What is Marketplace Business Model and How Does it Work?

In the previous article, we have studied about how modern start-ups have created a new form of a business model called the aggregator business model. There are several companies such as Uber and Airbnb which have been using the aggregator model successfully.

However, there is another business model which has been successfully used by even bigger firms. This model is known as the marketplace business model. It has been used by multi-billion-dollar companies such as Amazon and eBay.

In this article, we will understand what the marketplace business model is and what are the pros and cons of this business model.

What is the Marketplace Business Model?

Modern-day consumers use the internet extensively. They also use the internet to shop for a lot of products. This is because the internet allows them to make purchases from the convenience of their homes. This trend has been exacerbated by the recent coronavirus pandemic wherein people did not feel safe while visiting enclosed public spaces for shopping.

The marketplace business model is a virtual space where buyers and sellers can connect in order to buy and sell goods and services. The marketplace is the intermediary which adds value by facilitating this connection using a proprietary platform.

Generally, the marketplace does not own any inventories or play any role in the actual fulfillment of the order. Even though the marketplace does not participate in order fulfillment, it sets the ground rules which need to be followed while fulfilling the orders. For instance, the modes of payment, the delivery times, the refund policies, and other such important factors are decided by the online marketplace.

Marketplaces can be of several types.

  1. One popular way of classifying marketplaces is based on the number of product categories which are available on the platform. For example, a company like Amazon sells several types of products in its marketplace. Such business models are referred to as being global marketplaces.

  2. On the other hand, there are some other online marketplaces where products related to only a single category are sold. These types of marketplaces are called vertical marketplaces.

  3. There is a third category of companies that sells many products which are related to each other or belong to similar categories. Such a marketplace is called a horizontal marketplace.

How Does The Marketplace Business Model Work?

  • The marketplace business model can be very successful once a company has established its brand name. However, it is very difficult to start a marketplace. This is because of what is commonly known as the “chicken and egg problem”.

  • The chicken and egg problem is a debate about what came first, the chicken or the egg. The marketplace business model also faces a similar debate about what should the company focus on first, getting more customers or getting more sellers.

  • The problem is cyclical in nature since getting more customers to the platform will not convert into more sales till there are more sellers on the platform. Similarly, sellers will not be interested in joining a platform till there are a significant number of customers there that can help boost their sales.

  • The marketplace cannot add value to either the buyers or sellers till both parties are present in significant numbers. Hence, it is common for marketplace companies to spend their resources while trying to attract both parties to the marketplace. One of the common ways in which online marketplaces attract customers is by offering them great deals. They often give customers signing bonuses and very steep discounts. The idea is not to make money off the first few transactions. Some marketplaces sell their own products in order to give some choice to the customers.

  • Just like attracting buyers, the marketplace also has to attract sellers to subscribe to its platform. This is done by creating special seller programs. These programs encourage sellers since the marketplace does not charge any commission for a specific amount of time. Also, most successful marketplaces will keep the process extremely simple for the sellers. The degree of simplicity is directly related to the degree of success of the marketplace.

The Future of Online Marketplaces

The success of Amazon, eBay, and Walmart has attracted many competitors. As a result, the online market today is filled with marketplaces that do not offer much value to the customers. However, the future is going to be difficult for such a marketplace. As the current market is already saturated with several marketplaces, the future is likely to see some form of consolidation. Many marketplaces will be merged into bigger and more efficient marketplaces while several others will be simply shut down.

This is the reason that every marketplace startup must ensure that it is not a “me-too” company. If the start-up is serving a specific market niche and can provide unique value to the customers, it will continue to survive and thrive despite the high degree of external competition.

The bottom line is that the marketplace business model has been very successful in the past. However, due to its past success, this model has now become extremely common and hence has lost its competitive edge.

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