Everything you need to know about building an online marketplace platform
Are you thinking of buying a pair of shoes, and go to a shoe store instead of an online marketplace? There is a great collection of shoes, and you buy a pair of shoes by trying it on. While you are trying a new pair of shoes you see a poster of some model wearing cool attire on top of the shoes. Now, if you want to buy that pair of clothes matching the shoes; you will have to go to another store.
But, what if a store has everything that you want to buy at one place- that is your convenient store. Online marketplace platforms are the digital convenient stores that offer door to door delivery of products from different categories that you can buy on one website or app. Adoption of digital convenience has led to the rise of giants like Amazon and Airbnb.
According to McFayden report, online marketplace platforms’ revenue will be more than double by 2022, around $40.1 billion. The growth rate for online marketplaces is predicted to be around 114.44%, which is phenomenal. Online marketplace platforms have been a profitable proposition for many startups, and entrepreneurs and the above stats indicate that.
Here are some statistics to show the ,
- In 2019, 57% of global retail sales were accounted for marketplace startups, which was $1.97 trillion (Digitalcommerce360).
- Despite the pandemic, 55% of online marketplace startups will show growth both in short, and long-term (DealRoom).
- In 2020, the online marketplace platforms saw an 11% rise in the retail market share, which was the highest in the past seven years (DealRoom).
- Repeater buyers prefer marketplace over retailers by 13% (eMarketer.com)
- 90% of customers check the price of a product on Amazon (BigCommerce)
- eBay offers more than 1 billion active listings on its online marketplace platform (BigCommerce)
- Amazon accumulated 169,782 new sellers on their platform in 2020 (Marketplace Pulse)
But, if you are thinking of building a marketplace business, there are several factors that you need to consider, and each of them has been discussed in detail here.
Business Model For Online Marketplace Platform
A business model is the core concept on which you can build a marketplace. Let’s begin with a basic idea about any online marketplace business.
The Definition- An online marketplace platform works as a common ground for sellers and buyers to interact. Often these platforms don’t engage directly into a transaction and work as a facilitator.
Types of Online Marketplace Platform
There are several types of marketplace models. Two of the most popular categories are,
- Horizontal Marketplace
- Vertical Marketplace
In this business model, the marketplace engages with buyers and sellers over a wide range of product categories. Most of the horizontal type marketplace is multi-vendor. The best thing about a horizontal, or multi-vendor online marketplace platform, is that the number of transactions per user is considerably higher.
Unlike horizontal marketplace, the vertical marketplace is targeted towards a specific niche. The marketplace caters to a specific category of products and has expertise over the niches. Here, the product listing is not so extensive, and you may not offer different services, but they are focused on the niche. So, you need to integrate your eCommerce platform vertically!
The revenue model of your marketplace will depend on the type of marketplace you want to build. Once you have decided whether to go with a niche market or a multi-vendor marketplace platform, you need to devise a revenue model.
Let’s take a look at some of the prevalent revenue models for an online marketplace platform,
When you opt for a commission model, the online marketplace platform you create becomes a facilitator, and not the transactor. Buyers and sellers can use the platform for transactions, or the sale of products with commission fees.
When you compare the commission charges that a horizontal marketplace can apply, there is a clear difference in the fees from a vertical marketplace model. Niche markets specialise in a particular product category, which is why they may charge higher fees. For example, Etsy is a multi-vendor marketplace platform that deals in the niche of antics and jewelry. Here is how Etsy charges sellers on the platform:
- $5 charge in Etsy Ads credits monthly
- Free online marketplace store domain
- Charges $0.20 per listing
- A 5% transaction fee for each sale.
At the same time, Amazon charges individual sellers $0.99 per transaction. The eCommerce giant is a horizontal marketplace that offers multiple categories of products, and that is why the commission charges may be lower than a niche marketplace like Etsy.
Listing fees are the cost per listing for using an online marketplace platform. Here, the value proposition takes center stage, as the platform with a higher user base can charge more per listing. A horizontal marketplace can adopt this revenue model, as this is not that suitable for the vertical business model.
Vertical online marketplace platforms mostly adopt the subscription model. It is a revenue model that explores the exclusivity of products or services through subscription. Take the example of Amazon’s audiobook service, which allows you to listen to the free audio versions of famous books, and even buy these audiobooks through a subscription model. An online marketplace platform for audiobooks caters to a niche audience, and so the subscription model is the best suited to it.
Advertising or featured listing revenue models have many pros and cons, but you can target multiple niche audiences to make it interesting. For example, you want to build a marketplace for men’s shoes.
