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The Pros And Cons Of The Marketplace Model For E-Commerce

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.

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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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