If a marketplace isn’t performing as expected, how does a retailer diagnose and solve the problem?
Before we dive into the answer, let’s look at a few symptoms of an ailing marketplace:
- Unprofitable beyond Year 3,
- High return rates,
- High advertising and customer acquisition costs,
- Poor customer reviews, and of course,
- Stagnant GMV growth
If a retailer’s marketplace is exhibiting any of these issues -- most prominent of which is a flat or negative change in GMV -- then they have to take a step back and diagnose the root cause. A retailer needs to plumb for issues that reside either on the demand or customer side, or the supply or vendor side of their marketplace.
In this article, we first provide retail leaders with an underlying 3-variable framework to diagnose GMV problems on the demand side. Then we lay out a strategy to improve GMV across the marketplace. Finally, we discuss a counterintuitive growth metric we measure for the marketplaces in our network.
The marketplace growth equation: Growing GMV & generating demand
A growing GMV is the most important marker of a healthy marketplace. Regardless of vertical, strategy, or market, this is true across the retailers with whom we’ve worked.
But how exactly does a retailer grow GMV? Here’s the main equation for marketplace growth:
Customers x Average Order Value (AOV) x Purchase Frequency = Gross Market Value (GMV)
Whether a retailer should address customers, AOV, or purchase frequency depends on their brand and their business model.
A horizontal marketplace or aggregator like Amazon grows its GMV based on economies of scale. In contrast, B2C retailers curate their assortment for a select group of customers.
The strategy for a horizontal marketplace that peddles commodities is to attract more customers with a wide assortment, thanks to a high vendor count. Afterwards, the marketplace experiments with merchandise mixes that are optimized for cross-sells to boost AOV. On the other hand, the vertical marketplace strategy is to increase the return purchase rate for each customer and average cart value for each order.
For example, a local bike store that puts their catalog online would not want to compete with the assortment of $400 - $500 bicycles in a mass market sports store. Instead, they might target cyclists and cycling enthusiasts who are looking for the best ride for their needs. The store’s merchandising mix might mean an assortment of $1000+ models that customers can’t find in Sportchek or Dick’s Sporting Goods. This strategy also allows the shop to offer an assortment of complementary products and services, like bike tuning, maintenance, customization, and accessories to further increase AOV.
The vertical marketplace strategy optimizes for customer brand loyalty. This is the strategy of choice for most traditional B2C retailers making the leap from physical to digital. Digital customer journeys must include the same level of high touch consultation and service that customers expect from an in-store shopping experience. To pull the GMV levers of AOV and purchase frequency, retailers need to ensure it communicates its messaging just as well online as it does in a physical store. If the retailer does not communicate the digital strategy to an end customer who is used to shopping in store, it will lose a degree of dependability in their eyes.
Ensuring customer brand loyalty with vendor sourcing, enablement, & retention
There is a deep, but invisible causal thread that links vendor enablement to GMV growth. To accomplish the seamless, GMV-boosting customer experience we illustrated above, a retailer has to have an excellent relationship with its vendors.
While successful marketplaces give equal weight to the customer that drives GMV and to the vendor that services them, most retailers struggle to sustainably scale the supply side, whether they have a physical store, a digital marketplace, or an omnichannel strategy.
Problems in vendor sourcing, onboarding, and management could be due to a number of factors, such as:
- A poorly communicated digital strategy
- Poorly enforced or one-sided vendor SLAs
- Incompatible ecommerce ecosystems
Vendors who are used to fulfilling in-store orders have to fully buy into the idea of a digital marketplace. If the retailer did not do a good job selling their existing vendors on the transition from brick-and-mortar to digital, then vendors might fear the loss of customer relevance in the move and deprioritize the marketplace.
In the same vein, vendors might also hold off from allocating enough resources to fulfill the SLAs if they don’t fully believe in the marketplace as a profitable distribution channel. If this is the case, then the retailer needs to renegotiate profit margins with vendors or find a more effective way to communicate the value proposition to them.
Finally, incompatibilities between the retailer’s and its sellers’ ecommerce systems might be costing the marketplace more GMV than it realizes. Stockouts can happen if vendor inventory doesn’t update with the retailer’s systems real time. Customer orders can be lost in the manual shuffle of EDI between vendor and retailer. Unfulfilled or delivery errors cost customer satisfaction and purchase frequency, and as a result, cause customer lifetime value to plunge.
Because of these challenges, we found that negotiating and enforcing vendor service level agreements is the secret key to long-term GMV growth.
Vendor SLAs & benchmarks: How to lock in long-term GMV growth
Having a superior trade relationship aligns and incentivizes both a retailer and its vendors to deliver a world-class customer experience. A vendor service level agreement or SLA legitimizes that agreement.
In our article on Shipping Policy, we provided the SLA template below:
[Brand Name] agrees to ship orders on behalf of [Retailer Name] to customers of [Retailer Name]. When an order is placed on [Retailer Name] for [Brand Name]’s products, order information will be communicated within 24 hours to [Brand Name]’s Customer Success Manager or customer database via Convictional. [Brand Name] Agrees to ship in stock products within 24 business hours after order has been communicated. Please refer to Page X of this document for [Retailer Name]’s Shipping Policy.
There are two main pieces to a standard vendor SLA:
- Average ship time
- Average return rate
The industry standard is for sellers to ship within 24 hours upon receiving an order. Across Convictional’s platform, average vendor ship time tends to hover around 31 hours.
In general, a 20% return rate for ecommerce is considered to be a good standard across the board. This said, average return rates tend to vary wildly across industries. For example, clothing return rates hover at around 50%, while books tend to have much lower return rates.
Regularly reviewing overall vendor adherence to SLAs also helps retailers flag issues in their vendor sourcing, enablement, or retention processes. If the retailer isn’t able to attract and onboard enough new vendors to achieve its revenue goals, then it might be failing to communicate the profitability of its marketplace at the sourcing level. However if vendors are onboarding but are churning, then this might be because its SLAs are too rigorous.
Finally, if GMV is stagnant and SLA adherence is falling across the board, then it’s possible that vendors cannot fulfill the marketplace’s SLAs due to resource constraints or lack of profitability. If so, a retailer might need to rethink its vendor SLAs or renegotiate margins with vendors.
Read More: Seller SLAs
Enforcing equitable vendor SLAs are the key to successful marketplaces
Customers x AOV x Purchase Frequency = GMV
Although marketplaces take at least 2 years to fully realize return on investment, it’s possible for a marketplace to be cashflow profitable within 2 months of launch. Leveraging variables such as purchase frequency and number of customers seems to be the key to this because they affect the demand side of the equation.
In practice, however, most classic retailers launching online marketplaces have pre-existing demand. While more orders and customers are always welcome, it isn’t the root of the problem if a marketplace is stagnant.
Taking a page from phenomenally successful B2C marketplaces like Airbnb and Uber, retailers should turn their focus towards the supply side and seller enablement when faced with flat or declining GMV.
Vendor SLAs are an excellent proxy for the end customer experience, especially if the marketplace employs a dropship order fulfillment strategy. Meeting their SLAs mean vendors are fulfilling orders on time and keeping product quality consistent.
After a retailer has done the difficult job of persuading its customer to make an online purchase, it can then hand over the fulfillment to a trusted and valued partner. A positive customer experience from a deep retailer and vendor relationship, in turn, drives customer brand loyalty and jumpstarts GMV.