With this approach, you can add other niche vendors, like men’s grooming or fashionwear, making an ecosystem of men related to a niche audience. Not only does it help to improve sellers on your platform, but with advertising fees, you also generate revenue.
Once you have chosen the business model and revenue source for your online marketplace platform, the next step is to find your niche. If you are a multi-vendor online marketplace platform with a vertical business approach, niche discovery is especially vital.
Finding Your Marketplace Niche
When it comes to finding a niche, there are many different approaches that you can take. For example, if the products and services on your online marketplace platform are about solving the issues of a larger audience, a community-based approach can be the best option.
Take an example of housecarer.com that uses a community approach in its business model. It is a multi-vendor marketplace platform for people to find homesitters, and house carers. Here, people who are looking to be the house carers can register and an algorithm matches them with the most suitable house owners. Another multi-vendor marketplace platform that uses a community-based approach is LoveHomeSwap, that allows users to swap their homes.
The approach identifies the common denominator affecting different people, and uses it to propel the online marketplace platform. For example, CraftsVilla is one such marketplace that explores the traditional art forms in India and makes it retail-fit through its online platform.
It is an approach that will allow you to maximise your value proposition from an existing peer in the niche or an expert in the market. Take the example of the electric vehicle charging service called FreeWire. It is a startup by Volvo and British Petroleum to offer mobile charging for EVs or Electric Vehicles. The startup has been in the news with a Series C funding of $50 million.
Here, Volvo has been the expert partner, already a frontrunner in electric vehicles’ production; while BP(British Petroleum) deals with energy generation. Such partnerships can help you build a marketplace that is in sync with niche requirements.
Communication is at the epicenter of the brainstorming sessions for niche discovery. When you are at the ideation phase, identifying the problem and developing a solution needs effective communication. Allow your niche audiences or community members to communicate through multiple touchpoints.
One of the most effective channels for communication is social media platforms. For example, the Amazon influencers program explores social media followers’ power for better sales of products. It offers a unique URL that influencers can add to their profile or posts to promote products.
Imagine offering a Mercedes Benz car to a niche audience that has purchasing power on an average of $400 per month; sounds random, right? That is why researching your audience makes sense. Purchasing power dynamics can determine whether the products in your marketplace listing matches the sensibility of the niche or not.
According to Diana Olick of CNBC, millennials prefer to rent a product or service, rather than buy it. So, if you build a niche marketplace that offers services on rent, millennials are the most suitable user base to target.
Now that you have the revenue model and niche discovery completed, the next step is to create a pricing strategy for your online marketplace platform.
Marketplace pricing strategy depends on various internal and external factors. These factors can be related to the cost of goods being sold, the volume of transactions, and even the promotional expenditure that can impact any online marketplace platform’s pricing strategy.
Let’s understand some of these factors for better pricing strategies.
Branding & Production Costs
Branding is one of the essential parts of your online marketplace platform strategy. The impact of brand position is massive on pricing, as it can determine your platform’s value proposition.
According to the CMO survey in June 2020, the total budget allotted for brand marketing was reduced from 7.6% to 1.6% when the pandemic hit economies. This has been the root cause of weak brand positioning for many new marketplaces.
So, it is critical to have a separate budget for branding purposes to avoid such a cash crunch. Simultaneously, planning the cost of goods or services is also essential to your pricing strategy.
If you are to build a marketplace that offers multiple categories of products at low prices, then the cost of products should be minimum. If the cost of goods produced is high, your sellers will have to pay you commission from profit margins, making it a non-feasible business. One way to ensure that seller margins are protected is to have a relaxed MAP, or Minimum Advertised Prices.
MAP is a guideline that restricts sellers to have product pricing at a bare minimum. But, with some relaxations in MAP policies, your sellers can compensate the cost of goods through margins to keep business sustainable.
Volume of Transactions
Volume and size of transactions can be an internal factor to your pricing policy. Here, horizontal marketplaces can have higher pricing per listing or sales, as they offer more categories of products. At the same time, niche marketplaces need to have aggressive pricing models to attract sellers, as they offer limited types of listings.
The pricing model also depends upon whether the size of the transaction is larger or not. If the size of the transaction is larger and the volume is low, pricing can be aggressive.
Coming to the new age of data-driven business practices, competitor analysis becomes the crux of strategising an online marketplace platform. It enables you to keep your pricing aggressive, and attract more demand on the marketplace platform.
