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What Is a Marketplace?

Historically, a marketplace is a central location that allows interested parties to buy and sell products or services from each other.

But what do marketplaces look like in the ecommerce era?

This is a key question to ask. 

As online services such as Shopify and Etsy make it easier to start ecommerce sites and online businesses and the Internet enables more consumers to make multichannel purchases, a gap opens up in the market to connect supply with demand. 

In fact, research firm iBe TSD Ltd found that B2B and B2C marketplaces are expected to grow ecommerce sales to $7.1 trillion in 2021, up from an estimated $2.01 trillion in 2018.

This article is a primer on the world of digital marketplaces and answers a handful of fundamental questions:

  • What is an online marketplace?
  • What are the different types of marketplaces?
  • What is a curation or vertical marketplace?
  • How does a marketplace scale?

Let’s get into it.

What is an online marketplace?

An online or digital marketplace is an ecommerce website that connects those parties with each other. Online marketplaces aggregate sellers and inventory into one website and facilitate the economic transaction.

According to Bill Gurley, an investor in B2C marketplaces such as Stitch Fix, GrubHub, and Zillow, marketplaces are “connective tissue” that enhance the markets they operate in. This allows them to build communities around their products and achieve network effects with little to no physical constraints on scale.

Most online marketplaces are multivendor marketplaces. Multivendor marketplaces have digital storefronts that showcase products and services from a variety of third-party sellers. In the backend, the marketplace has an integrated platform that allows them to share and manage customer and order information with their sellers.

Venture capital firm Version One points out 3 metrics that measure the success of a marketplace: GMV, take rate or margins, and liquidity.

  1. GMV stands for Gross Merchandise Volume and measures value of transactions in a marketplace in dollars minus returns. Retail sales or buyer GMV is the typical number aggregated for GMV, not cost price or seller GMV.
  2. The take rate or margin is the percentage of cost price that the retail marketplace collects. 
  3. Liquidity measures a marketplace’s SKU efficiency and indicates how well it serves its end customer with the products they’re looking for. Supplier liquidity measures the percentage of listings that lead to purchases, while customer liquidity measures the probability that a web visit will lead to a transaction.

Marketplaces tap into new pockets of buyers and sellers and grow the overall pie of participants to grow their GMV. The best marketplaces empower more people to become sellers. This leads to more participation, liquidity, GMV, and overall value on the platform.

Types of online marketplaces

There are 3 types of marketplaces, based on who participates in them. 

Peer-to-peer (P2P) marketplaces allow private individuals to buy and sell products or services with each other. Marketplaces like eBay and Uber leverage the power of communities and enable consumers to become sellers, as well. As a result, these marketplaces tend to look at overall usage as a measurement for growth. P2P marketplaces tend to encounter trust and safety issues at scale.

Business-to-consumer (B2C) marketplaces allow businesses to list products or services and sell directly to individual consumers. Marketplaces like Amazon and Mercado Libre use GMV to measure their success and charge a “take rate” for sellers to do business on them.

Some marketplaces like Airbnb start out as P2P, where individuals rent out their primary or secondary residences for extra income. However, a successful P2P marketplace can eventually become a B2C one as its traction attracts businesses to sign up for it and successful sellers to professionalize their products and services.

Business-to-business (B2B) marketplaces allow businesses to buy and sell products or services from other businesses. In B2B marketplaces like Alibaba and Faire, most transactions are in bulk, wholesale, or need to hit a threshold or minimum order quantity.

Digital Commerce 360 found that a total of 42% of purchasing managers spend more time or significantly more time in B2B marketplaces in 2020. They also found that while B2C marketplaces are expected to reach 300% growth from 2018, B2B marketplace growth is expected to reach over 400%, compared to 2018.

As Tech Crunch pointed out, however, the B2C monetization model of charging margin or take rate may not translate well into a B2B marketplace. As a result B2B marketplaces need to find creative ways to make a profit, like financing with net terms and bulk discounts.

What about curation & vertical marketplaces?

While their business models may look similar, niche or vertical marketplaces operate very differently from their aggregator counterparts. 

In an interview with the US Chamber of Commerce, the founder of a product design studio for marketplaces said, “The best niche marketplaces speak clearly and directly to their communities, and are very thoughtful and intentional in their presentation. They don't feel anything like Amazon and they don't try to compete with Amazon.”

Aggregators like Amazon and Walmart aim to serve as many people as possible and compete based on the breadth of their assortment (thus, the Amazon tagline of “The Everything Store”). In contrast, vertical marketplaces serve a specific niche or industry vertical and compete on depth and quality of assortment.

