If I ask you to tell me the first thing that comes to your mind when I say ‘marketplace’, you’re very likely to respond with the name of a famous market in your region. If you’ve lived in India long enough, you would also have memories associated with visiting a weekly or a monthly market — ‘bazaar’, as we usually refer to them.
Marketplaces have existed since the time human civilisation has been around. The core idea of a marketplace is to serve as a meeting ground for buyers and sellers of products. While the idea has remained consistent, the space in which a marketplace exists has undergone changes.
The form in which a market is conducted has also evolved to match the shift in technological advancements.
Before the internet, information about sellers of all sorts of goods was listed on the yellow pages (Sulekha in India). Your parents would possibly remember the book being delivered at home, on a yearly basis, with relevant updates.
During the early days of the internet, craigslist was the online version of yellow pages. In India, though, access to cheap internet, and the proliferation of online services took longer than in the rest of the world. Nonetheless, we are not missing out.
So what really changed?
Speed of the internet took us all by storm.
In 1994, Amazon’s launch dramatically changed how users bought and sold goods. Amazon started with the sale of books. In India, Flipkart too was launched with the idea of selling books online in 2007. Within a decade since 2007, the internet, smart mobile phones, and marketplaces revolutionized the way any of us buy or sell.
If you think about it, marketplaces made the barriers of space and time irrelevant to the act of buying.
For the scope of this piece, I’d like to use this definition of a marketplace from Lenny’s article:
A marketplace business is one that (1) connects demand (i.e. people who want a thing) with (2) supply (i.e., people who have that thing), and (3) leads to a financial transaction. These businesses do not generally own any supply, do not provide products or services directly, and (eventually) handle the money being exchanged. Simply put, their job is to provide a platform where the supply and demand efficiently find each other and transact successfully.
Marketplaces are the present-day virtual malls that don’t need land and can get customers without installing air conditioners unlike in the case of a physical mall.
There are other factors that have led to the unprecedented growth of marketplace businesses.
But which major features of a marketplace contributed to making it one of the widely used business models?
Nature of marketplaces
The virtual version of marketplaces improves upon the physical experience of a marketplace by enabling an unlimited number of sellers to get listed on the website or on an app. Unless the marketplace focuses on a category, like in the case of Pepperfry, it can have unlimited sellers for an unlimited category of products.
A seller benefits because they get access to new users who may not have used their products because of geographical limitations.
Because of little to no geographical constraints, a consumer also enjoys better discovery. The notion of enjoying discovery, however, is debatable because of the sheer volume of choice offered to consumers but I’ll take this debate up in a separate essay.
Essentially, the nature of marketplaces allows for all sellers to be aggregated better, makes it easier for consumers to discover the various sellers, and creates a win-win for both stakeholders.
Network effects
We see the word network effects thrown around very casually in business writing. What it truly means is that increasing users of a particular product in turn increases the value of the said product. More the merrier? One can think of WhatsApp when trying to understand network effects. Because everyone you know uses WhatsApp, you have no choice but to use the service to exchange messages.
In economic terms, network effects improve the utility a person derives from a product because more people use the same product.
In the case of marketplaces, when a seller on Amazon accrues good business, more sellers of a similar product could see the value in listing their product on Amazon. They would not spend time creating a website specifically for their products when they can simply be one of the sellers on Amazon.
Endless scale
Quite often marketplaces are not the owners of any inventory and may choose to operate without having any physical stores. They are likely to have huge godowns or fulfilment centres but this doesn’t hinder their ability to scale.
As soon as there are enough buyers and sellers, a marketplace earns recurrent revenue from the same app and website.
Not owning inventory also helps a marketplace to venture into a new category of products or shut down if it isn’t successful. A combination of all these factors creates a strong barrier to entry, once the marketplace establishes itself in a category.
But, so far we have only discussed the upsides of marketplace businesses. However, in the last few years we have observed businesses moving away from marketplaces as the be all and end all of a Go-To-Market strategy.
But what are the reasons for businesses reducing their dependency on marketplace aggregators?
Commodification
I mentioned the curse of abundance in one of the points earlier, and in addition to confusing users with the variety, it makes it difficult for a business to stand out as a brand in a marketplace.
The abundance of sellers in a category leads to the commodification of brands.
You would usually type in ‘black T-shirt’, ‘funky shorts’, or ‘little black dress’ rather than the name of a specific brand in a search bar. This user behaviour can be mainly attributed to the service a marketplace provides.
An e-commerce store is simply telling the customer, “Mention the product, and I’ll help you with the rest.” You know, like a genie in a bottle?
If I am brand conscious I’ll use the filter option on the app to shop from a specific brand but the cost to make me aware of the brand would be borne by the business and not the marketplace.
