If you have an eCommerce business model in place, how can you make a move to a multi-vendor marketplace solution? Here’s our guide to eCommerce and marketplaces.
Picture the scene – you have an eCommerce website set up for your brand new business. While you’re getting a lot of buyers and making good money, it’s starting to get frustrating to manage. You have to be there 24/7 to provide customer service, warehouse costs are eating up your profits, and shoppers are demanding a more comprehensive range of products.
What do you do?
Rather than getting annoyed and quitting the startup world, you could consider moving to a marketplace startup model. With a marketplace model, you get the best of both worlds. You are responsible for a brand that shoppers love, but you’re leaving the hard work to other businesses.
Sounds great, doesn’t it? Of course, there are things you need to consider if you want to convert your business to a multi-vendor marketplace.
Here’s our guide to making the transition from an eCommerce business model to a marketplace model.
However, first things first, let’s take a look at what a marketplace model actually is…
What is a marketplace?
A marketplace is a website or app that lets buyers connect with sellers and vice versa. They pay a commission or fee to do so, which goes to the company that owns the marketplace.
Marketplaces can sell products and services to businesses and customers. Some marketplaces may even do all of the above at the same time! We’ll go into more detail about the different types of marketplaces later on in the article.
Take for example, Shyp, which connected customers to local couriers, Wash.io, where customers could get their dry cleaning picked up and Homejoy, which connected users with tradespeople. All three ultimately failed, primarily because they struggled to scale or offer a unique selling point.
As we move through this article, we’ll talk you through how to increase the odds of your multi-vendor marketplace succeeding.
What does moving from an eCommerce business to a marketplace model involve?
With an eCommerce business model, one company is selling its products on one website. With a marketplace model, multiple sellers are selling their products on one website.
This means that if you decide to make the leap to a multi-vendor marketplace solution, you will need to change the way you do business.
Marketplaces are typically seen as an easy way for startups to make money. You create a website, advertise for sellers and buyers to join you, and then take a portion of the profits. Nice and simple. Plus, you no longer have to worry about logistics, warehouses and shipping.
However, multi-vendor marketplace solutions aren’t without their challenges, and we’ll look at some of them later on in this article.
eCommerce businesses that made a move to a marketplace model
Some of the marketplaces we know and love today started as eCommerce businesses model before changing to a multi-vendor marketplace model.
When it launched in 1994, Amazon originally started as an online bookstore. When a customer placed an order, the team would pick up the phone, order the books from local distributors, and post them out. They did all the work themselves, without relying on other vendors.
Demand grew and grew, to the point that Amazon opened the site up to other businesses. Not only could third-party sellers sell their products through the site, but in an attempt to rival eBay, customers could sell their used books, CDs and DVDs through the Amazon marketplace.
Airbnb started as an ecommerce business too, albeit on a smaller scale. Joe Gebboa and Brian had some spare loft space and wanted to make money by hiring it out for overnight stays. They created their own website airbedandbreakfast.com, that customers could use to book their visit.
More and more people got on board with the idea, and it soon grew into the short-term rental marketplace that we all now know about.
Bear in mind that some startups go straight into a marketplace business model
Businesses like Etsy, Fiverr, Uber and eBay all started out as marketplaces. This typically happens because of two reasons.
Firstly, the type of marketplace means it has to rely on other buyers or sellers using it. For example, as eBay is an online auction site, it had no choice but to use the marketplace model.
Secondly, a marketplace model can be easier to grow and scale from the start. Etsy launched as its founder Robert Kalin wanted a place to sell his furniture online. Rather than launch an eCommerce site first, Kalin and his co-founders chose to open the site to other sellers.
Things to consider when moving from eCommerce to a marketplace business model
Now we know the difference between an eCommerce model and a marketplace model, as well as the advantages of moving across. So, what do you need to bear in mind when creating your brand new marketplace?
Here are some of our top tips.
1. Know where you are in the startup life cycle
We’ve talked about the startup life cycle a lot on this blog, and with good reason. It’s important to know where your startup is in the life cycle, as this may have an impact on when (and if) you decide to move to a marketplace model.
When you’re in the early stages of the startup life cycle, it’s essential to get to market as quickly as possible. This may mean launching a basic version of your site in order to get the edge over your competitors.
This is precisely what Amazon did. While Jeff Bezos could have spent time trying to create the perfect multi-vendor marketplace before launching, it’s likely this would have led to failure.
