By 2025, the global e-commerce market is expected to hit a net worth of $24.3 billion as reported by Accenture. Across all digital channels, the online marketplace has proven to be a popular choice amongst consumers and businesses. According to the 2018 Pitney Bowes Global Ecommerce Study, 68% of online shoppers prefer shopping on a marketplace as opposed to an individual online store. This comes as no surprise as the pervasive use of technology has made consumers accustomed to instant gratification. As such, the all-in-one marketplace caters to impatient consumers who can access competitive prices within a single platform rather than having to compare prices between separate stores.
To tailor to this shift in demand for competitive pricing and convenience rendered through the marketplace model, new players and even traditional businesses are exploring opportunities to increase customer engagement through marketplaces, contributing to the proliferation of digital marketplaces in recent years. Yet, how many of these marketplaces actually make it big? Juxtaposed against well established marketplaces AirBnB, Etsy and Alibaba, marketplaces such as Homejoy and Wash.io seem to pale in comparison. What then causes the huge disparity between marketplaces that succeed and those that fail? In this article, we have consolidated three key takeaways gleaned from successful marketplaces.
Liquidity is King
The inherent value of a marketplace lies in its ability to facilitate transactions between buyers and sellers. Rather than rushing to be the first marketplace in any one vertical or horizontal, businesses should aim to become the most fluid marketplace with the highest user retention (buyers and sellers). Prime examples include AirBnB overtaking a 10-year old VBRO or how UberX mimicked Lyft’s P2P business model. From these cases, it is evident that marketplaces with the first-mover advantage are not indomitable. To stay ahead of the competition, marketplaces would need to apply appropriate metrics to monitor its performance, and in particular liquidity.
Liquidity can be categorised into two types: buyer’s liquidity and seller’s liquidity. Buyer’s liquidity is commonly defined as the conversion rate of marketplace searches into successful transactions. The search-to-fill ratio, calculated by dividing the number of searches by the number of successful transactions, serves as a useful metric to measure buyer’s liquidity on the marketplace. On the other hand, seller’s liquidity represents the conversion of listings on the marketplace into successful transactions. Metrics to measure seller’s liquidity include the utilisation rate, measured by the turnover rate of inventory and listings on the marketplace.
Additional metrics such as Monthly Active Users (MAU), Bounce Rate, and the Time spent on the Site should also be employed to monitor the activity of users on the site. Such metrics enable marketplace owners to analyse data collected, allowing them to identify pain points and to further enhance their marketplace capabilities.
Value Creation for All Users (Both Buyers & Sellers)
As marketplaces continue to boom across all verticals, marketplaces must remain competitive in order to prevent attrition. Marketplaces would need to create more value not just for buyers, but also sellers in order to retain users on the platform. How then can marketplaces distinguish themselves from all of the other marketplaces in the industry? To focus on retaining sellers, Amazon has launched training programmes and invite-only events for top sellers on the platform. Such added functionalities render better support to sellers, incentivising them to work harder to hit their desired KPIs in order to enjoy such benefits.
On top of that, marketplaces must also create sufficient value for users in order to minimise incidences of platform leakage. To do so, platforms should aim to transform cumbersome end-to-end work flows into efficient and convenient processes through the platform. One way to proceed would be to explore collaboration opportunities with other tech enablers. For instance, marketplaces could onboard payment partners to improve the payment process on the site. Alternatively, marketplaces could also partner with 3PL firms to offer discounted freight services for merchants to carry out deliveries smoothly. Such partnership opportunities would further enhance the marketplace functionalities, building on a stronger value proposition for all users of the platform.
Value creation for users, both buyers and sellers are the core of the marketplace business. Whilst marketplaces fundamentally serve as an intermediary to connect buyers and sellers, what differentiates between successful and failed marketplaces is the ability to create further value for both groups of users, buyers, and sellers. Failing to do so would result in the downfall of the marketplace, evident in the cited examples, Homejoy and Wash.io.
Prioritise Long-Term Growth
Rather than placing too much attention on growing users in the short term, it may be more strategic to focus on accumulating a pool of loyal engaged customers and merchants. As trust remains the cornerstone of any relationship, marketplaces must provide reliable services in order to win over consumers and merchants. While the quantity of users does serve as a measure of marketplace performance, businesses should not be overly obsessed with this metric. The core function of the marketplace, to create a value-added platform for merchants and users to transact, must not be neglected.
Many times, businesses may lose sight of the bigger picture while fixated on short-term goals such as boosting marketplace growth. Undeniably, increasing marketplace traffic is a crucial goal for marketplaces. However, quality assurance must not be compromised. To retain users, marketplaces should curate their merchants to maintain an acceptable standard of quality in the marketplace. Any compromise in quality could shatter the hard-earned trust of users in the marketplace, with the potential loss of loyal customers. Hence, businesses must strike a balance between growing the platform whilst maintaining quality services for consumers on the platform.
Offering low margins and steady revenues, the marketplace model carries great potential to become a lucrative business. On the flip side, it is as easy for budding entrepreneurs to fall prey to the many pitfalls of the marketplace. Quoting AirBnB founder Brian Chesky, “Our overnight success took 1,000 days”, it is evident that the household names such as AirBnB, Etsy or Grab took time to rise to fame. Platform owners should adopt a forward-looking perspective, with a focus on customer engagement to ensure sustainable use value in order to attain long-term growth. Furthermore, it is of utmost importance to platforms to focus on relevance by harnessing new technologies or exploring partnership opportunities. Otherwise, it is a matter of time before competitors catch up and eventually render the platform obsolete.