Why an Online Store is not an Online Marketplace

Written by Arcadier, 24 May 2018

When looking to build a marketplace, people often ask how it’s different from websites built by Shopify, Magento, Volusion, Bigcommerce, Woocommerce, Wix and other alternatives or competitors for online store software platforms. While marketplace websites are usually much more complex than online store sites, the cost of the technology is now roughly the same, owing to the development of marketplace SaaS software technology like Arcadier’s. Is it better to set up a stand-alone online store or an e-commerce marketplace where sellers can congregate and sell their goods or services in the same place? Which is the right choice for you?

To help you decide, here are three main points where online stores and online marketplaces differ:

Inventory management

The marketplace model can considerably reduce your initial investment if you’re looking to sell products and services involving many different suppliers. An online store takes on heavier initial investments than a marketplace because the proprietor has to constantly invest in stock. As the store grows, storage facilities or warehousing will significantly add to operating costs. In an online store, the proprietor or operator is solely responsible for handling stock and managing inventory, whereas marketplaces allow suppliers to handle stock on their own.

In both the marketplace and online store model, the majority of sales will come from a minority of products and customers. In an online store, keeping unsold products in inventory could prevent you from stocking new products that could sell better. In a marketplace, because each supplier handles their own inventory, products that don’t sell well do not incur direct losses to you, the marketplace operator.

The larger the catalog, the easier it is to list and manage in a marketplace. In a marketplace, you can index more products from new suppliers without additional investment too.

Relationship with the customer

A great product catalog is not the only factor for success. Customer service and community building are other important components that can set your online store or marketplace apart from your competition.

Online stores offer the advantage of more freedom and control over how you want to present your brand/s and the customer experience. You have the flexibility to gather customer information and monitor and interact directly with those who visit the online store, allowing you to ask for feedback. You also have the prerogative to run promotions, giveaways, and other activities to keep them engaged with your brand.

On the other hand, online marketplaces act more as a mediator between buyers and sellers, meaning that the marketplace operator has to cater to both groups well by providing added value. This could call for greater commitment and investment. Online marketplaces can act as a community platform too, especially if the marketplace targets a niche market, like Etsy. As both suppliers and buyers are involved in a marketplace, the community could grow to be significantly larger than it would be for a stand-alone online store.

Scalability

Marketplace operators don’t have to worry about either, thus allowing them to achieve economies of scale more easily. This makes the marketplace model more agile and scalable. Besides earning revenue from commissions, marketplaces can also choose from multiple monetization options, such as offering buyers sponsorship opportunities, advertising or greater visibility on their site to gain more revenue. This is less likely with a stand-alone online store as suppliers are less involved on the site.

It typically takes an online store longer to break even. However, marketplaces need to sell greater volumes of products or services as its profit margin from each sale is lower. To break even, marketplaces depend on larger transaction volumes or larger transaction values. Dealing with a lot of transactions and requests can be demanding, so using the money earned marketplace operators are recommended to invest in automation of its systems to make the platform even more scalable.

Many online marketplace founders have achieved tremendous success, a great example being Amazon CEO Jeff Bezos, who reached a net worth of $105.1 billion in early 2018 and has been named the richest person in history. Whether you choose to build an online store, an e-commerce marketplace, or both to complement each other, it’s helpful to know how one differs from the other. All things considered, it comes down to where your passion lies, your business goals, your target audience, your competition and the amount of resources you have.

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