Whether you are developing a multi-vendor marketplace or a single-vendor online store, pivots should always be part of your e-commerce game plan. We are such fans of a good pivot that we have written and spoken extensively about its strategic value for lean startups.
Up till now though, we have mostly discussed pivoting as making calculated changes to different aspects of an existing business model. In other words, experimentation with different revenue streams, market segments, product lines, or redefining how you solve your target audience’s problems. But what if there was an opportunity to pivot from a single-vendor to a multi-vendor business model?
The examples are out there. E-commerce behemoth, Amazon, is probably the biggest example, having successfully transitioned from selling books to building a marketplace whose third-party sellers contribute 58% of its retail revenue.
Shopify’s founders started out with an online store for snowboarding gear and ended up with a $36bn SaaS platform for e-commerce stores. In fact, you can say integrations like its Fulfillment Network have transformed Shopify into a gigantic meta marketplace.
Even an iconic consumer electronics retailer like Newegg has leveraged its multi-million strong client base to launch the successful Newegg Marketplace.
As we explained in a previous post, there are different pros and cons attached to building single-vendor stores as opposed to multi-vendor marketplaces. The fairly low barrier to entry for most online stores (cheap plug-and-play e-commerce templates, simple site architecture, and fast set-up times) means that their numbers far outweigh that of marketplace platforms.
Marketplace platforms, on the other hand, are far fewer, because they take longer to set up, cost more to develop, and require additional technology and effort to establish product-market fit.
The carrot for marketplace entrepreneurs though, is their imminent scalability due to a combination of network effects, multiple revenue streams, and the ability to rapidly expand product ranges via multiple vendors. That means more market share and bigger revenues. Which is why marketplaces have grown to make up 60% of the $2.86 trillion global e-commerce market.
Timing is everything. If your online store has not gained sufficient traction, you first need to establish the reason. In all likelihood, a lack of product-market fit means that you are not ready to pivot to a marketplace model. Maybe focus on a product- or market-based pivot first.
Conversely, as a successful solo e-commerce vendor you would have developed a good understanding of the market segment that you operate in. Those insights could help you identify an opportunity for a marketplace platform.
Pivoting to a marketplace model simply based on a hunch, however well-informed, is not advisable though. Test your idea first with an MVP version to make sure that you are solving a real problem for vendors. You also need to make sure that the target market is big enough to sustain multiple vendors.
Another way of minimising risk is to retain your existing client base by implementing a hybrid model. That way you can continue selling your own product line in conjunction with other vendors on your platform. Once the new vendors have shown that they can sell their goods or services you have the option to step back and continue with only third-party vendors.
Your knowledge of the market segment can be a powerful advantage in other ways too. Business intelligence about competitors can be used to identify the first vendors for your platform. You can also leverage your insights to help your sellers up their game via tutorials and a knowledge base. Airbnb does this really well.
It’s best to be fully cognisant of all the challenges that are unique to the marketplace model before setting out on this new adventure.
Quality control can be a headache since you have less control over the products and services offered by third-party vendors. Buyers receiving inferior goods or services and fraudulent accounts can tank your brand very quickly. You will need to vet your vendors and conduct regular product checks to ensure your buyers get what they asked for.
You will need to decide what technology stack you are going to use for your marketplace. This can be a critical decision since marketplaces require a lot of additional functionality (seller dashboard and analytics, third party shipping, review systems, etc) and much more complex information architecture and navigational structures. Are you going to attempt DIY using an online marketplace builder or trust an experienced marketplace development agency to do the job right the first time? Choosing the wrong option could set you back seriously in terms of time and money.
Security is a bigger concern on marketplace platforms due to the increased number of stakeholders and transactions. This includes user data which needs to be protected in a clear and transparent manner. Choosing a suitable payment gateway is key to building trust with users. For example, you will have to make provision for new features such as escrow and split payments.
The marketplace model offers a variety of ways to monetize your platform. Potential revenue streams include commissions, listing fees, subscriptions, and advertising. Figuring out which ones to pursue can be difficult if you are used to a more straightforward single-vendor revenue model. Experience has shown that it’s best to test revenue streams as you chase product-market fit with an MVP version.
A key challenge is how to drive traffic to your marketplace. Unlike an online store where there is a singular focus on enticing buyers to your site, a marketplace needs both buyers and sellers. Do you ‘stock the shelves’ with vendors first or do you attempt to drive both sides at the same time? If you have already built up a solid customer base with your online store it will make the job much easier since you only have to find qualified vendors.
An often overlooked aspect of successful marketplaces is their team composition. Online stores tend to have much more localised teams due to their need for warehousing, manufacturing, and fulfilment. The marketplace model lends itself to a distributed organisation which means a larger pool of talent and reduced costs. An early-stage marketplace team should focus on product development and growing the platform community (buyers and sellers). As your platform matures you can get fancy with RevOps, DevOps and FinOps teams.
You are going to have lots more data. You will need to manage it properly to stay on the right side of your users and the data privacy laws of the different jurisdictions that you operate in. Data should not only be managed; it should also be analysed properly so that you can make informed decisions about the evolution of your marketplace. To that end you will need to come up with the right metrics to track.
All of the above are important for success, but your primary challenge is to define your value proposition aka unique selling point. Where online stores tend to be very product and price focused, marketplaces need to add extra value to differentiate themselves from existing solutions in the market. Are you going to emphasise a wide variety of goods or services and convenience like Amazon or are you going to focus on the user experience and transparent feedback like Airbnb?
Online stores are linear one-directional businesses. Owners source or manufacture a product line which they then promote to a chosen target audience. Which pretty much makes them the digital version of a physical shop.
Marketplaces are the digital equivalent of a shopping mall with multiple vendors selling a wide variety of products or services. As the owner of a marketplace platform, your role is to facilitate connections between buyers and sellers in a way that solves real pain points for both parties. That means building and maintaining a secure user-friendly infrastructure that can handle a myriad of features, such as customer feedback, shipping, and payments.
Sellers will rely on you to drive traffic to the platform through various marketing channels. Are you going to use technical SEO and user generated content to generate organic traffic or will you be spending your marketing budget on pay-per-click campaigns, social media ads, and affiliate marketing? Once procured, your sellers will also expect that your information architecture distributes that traffic fairly. Review and rating systems, categories, custom search, and localisation matter.
Buyers have different priorities. They want to find, compare and connect with qualified vendors in faster, more secure ways. Just like a brick-and-mortar mall, your goal should be to build a unified brand that offers them that centralised shopping destination. If you get it right, transparent competition on your platform should lead to better quality and prices and even greater brand loyalty.
Transforming your online store into a fully-fledged marketplace can be a daunting project, despite the huge potential rewards. Minimise the risk by testing your idea with MVPs and rapid iteration based on user feedback. An experienced development partner can smooth that process and increase your chances of success.
CobbleWeb has helped several e-commerce companies make changes that sped up their growth and increased their profitability. Get in touch for a free consultation.
Originally published November 18, 2019, updated December 2, 2019