In a previous article, we looked at the different business models that startups can adopt. This time, we would like to concentrate on Different Types of Marketplaces in the digital world including horizontal marketplaces and vertical marketplaces.
One of the options available to you is a marketplace.
The definition of a marketplace business model: A marketplace business model allows buyers to connect with sellers (and vice versa), charging a fee for doing so.
Did you know that marketplace-based companies are the largest companies in the world? For example, the Chinese marketplace Taobao sold a staggering $538 billion of merchandise in 2019!
If you want to go down the marketplace route for your new startup, there are a lot of different options to consider.
In this article, we will look at the different types of marketplaces and how they work.
Table of contents
- The three different types of digital marketplaces
- Vertical vs horizontal digital marketplaces
- Managed vs unmanaged marketplaces
- How do marketplaces make money?
- In conclusion: Challenges for new marketplaces
- Frequently Asked Questions (FAQ)
The three different types of digital marketplaces
There are three key types of the marketplace – B2C, B2B, and C2C.
While some of the existing marketplaces neatly fit into one of the three definitions, others aren’t so clear.
For example, you could argue that eBay technically falls into all three categories!
Business-to-customer (B2C) marketplace
A B2C marketplace allows businesses to sell their products to customers.
This is one of the most popular marketplace models, with Amazon and Alibaba examples of the most well-known. Websites like Booking.com and apps like Google Play are also B2C types of marketplaces too! Check how to create a custom marketplace app like Walmart and how can AI power up your custom marketplace app.
Business-to-Business (B2B) marketplace
A B2B marketplace allows businesses to sell their products to other businesses, usually in bulk or at wholesale rates.
Many B2C digital marketplaces also fall into the B2B category.
A B2B marketplace can be of benefit to smaller businesses that may not have their own eCommerce website. Alternatively, they may want to use a B2B marketplace to sell to companies that may have not otherwise heard of them.
Customer-to-customer (C2C) marketplace
Sometimes known as a peer-to-peer (P2P) marketplace, a C2C marketplace connects private individuals together so they can share services and products.
Freelancer platforms like Fiverr and Upwork are good examples of C2C types of digital marketplaces, where people promote services that other people can buy. Airbnb, Depop, and Uber are also examples of current C2C types of marketplaces.
C2C marketplaces are becoming more and more popular, especially with the rise of the gig economy. In China, 41% of all online retail sales are now carried out through C2C marketplaces.
The interesting thing about C2C marketplaces is the role of people who use their switches. For example on Fiverr, someone may sell their services as a graphic designer, but then buy services from a copywriter or web developer.
Vertical vs horizontal digital marketplaces
As well as being classified as B2C, B2B or C2C, marketplaces can be identified as ‘vertical’ or ‘horizontal’.
Vertical marketplaces focus on a particular niche and sell specific products. For example, the most known vertical marketplace for us is Etsy, as it focuses on selling handmade goods.
Horizontal marketplaces sell a more comprehensive range of products. For example, if you shop using a marketplace like Amazon, you can buy clothes, office supplies, and food in one transaction.
Horizontal marketplaces have a more extensive customer base, while vertical marketplaces have a smaller but arguably more loyal customer base.
Hope it is clear now the difference between horizontal & vertical types of digital marketplaces. Let’s move forward.
Managed vs unmanaged marketplaces
Another way you can define a marketplace is how tightly managed it is.
Fully managed marketplaces
With fully managed marketplaces, the marketplace carries out the transaction from beginning to end. This ensures high-quality service and an easy sale for the business making the transaction.
For example, a real estate marketplace would generally be regarded as a fully managed marketplace.
Lightly managed marketplaces
In these marketplaces, there are some background checks made on sellers. This ensures that buyers can trust sellers and that sellers are who they say they are.
For example, Uber carries out a background check on drivers to make sure they do not have any criminal convictions and that they have a valid driving license.
Unmanaged marketplaces are when the marketplace owners take more of a step back from managing the site.
Rather than user verification checks, trust is generated through reviews and ratings. A lot of C2C marketplaces are run this way.
As a rule of thumb, the more managed the marketplace, the higher the fees charged.
There’s a growing number of marketplaces that focus on matching supply and demand instead of allowing the user to browse all supplies. It’s not quite a fully managed marketplace though like Upwork, Toptal, Gigster, Growth Collective, etc.
How do marketplaces make money?
Regardless of whether they are B2C, B2B, or C2C, marketplaces can make money in a variety of ways, including:
- Taking a commission for every transaction;
- Charging the seller a monthly or annual fee for using the marketplace (some marketplaces may charge the buyer too);
- The startup can charge a listing fee for each product;
- Charging for premium listings (for example, paying for better visibility in searches or sponsored profiles).
In conclusion: Challenges for new marketplaces
Building a new digital marketplace can be challenging, especially because there are so many large competitors out there. However, with a bit of planning, any size marketplace can be a successful one.
Here are some of our top tips.
- Know your target audience and the challenges they have. This will help you build a marketplace that they will want to use;
- Have safety at the heart of your marketplace. Buyers want to know they are purchasing from someone reliable, and sellers want to know that they will get paid. Putting measures in place to build trust at both ends will encourage people to sign up;
- Don’t be too broad to start off with. By starting small, you can test the waters and scale up later.
Frequently Asked Questions (FAQ)
A marketplace business model facilitates the connection between buyers and sellers, charging a fee for this service.
Yes, for instance, Taobao, a Chinese marketplace, achieved $538 billion in merchandise sales in 2019.
The three types are B2C (Business-to-Customer), B2B (Business-to-Business), and C2C (Customer-to-Customer).
Yes, some marketplaces like eBay can technically fall into all three categories (B2C, B2B, C2C).
In a B2C marketplace, businesses sell their products directly to customers. Examples include Amazon, Alibaba, Booking.com, and Google Play.
B2B marketplaces enable businesses to sell products to other businesses, typically in bulk or at wholesale rates.
C2C (Customer-to-Customer) or P2P (Peer-to-Peer) marketplaces connect private individuals to share services and products. Examples include Fiverr, Upwork, Airbnb, Depop, and Uber.
Vertical marketplaces focus on a niche and specific products (e.g., Etsy), while horizontal marketplaces offer a broader range of products (e.g., Amazon).
Marketplaces can be fully managed (e.g., real estate marketplaces), lightly managed (e.g., Uber with background checks), or unmanaged (e.g., C2C marketplaces relying on reviews).
Marketplaces can make money by taking a commission per transaction, charging sellers and/or buyers fees, charging for premium listings, or imposing listing fees.
Challenges include fierce competition, a short average lifespan, understanding the target audience, ensuring safety and trust, and starting small before scaling up.
Know your target audience, prioritize safety and trust, and start with a focused approach before expanding.
Yes, leveraging third-party services can help in downgrading development costs for a marketplace startup.
“The Lean Marketplace” by Juho Makkonen is recommended for valuable insights.
“You are launched” has been collaborating with lean startups since 2014, providing expertise to support the growth, development, and profitability of marketplace startups. Contact them today to explore how they can assist you in launching your ideal marketplace app.
Creating a marketplace startup that people will want to use is challenging. We would recommend using as many 3d party services, as possible in order to downgrade the development price. Check how to develop a Custom Marketplace App for Nannies.
However, if you get it right and create something that solves people’s problems, buyers and sellers alike will be clamoring to use your service.
Wasn’t this enough for you to read about different types of digital marketplaces? in this case, check 24 cool tactics used by big marketplaces.
We have been working with a range of lean startups since 2014, helping them to grow, develop and generate high levels of profit.
Contact us today to find out more about how we can help you launch the perfect marketplace.