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Marketplace Best Practices
April 24, 2023

A Quick Guide to Maximizing Marketplace Margins

Nicole Kahansky
Nicole Kahansky

Marketplaces are uniquely positioned to generate sales on a considerable scale. The multi-vendor model lends itself to infinite SKU depth, increased customer reach…and low margins. 

Unfortunately, big doesn’t always equal profit. A giant marketplace can still operate at neutral margins or even a loss. So, what’s the best way to break the profitability barrier? 

By monetizing the marketplace itself.

In the webinar, The ABCs of Scaling Your Marketplace Promotions, Nautical's Founder and CEO Ryan Lee, and's CEO and Founder Andrew Yates, lay out how to maximize margins within your marketplace infrastructure. 

Here are key insights from their enlightening conversation. 

To Improve Marketplace Margins, Look Beyond Sales Volume

In many cases, marketplaces run slimmer margins than their first-party commerce counterparts. A brand that sells its own product can make margins upwards of 70%. But, as Ryan points out, marketplace transactions have margins closer to 5-20%. (The good news is 5% is still massive at scale.)

Marketplaces bump up against a profitability ceiling when:

  • Revenue is solely based on seller commissions. While there are many ways to monetize a marketplace, operators can only take so much off the top and still appeal to vendors. 
  • They can’t raise prices and remain competitive. If a blender costs more on a marketplace than a retailer’s website, the marketplace will lose the sale.
  • Sales don’t scale linearly with profits. Sales volume can mean more revenue but also more costs. 

To become profitable, marketplaces in this predicament must think beyond their primary revenue stream. One way to do this is to turn the marketplace into a product.

Productize Your Marketplace By Monetizing Your Infrastructure 

Your marketplace infrastructure holds a lot of value. The data it collects, the technology it uses, the network it creates: by productizing these components of your infrastructure, you open more doors for revenue. 

Take Amazon vs. Sears, for example. 

Amazon productized its infrastructure while Sears didn’t — and suffered the consequences. Both companies followed similar business models, dropshipping products to their customer’s front doors.

“The difference,” Ryan explains, “was some genius inside of Amazon said, ‘Wow! We're spending a lot of money on our infrastructure. We should productize this and offer it to other customers — meaning AWS cloud — and make a lot of money on this. [AWS cloud] is a product they probably make a 90% margin on.” 

While Amazon turned its marketplace infrastructure into a lucrative revenue stream, Sears collapsed under the weight of its competition, thin margins, and the tech debt that it never monetized. 

The lesson here is to turn marketplace tools into a revenue stream. 

You don’t have to sell your cloud infrastructure to do this. Most marketplaces can easily productize their infrastructure by monetizing the seller experience. Here are a few monetization levers you can pull to transform sellers into customers with very little effort: 

Seller Tools: Your marketplace already collects sales analytics. Monetize it by offering sellers a paid analytics dashboard that provides insight into purchasing habits based on the data you’ve collected.

Recommendations: Your marketplace already has product pages with suggestions for sales add-ons. Monetize it by offering sellers a paid opportunity to appear as a complimentary seller.

Advertising: Your marketplace already presents search listings. Monetize it by offering sellers a pay-per-purchase option where sellers can be showcased on the marketplace or ranked at the top of a search. 

As additional revenue resources, these monetization levers give marketplaces an opportunity to break through the break-even ceiling. The caveat? They must support and add value to the buying and selling experience to work.  

How Marketplaces Can Increase Margins

Elegant advertising isn’t an oxymoron. To activate marketplace monetization levers in a palatable way, marketplaces should efficiently match the right buyer to the right seller by:

Giving Sellers Access to a Highly Qualified Buyer Pool

By advertising on search engines like Google or Bing, sellers get top-of-funnel customers they would have to nurture and put through a sales cycle. With marketplace advertising, sellers are advertising to prospects with buyer intent. 

Ryan explains, “When a seller shifts ad spend to participating in a marketplace, instead of doing pay-per-click, they’re doing pay-per-order. If they’re already searching on the marketplace for the item, they’re one click away from a purchase. In the end, you have an SQL (sales qualified lead) instead of an MQL (marketing qualified lead).”

Connecting Buyers With What They Want Faster

When marketplace advertising is done right, it efficiently connects buyers to the product they’re looking for — and to products they weren’t looking for but need. 

“If you’re a brand selling one product, you only get to see that one product,” said Ryan, “You don’t get to build up a profile to understand purchasing patterns, where someone buys A, and they may also buy B. With a marketplace, you get this advantage.” 

This rich understanding of purchasing patterns is how marketplace advertising retains a high value-add for buyers. “If someone buys a panel, they’ll need brackets complimenting it. That’s where recommended products shine. They help with the buyer experience.” 

Keep in mind that for marketplaces to match buyers and sellers efficiently, a sophisticated data infrastructure must underpin the marketplace. 

Increasing Your Marketplace Margins Starts with Good Data 

Advertising, recommendation engines, and search results with suggested items are a function of good data. As Ryan remarked, “At the end of the day, [a marketplace’s] value is in its data. This is where you can mine information to increase your margins.”

Unfortunately, you can’t just flip on the “data” lever at quarter end. A data infrastructure must be implemented as you’re building out your marketplace to support sophisticated ads and recommendations later on. For this reason, Andrew recommends implementing measurement tools early.

You can’t start with machine learning and recommendations without data. Think about what you see on Amazon, Facebook, and Google. They give you a whole control panel: You have IAB impressions, click rates, incrementality, and attribution. This is the data that’s going to empower all your optimization and machine learning. If that’s not in place, no matter what data you’ve collected, it’s unlikely to be good enough or formatted in the right way to get those hard-won incremental gains.”

Marketplace Profitability Begins and Ends with Infrastructure

Your marketplace’s profitability potential is determined by its infrastructure. If your infrastructure can’t orchestrate data or integrate with the AI required to match buyers and sellers, those coveted monetization levers won’t be elegant enough to add value to marketplace users. 

The good news is pre-packaged marketplace infrastructure, like Nautical, exists to set your marketplace up for profitability from day one. As Ryan said, “If a company makes a toolset that allows you to turn on monetization levers and gets you there in an 80% way, why wouldn't you do that? That’s just smart business.”

Watch the full live session below. 

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