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15.07.2020
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Everything you wanted to know about marketplaces: part 2. Why CS-Cart Multi-Vendor is the best solution for marketplaces
07.08.2020

Everything you wanted to know about marketplaces: part 1. What is a marketplace and how can you make money on it

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Marketplaces are booming. According to forecasts by Juniper Research, the total annual revenue of the marketplaces sphere will double by 2022 and grow to $ 40.1 billion*. The main reason that marketplaces are developing so rapidly is that owners do not need to have the product itself (or service) to start up. For example, Amazon does not have its own products, but the company is considered the largest marketplace in the world by capitalization. Airbnb does not have its own hotels or apartments for rent, but it is one of the most popular companies in the niche of short-term rental housing.

It looks promising, right? If you are thinking about launching your own marketplace or want to transfer your existing business to this model, our article will come in handy. In it, we collected all our knowledge about marketplaces: we will tell you about the main features of this method of e-commerce; put on the shelves all possible classifications of marketplaces; show how you can make money and organize sellers; and in the end we will discuss whether it is so easy to become a competitor to Amazon and Aliexpress.

What is a marketplace

Marketplace is a service that helps sellers and potential buyers find each other online and interact with each other. Marketplace resembles a shopping center: different sellers are on the same square, buyers can shop at any stores without leaving the building. International companies Amazon, eBay, AliExpress, Airbnb, Uber are marketplaces. The largest marketplaces in Russia are Ozon, Avito, Lamoda, Goods. The marketplace model is suitable for many industries (you can read about this below).

Marketplace is an intermediary between the buyer and seller. Its goal is to ensure effective interaction between them, to make the search for goods or services convenient for users, and to increase sales of sellers. Marketplace is also a guarantee of transaction security: the buyer is sure that he will receive his goods, and the seller that he will receive money for the order.

This form of e-commerce is beneficial for all participants:

1. For the buyer.

It is convenient for him that he can quickly choose the most advantageous offer of a product or service. No need to go to different online stores and compare prices — a wide range of products are already collected on one site. You can choose products from different suppliers, but pay for delivery only once. The supplier can be selected based on the rating and reviews of real customers, which gives confidence in the safety of the purchase.

2. For the seller.

Sellers save on attracting traffic, maintaining the online store and employees.

3. For the marketplace.

The trading platform makes money: the more sellers came to it, the more buyers bought the product, the greater the profit of the marketplace owner.

Types of marketplaces

There are at least two more parties in any marketplace, except its owner: the buyer and seller. The scope and specifics of this interaction may vary depending on the relationship of the parties, the product sold and the status of the participants.

By type of participants

One of three basic models is at the heart of each marketplace:

1. C2C. Both sides are individuals who interact with each other on equal terms. They are united by common interests, they cooperate on mutually beneficial conditions and can easily change roles: today you are a buyer, and tomorrow — a seller. Examples: BlaBlaCar, Etsy.

2. B2C. Buyers are individuals, and companies act as sellers. Examples: AliExpress, Amazon, Ozon, Wildberries, SDEK.MARKET, Goods.

Sometimes B2C and C2C models are mixed in one place. For example, Airbnb presents rental offers not only from individuals, but also from individual entrepreneurs or agencies. Some of them started working with the marketplace as a private person, but then decided to turn additional earnings into a full-fledged business.

3. B2B. Such a marketplace connects entrepreneurs on one trading platform and helps them find successful solutions for their business. For example, there are buyer companies that are looking for wholesale suppliers or large contractors, and seller companies that need new markets. Examples: Alibaba, BookingB2B, Allbiz. There are also many niche B2B-marketplaces focused on a narrow segment of the market, such as trade in industrial equipment, seafood, paint and varnish products, etc.