While an “everything store” like Amazon would be a customer’s first stop for commodity items like salt and toilet paper, niche marketplaces still share a place in consumers’ wallets. Internet Retailer found that 35% of consumers shop at vertical marketplaces, notably in apparel, sneakers, and home goods. 

A curated vertical marketplace is about having quality brands and products that cater to their customer, irrespective of the actual assortment size. They compete based on community and values. They also help their customers discover new brands that otherwise would not know about. This results in buyers self-selecting themselves and engaging more deeply with the community. 

For example, a retailer who specializes in home renovations might curate sellers based on the quality of their warranty programs. In contrast, a premium menswear retailer might curate sellers based on their price point and ability to ship to a specific locale.

Both types of marketplaces could have hundreds of sellers and thousands of quality products, while still retaining their curation strategy.

Supply & sellers: The underrated unlock to growing marketplaces

Whether they’re vertical marketplaces or aggregator-conglomerates like Rakuten or Amazon, marketplaces grow GMV by increasing the number of economic transactions on its platform. Economic transactions are driven by buyers and buyers are attracted to marketplaces that deliver what they want, when they want it. 

In other words, the right supply — sellers and products — attracts demand.

Anand Iyer, former Head of Product at Threadflip, advises marketplaces to put as much weight as possible behind supply, once they reach a minimum threshold of traction in demand. 

While the Internet’s network effects organically grow demand for online retail, they do not necessarily correlate to growth in supply.

Iyer says, “It’s crucial that marketplaces focus first on devising an elegant, instructive and — above all, easy — experience for suppliers,” because buyers have grown accustomed to making online purchases. 

Even if API-first online platforms and marketplace solutions have made online selling easier to do, fewer people know how to start an online store, execute an SEO or social media marketing strategy, or optimize pricing for profitability on ecommerce platforms. 

Angela Tran, general partner at the venture capital fund Version One, agrees. “The next step to scaling a marketplace is to support your power sellers — those sellers who earn a living off your marketplace.  To be successful at scale, a marketplace needs good supply.”

In Version One’s A Guide to Marketplaces, she writes, “The virtuous cycle is the holy grail for online marketplaces. In this positive feedback loop, a high number of quality suppliers attract more customers; then more customers attract more suppliers to join. This cycle continues as a self-sustaining growth engine until both supply and demand reach critical mass to be ‘winner takes all’.”

Historically, a marketplace is a central location that allows interested parties to buy and sell products or services from each other.

But what do marketplaces look like in the ecommerce era?

This is a key question to ask. 

As online services such as Shopify and Etsy make it easier to start ecommerce sites and online businesses and the Internet enables more consumers to make multichannel purchases, a gap opens up in the market to connect supply with demand. 

In fact, research firm iBe TSD Ltd found that B2B and B2C marketplaces are expected to grow ecommerce sales to $7.1 trillion in 2021, up from an estimated $2.01 trillion in 2018.

This article is a primer on the world of digital marketplaces and answers a handful of fundamental questions:

  • What is an online marketplace?
  • What are the different types of marketplaces?
  • What is a curation or vertical marketplace?
  • How does a marketplace scale?

Let’s get into it.

What is an online marketplace?

An online or digital marketplace is an ecommerce website that connects those parties with each other. Online marketplaces aggregate sellers and inventory into one website and facilitate the economic transaction.

According to Bill Gurley, an investor in B2C marketplaces such as Stitch Fix, GrubHub, and Zillow, marketplaces are “connective tissue” that enhance the markets they operate in. This allows them to build communities around their products and achieve network effects with little to no physical constraints on scale.

Most online marketplaces are multivendor marketplaces. Multivendor marketplaces have digital storefronts that showcase products and services from a variety of third-party sellers. In the backend, the marketplace has an integrated platform that allows them to share and manage customer and order information with their sellers.

Venture capital firm Version One points out 3 metrics that measure the success of a marketplace: GMV, take rate or margins, and liquidity.

  1. GMV stands for Gross Merchandise Volume and measures value of transactions in a marketplace in dollars minus returns. Retail sales or buyer GMV is the typical number aggregated for GMV, not cost price or seller GMV.
  2. The take rate or margin is the percentage of cost price that the retail marketplace collects. 
  3. Liquidity measures a marketplace’s SKU efficiency and indicates how well it serves its end customer with the products they’re looking for. Supplier liquidity measures the percentage of listings that lead to purchases, while customer liquidity measures the probability that a web visit will lead to a transaction.

Marketplaces tap into new pockets of buyers and sellers and grow the overall pie of participants to grow their GMV. The best marketplaces empower more people to become sellers. This leads to more participation, liquidity, GMV, and overall value on the platform.