In many ways, marketplaces kill the idea of uniqueness.
When I get a stitched dress, it is made specifically for my taste and to suit my physical appearance but when I buy from a marketplace everyone is buying the same dress.
One could argue that sameness is an outcome of factory-produced goods but in the present day, algorithms play a bigger role in influencing sameness.
A marketplace algorithm will favour the product that is bought frequently and rank it higher, making it more likely to be bought.
Platform dominance
People use marketplaces because they’re functional and easy to use. We use an app like Spotify because of all the artists we can discover on the platform. In the past, we would have to buy a CD or cassette for a specific band’s music.
Marketplaces wield greater power by hosting the creators on a platform. The creator is not bigger than the platform they are present on.
Another instance of platform dominance is the case of Joe Rogan. When he hosted his podcasts on YouTube, there was free access. His podcasts also gave way for other creators to make money off of the content he was producing.
And you are very to likely use YouTube for reasons which have nothing to do with the creator’s existence on the platform.
Given how pervasive a marketplace is, it has changed buying behaviour in some fundamental ways.
Between the upsides and downsides, in what way is consumer behaviour shaping the change we are about to witness with marketplaces?
E-commerce shopping shifted consumer behaviour in radical ways. We now expect free trails of mattresses, hassle-free returns, cash reversals for returning a product and on-demand exchanges.
Marketplaces can afford to provide this level of last-mile serviceability because of the scale at which they operate. It helps a marketplace stand out and become a preferred shopping platform.
A hindrance-free, online shopping experience is a win-win for everyone, right? Not always.
So, who really is winning then?
In the last few years, there has been a massive rise in online shopping exacerbated because of COVID-19. But many established brands, as well as quite a few D2C (direct-to-consumer) businesses, have ventured into driving traffic on their personal websites and apps.
More importantly, the benefits of change in buying behaviour enabled by a marketplace are actually reaping benefits for brands and businesses that are choosing to have their own app.
When I order a meal via the McDonald’s app I get a higher discount on the order. Often times I order directly from a clothing brand's website because it takes less time to make choices.
Quite recently, I wanted to order jewellery for gifting. I decided to buy from a D2C store. What surprised me the most was that the website, where all the products were listed, incentivised me to download an app to get better discounts. And download, I did.
When I downloaded the jewellery store app, I suddenly realised how this was happening in a few other instances.
Why are consumers as well businesses moving away from the marketplace?
I downloaded the McDonald’s app just to get access to the great offers that I got by ordering directly. You may claim that I am shopping for offers and downloading every other app to get a discount. You would be right too, but the reasons for the shift point to some interesting factors that are usually hidden from a customer.
What do these hidden costs mean for a business?
Commission costs
Marketplaces enable a business, restaurant, or product to get discovered through the platform but the commission costs can be in the range of 24% to 28% of the order value.
While marketplaces should earn for enabling a sale that wouldn’t have happened at all, it can get expensive for a business to depend on the aggregator. Commission costs could be relabelled as dependency costs.
Moreover, there has been a massive spike in automation SaaS for logistics and order fulfilment, that cater to a specific business sector.
When the commission costs to do business in a marketplace are high, a business can very well decide to go solo.
Discovery costs
As I mentioned earlier, the curse of abundance plagues the feature which made marketplaces a good business. As all sellers decide to list on the aggregator it is difficult to discover and choose.
Because a business is discoverable there is no guarantee that it will earn business.
To solve this, apps like Amazon and Zomato charge the sellers extra to promote their products and feature them among the top 5 results as can be seen below.
A marketplace doubles up as an in-built ad platform for a business.
The larger implication of these issues is that unbundling of brands from aggregators, and creators from platforms are taking place widely.
As consumers we benefitted greatly by having everything available with one search query away. But are we ready for the gradual shift that is taking place as businesses unsubscribe and unbundle their offerings from a marketplace?
It is almost as if shops are moving out of a mall set-up and opening separate shops outside the mall.
The ease of getting listed online on a platform is coming back to bite businesses, both large and small.
The only difference in the unbundling experience for a small business is that it doesn’t have the deep pockets that an established business like McDonald’s does. McDonald’s can afford to pay a commission to the aggregator, pay to build their own app, offer deep discounts and also spend on brand awareness to drive traffic to their app.
But I am observing the trend of businesses operating independently via websites on a big scale, all thanks to Instagram. D2C businesses are spending a lot on Instagram Ads in order to drive traffic towards their page and subsequently a website, or an app. There is a visible shift in consumers frequently shopping from independent brands too.
But how sustainable can this shift be? I will explore the same with the context of D2C stores in the Stoa Daily tomorrow.
If you liked reading this piece, you would enjoy this piece we wrote earlier.