By product type

Marketplaces can be divided into several types depending on what type of product they provide:

  1. Goods. Such a marketplace looks like a set of online stores combined on one platform. The buyer can shop at different sellers. Examples: AliExpress, Amazon, Ozon, Wildberries, SDEK.MARKET, Goods.
  2. Services Companies that provide the same service are gathered on one site. Examples: taxi services (Uber, Getti) or hotel reservations (Booking, Trivago).
  3. Investments. These are platforms where users receive collective financing for creative, scientific, social and entrepreneurial projects and give rewards to the most active investors. Examples: Kickstarter and Indiegogo. 
  4. Information. The main function of such a platform is to give users important information for them. Examples: TripAdvisor, HeadHunter, freelancer exchanges (Freelansim, Upwork and others).

By appointment

Three types of marketplaces are distinguished depending on the variety of the presented categories of goods:

1. Niche.

At such sites, there are products of the same segment but from different sellers. For example, TrueFacet sells watches and jewelry. Each product has an individual number confirming its authenticity.

Truefacet

An example of a Russian niche marketplace is the VseInstrumenty.ru, which implements only tools.

VseInstrumenty.ru2. Industry.

Such a platform places different goods or services that have a common global characteristic. For example, Etsy. This marketplace sells different products, but they are united by the fact that all of them are hand-made. There you can not only sell and buy, but also communicate and read useful articles.

Etsy

Another example is the exchange Kwork. It collects the services of different sellers (programmers, advertisers, designers, etc.), but all of them are united by freelance.

Kwork3. Multi-category.

Goods from various categories are sold at such marketplaces: from food to electronics. The examples: Amazon, Aliexpress, Beru, Wildberries, Ozon, SDEK.MARKET and many others. 

Amazon

Work with sellers

Another of the parameters by which marketplaces differ from each other is the type of relationship with sellers. The simplicity of scaling a business, the ability to set its own rules and the degree of responsibility to customers depends on it. 

1. Marketplace provides a storefront and fulfillment.

What does it mean? The marketplace has its own warehouse where the seller delivers the goods. Marketplace stores goods in this warehouse, forms orders, packs, delivers — does everything on its own behalf. This is called fulfillment — when the marketplace is engaged in full support of the goods from the order to the transfer to buyer.

This is how russian marketplace Ozon works according to the FBO (Fulfillment by Ozon) scheme.

2. Marketplace provides a storefront and arranges delivery.

The seller stores the goods in his own warehouse. After receiving the order, it prepares it for shipment, packs the goods and transfers it to the sorting center of the marketplace. Delivery on the marketplace on its own behalf.

This is how Goods, SDEK.MARKET and Ozon works according to the FBS (Fulfillment by Seller) scheme.

3. Combination of work schemes.

Let’s analyze this model using russian marketplace Ozon as an example.

Ozon has three options for working with sellers: the already mentioned FBO (Fulfillment by Ozon) and FBS (Fulfillment by Seller), as well as a combined version of FBS + FBO. This means that some small goods that the seller does not want to get involved with can be sent to Ozon’s warehouse. Something more expensive and bulky — leave in the seller’s warehouse and trade on FBS. Such a combination is beneficial to the seller: it allows optimizing the place in the warehouse, since part of the goods is in the marketplace warehouse. And beneficial to the marketplace: you can flexibly manage stocks in your warehouse and not clutter up those goods that are more convenient to send immediately from the seller’s warehouse.

4. The platform provides only storefront.

In this case, marketplaces do not have their own warehouse and delivery service. Orders are received by the seller, who sends the goods from his warehouse and on his own behalf. He can do this on his own or through delivery services connected to the marketplace (Boxberry, UPS, FedEx etc.). Marketplaces act as arbiters in conflicts between the seller and the buyer, all responsibility for defective goods or delivery lies with the seller.

This is how, for example, Aliexpress works.

5. The platform is an aggregator.

Marketplace only collects offers from sellers on the storefront. The buyer compares them, clicks on the interested offer. Then he either goes to the seller’s website, where he makes a purchase, or receives the seller’s contact details and communicates with him personally. Such sites can grow rapidly, adding more new members, but they do not have the ability to control the activities of each seller or freelancer.

This is how C2C-platforms and commodity aggregators work.

How to make money: monetization models

To create a sustainable and successful marketplace, you need to find a business model that will make a profit. The owner of the marketplace has different options for monetization. 

