Michael Vax

What businesses benefit from online marketplaces, and how do you implement them?

A digital marketplace, put simply, is a digital platform and infrastructure that enables buyers to purchase products and services from multiple sellers.

But there are many different types of marketplaces and several ways to classify them, which can get a bit confusing. This article looks at different marketplaces’ characteristics, what businesses benefit from the marketplace model, and the main differences in implementation. I included iconographics to illustrate the points we discuss here.

The multisided business model of the marketplace has three types of participants:

• Operator is an organization that provides a digital platform for facilitating buying and selling;
• Buyer is an individual or business who buys from different merchants;
• Seller /Merchant is a company that offers its products or services on the online marketplace.

As you can see on the iconographic below, marketplaces can be categorized by geographical reach (global or local), industry focus (niche or broad), their offerings (products, services, or both), and sources of revenue.

A fundamental way to distinguish marketplaces is by the role played by the company that created them. A marketplace can be “Classic” or “Enterprise.” In the former, the Operator only provides the platform and brings sellers and buyers together. In the latter, the Operator is also a seller, in many cases the biggest one.

Many companies have implemented successful Classic marketplaces. You can see the list of 100 largest and fastest-growing consumer-facing marketplaces created by a16z.

Enterprise marketplaces offer even more opportunities as any business that has implemented its infrastructure for digital commerce could invite third-party sellers to sell to their customers and become an Enterprise Marketplace. They represent a fundamental business model change for organizations, which improves efficiency and experiences for buyers and sellers and opens new revenue sources. Gartner predicts that by 2023, organizations that have created enterprise marketplaces will see at least a 10% increase in digital revenue.

As consumers, we all are familiar with B2C marketplaces. Marketplaces offer even more significant opportunities for innovation and growth in B2B.

Many types of B2B businesses like manufacturers or distributors would benefit from creating an enterprise marketplace. They can create a large ecosystem of value-added services, offer more choices to their customers, and gain additional revenue streams. A well-rounded and optimized product and service portfolio will unify customers’ needs, increase customer loyalty, and keep them from switching to competitors. Marketplace operators can also decrease their financial risk by keeping operational and inventory costs low and use third-party merchants to test demand for new products and categories.

Marketplaces are also attractive to B2B buyers. They facilitate product research. There’s no need to switch sites because multiple sellers are present in the marketplace, and buyers can make educated decisions based on products and sellers’ reviews. Marketplaces make it much easier to compare prices and delivery options. As orders are made from the same site, it is easier for a buyer to track them, control spending, and generate reports. And, the fact that the marketplace operator vetted the sellers adds a feeling of security. (A list of some 90 B2B marketplaces and several marketplace technology vendors appears in the B2B Marketplace Series: Part 1 report from Digital Commerce 360 | B2B.)

Implementation

As interest in marketplaces increases, so is the number of tools and providers to build them. Implementing a Marketplace is not a simple matter, and marketplaces are quite different when it comes to digital commerce functionality. This article will capture only the main characteristics of Marketplace implementation and highlight the key differences between building a regular Ecommerce shop and a Marketplace.

Depending on the ecommerce vendors you use, there are two approaches to marketplace implementation.

Some ecommerce vendors have added built-in support for marketplace functionality to their ecommerce platforms. The main benefit here is that you have a single system to learn and support. Adding a marketplace feature, in this case, is equivalent to an ecommerce site upgrade vs. re-platforming.

An alternative is a two-systems scenario: purchasing a separate license to a standalone marketplace platform and integrating it with your existing ecommerce system.

3-Party Transactions

In a marketplace, instead of two usual parties in an ecommerce transaction (buyer and seller), there are three: buyer, seller, and marketplace operator. To complicate things further, in an enterprise marketplace, an online seller that deploys a marketplace has the dual role of the operator and the seller.

Having multiple sellers means that everything in the ecommerce system needs to be looked at from this additional seller perspective. For example: Which merchant owns product data? Whose price is it? Which shipping or payment methods does each merchant use? What inventory does each merchant have? How is each merchant’s category structure mapped to the marketplace categorization?

Merchants also need their own back-end user interface to manage their operations through a merchant portal, and the marketplace operator needs an interface to manage merchants, their products, and orders. The storefront also needs to have new functionality. Customers should be able to see merchants’ information and which merchants sell a product they want to buy.

Main Functional Differences

Other main differences are in catalog, payments, and fulfillment areas.

Catalog: Marketplace sellers may have unique products in the catalog, or several merchants may sell the same product. In the latter case, a marketplace can avoid duplication of product data by allowing merchants to create “offers.” When product data already exist in the catalog, a new merchant who wants to sell the same product can easily do it simply by specifying their price and available stock.

Orders: Because customers can mix products from multiple merchants in the same cart, there are two types of marketplace orders. From a customer and operator’s perspective, an order contains all products purchased by a customer. However, a merchant is only interested in goods or services bought from its inventory. That means the marketplace needs to split the marketplace order into several parts, one for each merchant. While splitting the order, the system should properly allocate each merchant’s portion of taxes and discounts.

Payments: The third party in marketplace transactions complicates the payment implementation as well. Each merchant should be registered with the payment provider, which is responsible for distributing customer payments across merchants and retaining the marketplace operator’s .commission. Note that not all payment providers support marketplace functionality.

The Digital Marketplace model offers numerous opportunities to B2B businesses that want to provide additional value to their end customers, distributors, and suppliers. They will offer a broader choice of goods and services without investing in additional inventory and gain new revenue sources.

Michael Vax is the founder of CommerceIsDigital, a provider of B2B and B2C ecommerce consulting and training services. He is an ecommerce veteran who has worked at ecommerce technology companies including Hybris (now part of SAP SE), Elastic Path, and Spryker. Connect with him at [email protected] or on LinkedIn.