Types of online marketplaces

There are 3 types of marketplaces, based on who participates in them. 

Peer-to-peer (P2P) marketplaces allow private individuals to buy and sell products or services with each other. Marketplaces like eBay and Uber leverage the power of communities and enable consumers to become sellers, as well. As a result, these marketplaces tend to look at overall usage as a measurement for growth. P2P marketplaces tend to encounter trust and safety issues at scale.

Business-to-consumer (B2C) marketplaces allow businesses to list products or services and sell directly to individual consumers. Marketplaces like Amazon and Mercado Libre use GMV to measure their success and charge a “take rate” for sellers to do business on them.

Some marketplaces like Airbnb start out as P2P, where individuals rent out their primary or secondary residences for extra income. However, a successful P2P marketplace can eventually become a B2C one as its traction attracts businesses to sign up for it and successful sellers to professionalize their products and services.

Business-to-business (B2B) marketplaces allow businesses to buy and sell products or services from other businesses. In B2B marketplaces like Alibaba and Faire, most transactions are in bulk, wholesale, or need to hit a threshold or minimum order quantity.

Digital Commerce 360 found that a total of 42% of purchasing managers spend more time or significantly more time in B2B marketplaces in 2020. They also found that while B2C marketplaces are expected to reach 300% growth from 2018, B2B marketplace growth is expected to reach over 400%, compared to 2018.

As Tech Crunch pointed out, however, the B2C monetization model of charging margin or take rate may not translate well into a B2B marketplace. As a result B2B marketplaces need to find creative ways to make a profit, like financing with net terms and bulk discounts.

What about curation & vertical marketplaces?

While their business models may look similar, niche or vertical marketplaces operate very differently from their aggregator counterparts. 

In an interview with the US Chamber of Commerce, the founder of a product design studio for marketplaces said, “The best niche marketplaces speak clearly and directly to their communities, and are very thoughtful and intentional in their presentation. They don't feel anything like Amazon and they don't try to compete with Amazon.”

Aggregators like Amazon and Walmart aim to serve as many people as possible and compete based on the breadth of their assortment (thus, the Amazon tagline of “The Everything Store”). In contrast, vertical marketplaces serve a specific niche or industry vertical and compete on depth and quality of assortment.

While an “everything store” like Amazon would be a customer’s first stop for commodity items like salt and toilet paper, niche marketplaces still share a place in consumers’ wallets. Internet Retailer found that 35% of consumers shop at vertical marketplaces, notably in apparel, sneakers, and home goods. 

A curated vertical marketplace is about having quality brands and products that cater to their customer, irrespective of the actual assortment size. They compete based on community and values. They also help their customers discover new brands that otherwise would not know about. This results in buyers self-selecting themselves and engaging more deeply with the community. 

For example, a retailer who specializes in home renovations might curate sellers based on the quality of their warranty programs. In contrast, a premium menswear retailer might curate sellers based on their price point and ability to ship to a specific locale.

Both types of marketplaces could have hundreds of sellers and thousands of quality products, while still retaining their curation strategy.

Supply & sellers: The underrated unlock to growing marketplaces

Whether they’re vertical marketplaces or aggregator-conglomerates like Rakuten or Amazon, marketplaces grow GMV by increasing the number of economic transactions on its platform. Economic transactions are driven by buyers and buyers are attracted to marketplaces that deliver what they want, when they want it. 

In other words, the right supply — sellers and products — attracts demand.

Anand Iyer, former Head of Product at Threadflip, advises marketplaces to put as much weight as possible behind supply, once they reach a minimum threshold of traction in demand. 

While the Internet’s network effects organically grow demand for online retail, they do not necessarily correlate to growth in supply.

Iyer says, “It’s crucial that marketplaces focus first on devising an elegant, instructive and — above all, easy — experience for suppliers,” because buyers have grown accustomed to making online purchases. 

Even if API-first online platforms and marketplace solutions have made online selling easier to do, fewer people know how to start an online store, execute an SEO or social media marketing strategy, or optimize pricing for profitability on ecommerce platforms. 

Angela Tran, general partner at the venture capital fund Version One, agrees. “The next step to scaling a marketplace is to support your power sellers — those sellers who earn a living off your marketplace.  To be successful at scale, a marketplace needs good supply.”

In Version One’s A Guide to Marketplaces, she writes, “The virtuous cycle is the holy grail for online marketplaces. In this positive feedback loop, a high number of quality suppliers attract more customers; then more customers attract more suppliers to join. This cycle continues as a self-sustaining growth engine until both supply and demand reach critical mass to be ‘winner takes all’.”

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