1. Commission

The most popular business model for modern marketplaces is to charge a commission on each order. The buyer pays for the order at the marketplace, and the site takes from this cost either a fixed fee or a percentage. Such a scheme is convenient for both owners of the marketplace and sellers. The seller pays the service only at the moment when it is guaranteed to make a profit, and the marketplace controls all payments that pass through the platform. 

This model is used by most marketplaces in the market. Among them: Airbnb, eBay, Fiverr, Etsy, TaskRabbit and Uber.

However, there are conditions in which this monetization model will be difficult to implement:

  1. If complex schemes of mutual settlements with sellers are used. Especially if they are conducted in third-party services (for example, through QuickBooks). Then the commission deduction does not occur immediately when paying for the order, but later through a third-party service (manually or automatically). 
  2. If orders are paid not online, but upon receipt or at pickup. 
  3. If payment occurs on accounts through a bank. This is typical for B2B-marketplaces and for some B2C.

Under these conditions, it is not clear how the marketplace will eventually receive money from the seller for paying for the transaction outside the site. Have to choose a different monetization model.

2. Subscription fee

This model means that all or some users regularly pay a fixed amount for access to the marketplace. Unlike the commission model, the monthly fee is suitable for those who sell luxury goods or services. The monthly fee will be beneficial for such buyers who regularly use the same marketplace.

The example of such a model is Traderb2b. The subscription is paid for both buyers and sellers. Organization of bidding is similar to a tender. The buyer places a request for the purchase of goods, and sellers within 8 hours inform how much they are willing to sell it. The buyer chooses the best deal.  

Traderb2b

Among C2C-marketplaces, such an example is the exchange service Home Exchange home, where the user gets advanced opportunities for finding housing for a fee.

In the B2C-sphere, the monthly fee is used by the staff search site hh.ru, where employers pay to gain access to job seekers.

hh.ru

The monthly fee, as a model of monetization of the marketplace, has a problem: sellers will not pay for placement on a marketplace where there are no visitors, and they will not come for purchases in a marketplace where there are few sellers. There is a way to overcome this vicious circle. When launching the marketplace, you can offer discounts to the first participants or completely cancel the subscription fee. It will be possible to enter it later, when the marketplace will gather a sufficient base of sellers. 

For example, the Russian B2B-service, Sdelki.ru, first allowed free placement of goods. Sellers paid only when they wanted to raise their ad in search results. When the service became popular, its owners launched several tariffs with a monthly subscription fee.

3. Payment for placement

This is a payment from sellers for the publication of new positions. For example, a seller may place ten products on your site for free. For an additional fee, he will be able to add a few more and expand the range, as well as increase the position of the store or a specific product in the search results.

When the seller does not need your marketplace all the time, he is more likely to choose payment for placement, rather than a monthly fee. He will sell certain goods and leave without spending extra money. Therefore, this model is most often used by bulletin boards. For example, on russian site Avito, paid ads are added to a separate block marked VIP or placed at the top of the feed.

The first problem is payment for placement — it does not guarantee the seller that he will be able to sell his goods. This means that the seller wants to be placed on your marketplace, the size of this payment cannot be too high. The second problem — the model of payment for placement requires a large flow of new ads. Otherwise, you simply will not be able to recoup the costs of the marketplace.

4. Payment for lead

Marketplace can also make money on lead generation, that means that sellers will pay the site owner for each new client. The lead payment model only works when the lead cost is high. Therefore, it is not common on C2C-marketplaces. Most often, such a model is used in B2C or B2B-markets, where each new sale builds long-term relationships with the buyer. Using this model (as in the case of the commission), it is necessary to think over control options so that the supplier and the buyer do not begin to make transactions bypassing the platform.

This is how Thumbtack implemented this model — it’s a B2C service that offers all kinds of professional services, from teachers of a foreign language to locksmiths. In the beginning, when the flow of new customers was active, the service made good money on lead generation. But then the contractors established relationships with customers outside the platform and began to use it less often. Thumbtack is currently developing tools to control its members: billing and payment only through the service, hiding customer contact information, etc. Most likely, in order to derive great benefits from the transactions that the marketplace helps to complete, its owners will switch to a commission monetization model.

