E-commerce is here to stay. There is no denying this. But as
investment and innovation continue to grow within the industry, we’re starting
to see new models take shape under the e-commerce umbrella, the most popular
being marketplaces. The list of companies that have successfully leveraged the
marketplace model to facilitate access to goods and services is impressive.
Some of these include eBay, Uber and Airbnb, to name a few. The model has clear
advantages, but also plenty of challenges.
From a business perspective, traditional e-commerce ventures can
be capital-intensive because of inventory costs. Whether you make the decision
to curate and sell third-party brands or you’ve created your own branded
merchandise, there is an inherent cost of building up a stock of inventory that
you will inevitably offer for sale. There are also a number of ancillary costs
related to this, like inventory forecasting tools, inventory management,
shipping, logistics warehousing and the list goes on. But marketplaces
circumvent all this quite well by putting the burden of product offerings on
the various sellers who are participating on the platform.
And this is the core tenet of this operating model, which cross-functionally
applies to product and service-focused marketplaces alike. In fact, even before
the proliferation of marketplaces, the team behind Skype, specifically Jonas
Kjellberg, created a whole philosophy around this principle, which he coined
“innovating in zeroes.” This simply means finding ways to reduce onerous costs
to get competitive advantages and make your business more viable. Skype did
this in two ways: The first was to use a user’s existing internet connection to
place the calls, which significantly lowered server costs. Another was to
eliminate customer service completely, as he found users were often just as
angry or unsatisfied after speaking with customer service. So why not get rid
of it altogether? Within the context of marketplaces, Airbnb has innovated in
zeros. They have no hotel maintenance costs, and they pay nothing to clean one
of their listed apartments.
But these platforms come with many challenges as well. For
starters, depending on the complexity of the marketplace, they can require a
great deal of capital to build in order to support a wide range of
functionality. Consider, for example, a marketplace that operates globally: It
would need to be able to translate all content and product data into a user’s
native language. It would need to support multiple currency conversions, and it
would need a constant awareness of regulatory considerations, depending on the
market the user resides in. Moreover, if the platform allows users to upload
product data, it would need a central mechanism to standardize all this data
that would be coming from a wide range of different sources, in different
formats, etc. Quality assurance would become a real challenge. Groupon had
a case in which a
seller published a product listing with offensive language that the company
only detected after the fact, when the damage was already done.
The challenges aren’t just technological. When discussing marketplaces,
the concept of “network effects” will more than likely come up. It describes
the phenomenon of scale achieved when enough people have joined a network to
make it beneficial for others to also join. Achieving this singular moment is
every marketplace’s end game. But establishing this can be devilishly
difficult, especially in two-sided marketplaces — with, say, buyers and sellers
— because acquiring enough users in tandem to create some semblance of
equilibrium is beyond tricky. If the dynamics become lopsided — more sellers
than buyers, or vice versa — it can cause attrition, which is the complete
opposite of network effects.
Whether your view of marketplaces is positive or negative
overall, the ability to construct an environment and observe how two parties
interact with one another is fascinating on both a technological and behavioral
level. As leading marketplaces mature, there is a growing sentiment calling for
the central operators to take a more active approach in order to improve the
overall user experience. This may take the form of implementing additional
measures to reduce fraud, partnering with a logistics operator to standardize
shipping operations or making future membership more selective. Etsy dealt with
this firsthand in a case in which a group of investors had sought to recoup
their investments because of how widespread the sale of counterfeit items was
on the platform — which had implications on the company’s reputation. As the sheer
number of niche marketplaces continues to increase, it will be interesting to
observe their ability to compete with larger, more generalist platforms like
Amazon or Alibaba, whether they use a hands-on or a hands-off operating
approach and which other industries they can continue to disrupt through
centralization.
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