Cloud Topics

An Introduction to Online Marketplaces

By Nicole Lim / May 25, 2020

An online marketplace is a website or app that offers products or subscription services, either from a range of brands or from a single provider. The website owner doesn’t necessarily store or sell physical inventory; rather, they present other sellers’ products — including digital products and subscription services — to shoppers and handle the transactions. Like a farmer’s market or a bazaar, these online marketplaces allow sellers to gather in the same space to try to target as many shoppers as they can.

Online marketplaces often center around a single niche. For example, eBay facilitates bidding for items as well as fixed-price sales, while Jane.com centers around clothes and home goods. The explosion of subscription commerce has also led to digital commerce platforms acting as marketplaces, hosting all manner of service-based brands, solutions, and subscriptions. Other examples of marketplace niches include:

• Auto parts;
• Software applications, like cloud marketplaces and SaaS marketplaces;
• Tourism and travel;
• Handmade crafts;
• Technology and gadgets.

According to a study by Think with Google, 84% of people are shopping for something in any given 48-hour period. Additionally, 63% of shopping occasions begin online. Online marketplaces have made the shopper’s experience easier because of the ability to compare and research products in an instant. That is why a brand must have a strong online presence. This article will explain how online marketplaces work so you can make the most out of them.

How Do Online Marketplaces Work?

The main advantage of an online marketplace is the customer experience. The shopper does not need to navigate to another website to complete a purchase; instead, the transaction is facilitated on the marketplace’s website. Customers can also order from different merchants in one transaction, even if the sellers aren’t associated with each other.

For many digital products and subscription services, fulfillment is instantaneous at checkout, and delivery can commence immediately. For physical goods, when a customer makes a purchase, the merchant is given a notification of the sale. Then, the merchant will individually prepare the fulfillment process for the customer.

Types of Online Marketplaces

There are four types of online marketplaces:

• Vertical Marketplace: This marketplace sells one type of product or service from many different sources. An example would be a website like Udemy. These sites offer a range of solutions that target a well-defined audience of users or customers with similar needs.
• Horizontal Marketplace: This marketplace sells many different products or services with similar characteristics. Examples include websites like Etsy and Overstock. Both sell a variety of items, however, Etsy sells primarily handmade items and Overstock sells excess inventory (like an outlet store).
• Global Marketplace: This marketplace sells physical goods as well as facilitating trades, exchange of services (like babysitters or gig workers). Examples include websites like Craigslist. Customers are drawn to these marketplaces because they can easily get a variety of items, information, or services without navigating to different sites.
• Service-Based Marketplace: This marketplace exclusively sells services instead of products. Examples include websites like Care.com, Freelancer, and TaskRabbit. Each of these sites sells services ranging from design, writing, childcare, and labor.

How Do Online Marketplaces Make Money?

Online marketplaces offer different revenue options and monetization strategies to help turn a profit. Each business model has pros and cons for both you and the merchants you choose to host, so it’s important to choose one that works best for your products.

The different business models include:

• Subscription model: In this model, customers and merchants pay a monthly fee to host products and to shop. While you can guarantee a monthly income from the fees, it may discourage people from using the marketplace because of the extra cost.
• Commission model: This model allows you to make a commission from every transaction on your marketplace. The commission model guarantees revenue and facilitates trust with your merchants and customers because they know you are invested in making sales.
• Mixed model: Often marketplaces will use a combination of business models to drive revenue. For instance, Etsy uses the commission model and the listing fee model to make money from products that are likely to sell and products that are not likely to sell.
• Sign-up fees: This model charges sellers a flat payment when they apply to sell through a marketplace. Most sellers will not mind paying an upfront fee for the chance to sell on a popular marketplace, and this model can guarantee revenue upfront.
• Product listing fees: This model charges merchants a fee to list their products or services on your marketplace. The fee could be charged as a flat rate or as a percentage of the product value. Some marketplaces use this model when there is a large potential value from the listed products.
• Referral fees: This model charges sellers a fee every time they make a sale. The fee is typically a percentage of the total sales price and can vary based on category. This model allows the marketplace to take a percentage of a merchant’s sales because they technically brought the customers to the merchant.

Steps to Create an Online Marketplace

Creating an online marketplace can be overwhelming. Since it differs from traditional e-commerce stores in that there can be a wider range of digital resources and subscription services on offer, there is a different approach to starting your online marketplace. Consumers are looking for products in a convenient place at the best price. Creating an online marketplace includes:

• Refining your idea and finding a market opportunity;
• Choosing business and monetization models;
• Finding an online marketplace platform and marketplace software to support it;
• Building an online marketplace website;
• Focusing on a minimum viable product;
• Establishing a budget to start your marketplace;
• Integrating online services to maximize customer experience;
• Creating long-term goals for the marketplace.

The Future of Online Marketplaces

With the advancement in technology, including artificial intelligence (AI), machine learning, and real-time personalization, online marketplaces have a bright future. The business to business e-commerce market is predicted to be worth over $1.2 trillion by 2022. Additionally, 67% of businesses agree that e-commerce is critical to their growth.

Digital marketplaces are also giving businesses new ways to reach their audiences and accelerate their digital growth by offering personalized experiences for the customers. AI and machine learning help online marketplaces personalize marketing messages and provide fast customer service in the form of chatbots. These trends can help facilitate trust between marketplaces and customers.

Although online marketplaces can seem like a tremendous undertaking, understanding the market share and what appeals to customers can help narrow down the scope of what it takes to create a marketplace. By knowing how marketplaces work and choosing the right business model, you are one step closer to creating an online marketplace that can provide unique products or services to shoppers.