Amazon was only born in 1994, eBay in 1995 and Alibaba in 1999 and yet today 50% of all European commerce sales are through marketplaces. That is set to reach around two-thirds of sales globally1 in the next five years making marketplaces the fastest growing retail channel, creating value and new unicorns to join the existing well-known players in the sector. All business leaders need to take heed: joining a marketplace, setting one up or considering how to compete with marketplaces is the choice facing many who want to grow share.

Visits to marketplace sites are staggering, with Amazon dominating in key European markets; average monthly visits to their site over the last year were 373m in Germany, 330m in the UK, and 148m in France2.

There is a proliferation of business models from a pure marketplace to pureplay multi-brand retail, so it's important to define what a marketplace is.

In its purest form, a marketplace simply facilitates buyer-seller transactions, acting as a place to 'meet' and transact (eg eBay). Mixed marketplaces augment this model by holding inventory as well as selling their own label brands (eg Amazon), whilst multi-brand retailers may run a marketplace separately from their own online proposition (eg ASOS_Marketplace).

Revenue streams are generated from commissions and product listing fees, seller and customer subscriptions, joining fees and payment terms, with additional revenue from services such as fulfilment (warehousing, stock management, packaging), on-site advertising, customer services, returns / reverse logistics management, data management and reporting and more.

More retailers leverage marketplaces

In recent years we have also seen a significant increase in marketplaces run by incumbent retailers; not only ASOS but also the likes of Douglas, Decathlon, B&Q and Superdrug, with Boots due to be launching their marketplace this Spring3.

Why are we seeing this? Marketplaces appeal to a broad range of consumers and offer retailers an effective and complementary route to market, supporting customer acquisition and retention, for five reasons:

  1. Financial efficiency. A retailer can launch a marketplace without any incremental stockholding, and there are usually further working capital benefits in payment terms to sellers.
  2. Test & learn. Trialling a new brand, category or product on a marketplace enables a retailer to test quickly whether it resonates with consumers before deciding whether it should be an area of focus.
  3. Category authority. Marketplaces work particularly well for single-category retailers that are looking to enhance the depth of their customer proposition. This applies especially to the long tail of product which is likely to generate incremental sales.
  4. Rapid scalability. B&Q launched over 100,000 products on their marketplace in less than six months4, demonstrating that marketplaces are attractive for retailers looking to scale their product range quickly. Free from constraints of existing OTB (Open-to-Buy) cycles, and buying processes, marketplaces allow retailers to scale at speed, with lower requirements for internal production.
  5. Reduce Complexity. By handing back many elements to marketplace sellers (e.g. photography, copy, production and fulfilment), retailers can benefit from incremental margin in a simple way.

All of these elements are underpinned by new technology that is now available to retailers that can integrate with their existing online selling platforms.

What should retailers consider?

However, it is not as simple as "plug and play". Retail leaders must consider the strategic objectives of a marketplaces and how they will manage the customer experience. We have identified eight strategic levers that retailers need to build a marketplace and establish a virtuous flywheel for buyers and sellers:

  1. Positioning. Determine key categories, size of range and price positioning before starting to execute.
  2. Acquisition & Retention. As with launching any ecommerce venture, consider costs of customer acquisition and the target ROI to build to profitability.
  3. Site Optimisation. Optimise the site itself to support SEO, conversion and average transaction value. It is also important that customers understand that they are buying from a marketplace and not directly, especially if this impacts their experience for delivery or returns.
  4. International. Marketplaces can be used very effectively for international expansion, however, there are many considerations such as fulfilment, pricing, customs, payments and tax to be worked through.
  5. Legal & Compliance. Marketplace operators must have watertight agreements with sellers and customers, detailing aspects such as product liability. Ignoring this can be extremely costly in the long run. Ensure sellers comply with terms e.g., to avoid off-market transactions.
  6. Fulfilment. Managing the customer experience for last-mile delivery is paramount, with consideration taken around charges for transactions involving more than one seller (which can sometimes lead to customers paying multiple times for delivery in one purchase).
  7. Seller Selection & Operations. New processes will be required when operating a marketplace for everything from prioritising new sellers to SLAs to dispute resolution.
  8. Seller Services. Modern marketplaces often make a suite of services available to sellers (usually at extra charge), including retail media / advertising, data and account management support.

All these factors should be underpinned by both the technical platform and the commercial structure, i.e. how the marketplace is actually going to make money. This could be via traditional levers such as commission, listing fees or subscriptions, among others, and/or through monetising some of the services listed above.

There are many strategic and operational points to consider and there is no one-size-fits-all when it comes to setting up or running marketplaces: But one thing is true for all brands and retailers – you need to consider the impact of the marketplace model to avoid being trampled by the growing herd of unicorns.

Footnotes

1. European Marketplaces 2022, RetailX

2. Similarweb, Feb 22-Jan 23 average monthly site visits

3. Boots launches brand new online marketplace (boots-uk.com)

4. B&Q's marketplace accounted for 8% of the DIY retailer's online sales in August, says parent company Kingfisher - Internet Retailing

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.