By getting Amazon up and running as an eCommerce site first, the brand grew traction and could start nurturing a cohort of loyal customers. That meant that when Amazon was finally ready to accept vendors, other businesses jumped at the opportunity.
Of course, if you are past the launch stage and are now growing, it is probably the best time to make a move to a marketplace model. Businesses like Walmart, Best Buy and Carrefour all added a marketplace to their offering when the time was right for them to do so.
2. Consider your e-business model
There are a lot of different e-business models out there when it comes to online marketplaces, and it’s vital to pick the one that is the right fit.
There are three different types of marketplaces:
- Business-to-business (B2B)
- Business-to-customer (B2C)
- Customer-to-customer (C2C)
Bear in mind that your e-business model may change over time. For example, AliExpress originally started as a B2B selling marketplace, but eventually expanded to B2C and C2C.
You will also need to decide whether you will be a vertical or horizontal marketplace. Horizontal marketplaces are more generalist (for example, Amazon, AliBaba and Taobao), while vertical marketplaces are more niche (for example, Etsy, Uni.Diamonds and Airbnb).
It’s typically easier to start as a vertical marketplace and then broaden the products and services you sell to become a horizontal marketplace. Bear in mind that the wider your offering, the more competition you will have.
3. Look at how you will build trust between buyers and sellers
Whichever type of marketplace business model you choose, it’s important to make sure both buyers and sellers are happy and confident in making transactions. You will also need to ensure that the products and services sold are of the highest quality.
Although you are not responsible for the actions of buyers and sellers, any bad customer service or publicity will still negatively impact you as the overall business provider.
It is up to you how much control you have over the marketplace. There are three different models you can consider:
- A fully managed marketplace. This is when you are involved with the transaction from beginning to end
- A lightly managed marketplace. This is when you carry out background checks on sellers, for example, asking for identification or asking them to complete a test to prove they are competent
- An unmanaged marketplace. This is when you have more of a hands-off approach to managing the marketplace. Vendors typically manage the marketplace themselves, relying on customer reviews and ratings to generate trust
4. Understand how you will make your money
With a multi-vendor marketplace model, you need to determine how you will make your money. There are several options available to you, and you may even decide to use a combination of methods:
- You can take a commission for every transaction. This can be either a flat fee or a percentage of the cost
- You can charge the seller or buyer a monthly or annual fee for using your marketplace
- As an option you can charge sellers a fee for every lead you send their way
- You can set a listing fee for each product you sell
- You can charge for premium listings, sponsored products or better visibility
You may provide a ‘freemium’ version of your marketplace with paid-for features that offer extra advantages. Take for example, freelance portal Upwork. While sellers get a free number of credits a month to bid on jobs, they can pay a monthly fee which lets them see what other sellers are bidding for work.
Ultimately you need to generate profit while keeping your buyers and sellers happy. We recommend being as flexible as possible and trying different methods until you hit that sweet spot.
5. Consider how will you manage the competition
While marketplaces can be lucrative, they can be extremely competitive, especially if you want to compete with multi-vendor platforms like Taobao, Amazon or eBay.
With marketplaces, you’re not only competing with similar marketplaces, but other sellers on your platform too. If you’ve created a marketplace to help sell your own products and services, you’re going to be up against rivals on your very own platform.
Here’s how you can manage the competition on your new multi-vendor marketplace platform
- Do your market research first. Who are your competitors, what are they selling and what do they charge for using their platform?
- Speak to potential users of your platform. What can you offer that will entice them to join you?
- Consider a more niche marketplace rather than something generalist – a vertical rather than a horizontal one. This will result in less competition and mean you can focus your energies on one specific industry
In summary: Making the move from an eCommerce business model shouldn’t be challenging
94% of B2B buyers have bought products and services from marketplaces. This means that if you haven’t made a move to a marketplace model, you could potentially be missing out!
It can be tricky knowing if an eCommerce business model or marketplace model is the correct option for your startup. Let’s review the key things to think about:
- Consider where you are in the startup lifestyle cycle and how it may impact on your transition;
- Research which e-business model is suitable for your needs;
- Decide how you will manage your marketplace and your customers;
- Review which method you will use to make a profit;
- Carry out thorough competitor research.
Remember, if you need help with your new business, whether it is an eCommerce or marketplace site, we’re here to help…
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