5. Frimium

Frimium means that there is a free basic tariff for marketplace users, but after the seller finds a buyer, you will offer them additional functions for a fee (VIP-status, premium service, free delivery, insurance, etc.). 

The problem is that these paid features should be useful to most users. If only 1% of users are interested in a premium offer, and everyone else uses the site for free, this will not be enough for a stable profit.

Here’s how the Peerby marketplace works. This is a C2C-platform where people can borrow things from each other. The basic tariff is free for all platform users. To monetize the business, the marketplace offers users additional services:

  1. Insurance. The owner of the thing may demand that the client pay an insurance fee that guarantees the replacement of the thing if it is damaged or stolen;
  2. Delivery. In default, the client had to take the thing from the owner himself. Having paid, he can order delivery to the door.

It can be difficult to think of additional services or a premium service that would be of interest to a wide audience. Therefore, freemium is most often used as an additional source of income for the marketplace.

6. Hybrid model

Sometimes it is useful to use several business models on one site. For example, to take a commission for the sale of goods, and provide VIP-status with additional services for a monthly fee. For example, Amazon has Amazon Prime for customers. By paying a monthly fee, you get free delivery in the USA for all products participating in this program. Etsy also works on a hybrid model: sellers pay a commission on sales and for posting ads. This is beneficial because the marketplace earns income from both popular and not very popular products.

Which model is better to choose

As our experience shows, the best option for most marketplaces is the commission monetization model. You can flexibly manage your business and easily scale it by charging a fee for each order. If payment for orders occurs outside the trading platform and it is impossible to calculate, test alternative business models, and you will definitely find the right one. Over time, when the marketplace expands, it is best to combine several sources of income. Remember that the marketplace, like most sites, can earn more from advertising and selling traffic.

Why is the marketplace not for beginners

You should always remember that marketplace is primarily a service. For sellers, this is a service to attract buyers. For buyers, it’s a convenient search for the best deals. There is an extremely great risk of wasting money and not recouping the invested costs if the owner of the marketplace does not know:

  • how to make this service convenient for participants, 
  • how to attract sellers and buyers, 
  • due to which it will earn.

Before starting to develop a marketplace, these questions must be clearly answered.

Another difficulty is if you want a marketplace “like Amazon or Aliexpress”. It will be difficult for even an experienced businessman to compete with such large market players without investment. These giants firmly hold their market segment, occupy the top search results and squeeze weaker players through a huge assortment, free delivery and user reach. Instead of competing unsuccessfully with such giant retailers, you can focus on a narrow niche: for example, manufacturers of industrial machine tools, auto parts, etc.

If you are still determined to launch a large multi-category marketplace, look at the example of the Beru marketplace from Russia. It was launched in 2018 as a joint project of Sberbank and Yandex. According to the Kommersant, 30 billion rubles were allocated for the development of Beru. Such investments should bring the marketplace to the top 3 along with Ozon and Wildberries. Now these prospects do not seem transcendental: in two years, Beru has grown at an impressive pace, which would have required other marketplaces for many years.

With this example, we want to inspire you: if you have developed the right marketing strategy, if you are ready to invest in the development of the project both financially and in time, then you can try to move Amazon off the pedestal. The path will not be easy, but anything is possible. If you are not sure that you can competently conduct preliminary analytics or draw up a promotion strategy for the marketplace, contact Cart-Power.

We have been developing marketplaces on the CS-Cart platform for 9 years. Our largest projects:

Want to launch a marketplace? Leave a request, we will call you back, clarify the details of the project and propose a suitable solution.

In the second part of the article “Everything that you wanted to know about marketplaces”, we will talk about the possibilities and limitations of CS-Cart Multi-Vendor and demonstrate by examples that this is the most convenient platform for developing a marketplace. 


* source McFadyen Digital

 

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