Here are some intelligent tools to use for competitor analysis:
It is a pricing intelligence tool that helps eCommerce marketplace platforms to analyse competitor pricing and suggest relative strategies. The analytics tool is based on Artificial Intelligence technology that helps with real-time data on competitor pricing strategies, and enables your online marketplace platform to adjust the pricing accordingly.
Top features include:
- Automated benchmarking
- Real-time data analytics
- Interactive visualisation
- Trending data insights
- Competitor data mining
When it comes to pricing data acquisition, Price2Spy is one of the best tools in the market. It tracks competitor pricing, changes in the stock of products, historical data, and prices in different product categories. The tool also provides daily alerts on your devices regarding competitor pricing changes, and even adjust the costs on your online marketplace platform accordingly.
Top features include:
- Automated benchmarking
- Real-time data analytics
- Interactive visualisation
- Trending data insights
- Competitor data mining
Competera offers a unique algorithm that analyses the pricing trends in the market to adjust your prices accordingly. It is a great way to stay competitive against other online marketplace platforms. The tool helps draw data on promotions, stocks, and competitor pricing strategies.
Top features offered by it are:
- Web-store synchronisation.
- Market visualisations
- Branding analytics
- MAP monitoring
- Promotions analytics
- Competitor analysis
Ready to create the best pricing strategy for your marketplace? Discover, “Top factors that affect the online marketplace pricing in 2021.”
Now that you have your marketplace plan ready, all you need is an investment to kickstart the operations. Let’s discover different ways to raise funding for your online marketplace platform.
Raising Funds for an online marketplace platform
When you want to build a marketplace from your savings or borrow some money from your friends, it is called bootstrapping. It is an approach where the financial burden lies with the owner of an online marketplace platform. Such a source of funds is excellent, as you can have complete control over your marketplace, and there is no exterior involvement in the management decisions.
Bootstrapping is a minimalistic business approach that is simple and does not require external inputs. However, there is one drawback to this approach, and that is burnout.
When you build a marketplace through bootstrapping, there is a need to have a regular cash inflow. The reason is simple, if you are not sustaining cash reserves to back your marketplace in a cash crunch, burnout is evident.
Crowdfunding works like a community of people that want to solve everyday problems. As there is a developer community for frameworks and technologies to help improve the platform, the same is the concept of crowdfunding, but the contributions are monetary. There are many crowdfunding campaigns and platforms that allow different startup entrepreneurs to attract funding.
According to Statista, the global crowdfunding market is set to reach $37.79 billion by 2026. The market has many significant players like IndieGoGo and Kickstarter. Another way to tap into the potential funding opportunities is to integrate your online marketplace community with a crowdfunding platform. Such an approach can help you validate the solution that your products may offer.
The only drawback is the time duration for which you get funding is short, and it suits online marketplace platforms that need funds to expand business operations.
Venture capitalists invest money in your online marketplace platform with an equity share in your business. It is one of the best ways to raise funds, because most of the time, the investments for extended periods unlike crowdfunding programs. Here, the strategic value of your marketplace is essential to attract venture capitalists.
According to Ulrich Quay of BMW iVentures, there are some essential points to understand while presenting the strategic value to a venture capitalist.
- Emphasise both the financial and strategic value, not just one of them.
- Create a steering committee to guide business decisions despite the autonomous nature of investment decisions.
- Measurement of business units for strategic value should be done open-minded.
With venture capital investment, you don’t need to pay any fees, unlike the crowdfunding platforms. Many venture capitalist firms across the world invest in multi-vendor marketplace platforms and other upcoming startups.
Angel investors are industry professionals or market experts that invest in upcoming startups to lend financial support, and have their say in the business decisions. Most of the angel investors that invest on online marketplace platforms are influencers.
The biggest advantage of angel investment is that the financing has lower risks than debt financing. It does not need collateral assets like loans, bootstrapping, or even fees. However, angel investors do own a part of your online business, and that may incur some lack of control over the operations.
Incubator or accelerator programs are investment campaigns that help startups, and upcoming marketplaces raise funds. These campaigns have participants like government agencies, venture capitalists, angel investors, and larger enterprises.
An incubator program is just like an academic program, where you need to apply, get selected, and then follow a schedule to meet the standard set by incubators.
If you are to build a marketplace from scratch, you will need to plan every aspect of an online marketplace platform. Here, we have discussed some of the most quintessential elements of a marketplace business structure. From the type of marketplace to finding a niche, and even raising funds; every step of building a marketplace needs good planning, and execution. The best practice is to find a partner that can help you at every stage of marketplace planning, and execution.