent years and our own millions on R&D to enable a variety of marketplace use cases. We kept our receipts and can share with you what you can expect if you endeavor to do the same in your business:

Here are some of the costs you can expect, variability depending on your industry and scale:

  • A team of software developers will be required in order to develop integrations with relevant seller platforms. Most companies we see have a team of 6-10 ($600k-1M)
  • A team of growth and ecommerce specialists with a focus on sourcing and onboarding vendors. This depends on how many sellers you have, but it generally works out to about one person in this role for every 100 sellers you have ($80k/100 sellers)
  • Additional in-house skills in supporting areas like technical writing, legal admin, product information management, copywriting and photography. This varies depending on your industry a lot and whether you have to reshoot/rewrite everything ($100k-$1M)

The real challenge facing marketplaces is that these costs often have to start being incurred as soon as you undertake to build a marketplace. When and how the actual business launches and starts to monetize tends to come later, after this $750k-$2M payroll is already in place. That can be a significant risk, and requires some meaningful reflection before fundraising (and on the part of investors funding these companies). Given a standard marketplace rake of 10-15%, you’ll have to be able to get to as much as $20M/year in GMV in order to sustain this early team.

Alternatives to Building

The obvious alternative to building a marketplace platform yourself is to partner with existing options in the market. There are generally two quite distinct segments of marketplace platforms. One is focused primarily on the needs of existing offline retailers. The main integration method is EDI, and there generally is no concept of a seller network attached. This may make sense if you’re already a publicly traded retailer with an existing seller base. For a marketplace startup, it typically ends up costing the equivalent to the payroll above, but with less control over outcome.

The second generation of marketplace platforms are partnered with modern ecommerce platforms. The cost can be lower, because of the significant existing investment in ecommerce software development. The spend goes directly to things that benefits sellers, rather than dated EDI infrastructure or your own dev team. It typically ends up costing as much as 5x less as the built in-house versions we are seeing when startups end up coming to platforms like us. If you are in this position, we could be a way for your marketplace to get to market sooner and less expensively than if you undertake to rebuild the entire stack yourself. If you’re in a vertical that might benefit from building it, we will ultimately advise you to stay the course and can provide advice as needed. Either way, the goal is to do right by customers and investors, and the marketplace stack you choose to build your business on is a defining decision in your business.

Powerful Infrastructure To Launch & Scale Your Digital Marketplace — Chat with us to learn more

Powerful Infrastructure
To Launch & Scale Your Digital Marketplace

Chat with us to learn more

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