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Online Marketplace

Online Marketplace

Online Marketplace Definition

An online marketplace is a digital platform that connects buyers to multiple third-party sellers. Unlike traditional brick-and-mortar or ecommerce stores, online marketplaces do not own inventory. Instead, they provide a venue for sellers to offer products and services to potential customers. The marketplace operator typically earns revenue through commissions on sales or by charging fees for using their platform.

Building a successful online marketplace requires careful planning, a solid understanding of your target market, and a commitment to providing a high-quality user experience. With the right strategy in place, however, an online marketplace can provide a lucrative opportunity for startups, mid-market businesses, and enterprise businesses alike looking to launch or expand their business.

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How does an online marketplace work?

If you want to better understand how online marketplaces work, it can be helpful to first go through the key differences between traditional, first-party commerce and multi-vendor marketplaces:

Product assortment 

In first-party ecommerce, the business purchases inventory, stores it in their warehouses, and fulfills orders themselves.  Unsurprisingly, this limits the amount of products you can offer to buyers. With third-party sellers, on the other hand, it’s much easier to expand product assortment, as the sellers take on the heavy load of uploading and warehousing products and fulfilling orders. So online marketplace businesses can offer more assortment with less risk.

Data management

Businesses that own first-party ecommerce sites manage, enrich, and then upload all of the necessary data onto their online store. In a marketplace, sellers manage their own product data and upload it directly onto the marketplace operator's website.

Order fulfillment and support

In both first-party ecommerce and online marketplaces, the operator takes customer orders. However, in first-party, the business fulfills the orders and provides support for the products they ship. In a marketplace, third-party sellers fulfill the orders, and there's a collaboration between the host company and the sellers to provide support to the end customer.

Returns handling

Owners of traditional ecommerce businesses typically handle returns by taking them back to their warehouse. With a multi-vendor marketplace platform, third-party sellers take returned merchandise to their own warehouse, and there's usually collaboration between the host company and sellers to optimize the process.

Types of online marketplaces 

While the definition of an online marketplace holds true across all online marketplace businesses, there are differences in what’s being sold, by whom and to whom. 

Physical goods marketplaces

Physical goods marketplaces offer tangible products for sale to consumers or other businesses. These marketplaces typically feature a wide range of product categories, allowing customers to shop for many different items in one place.

Service marketplaces

Service marketplaces connect individuals or businesses seeking services to providers on the platform. Some service marketplaces offer a wide range of services, while some are specific to a single type of job.

Digital marketplaces

Digital marketplaces facilitate the distribution and sale of digital goods and services, including software, ebooks, music, videos, online courses, etc. These platforms enable content creators and software developers to reach a broader audience and monetize their digital products. Unlike physical goods marketplaces, digital marketplaces don’t require logistics capabilities around warehousing or returns. 

Horizontal marketplace

Horizontal marketplaces offer a diverse range of products or services across various industries and categories. A horizontal online marketplace caters to a broad audience and aims to fulfill different consumer needs, like an online department store.

Vertical marketplaces

Vertical marketplaces focus on a specific industry, sector, or product category, offering a curated selection of goods or services within that niche. By specializing in a particular area, vertical marketplaces can provide much more targeted products and experiences to buyers.

B2B marketplaces

Business-to-business (B2B) marketplaces facilitate buying and selling goods or services between — you guessed it — businesses. These platforms typically cater to organizational needs, such as procurement, supply chain management, and vendor sourcing.

B2C marketplaces

Business-to-consumer (B2C) marketplaces facilitate transactions between businesses and individual consumers. These platforms offer a wide range of products from various sellers, with a focus on convenience, selection, and personal shopping experiences.

P2P marketplaces

Peer-to-peer (P2P) marketplaces connect individuals who want to share products or services. P2P online marketplace users can act as both consumers and providers, offering or renting out their goods or services to others within the community.

What’s an example of an online marketplace?

Amazon is the most visited online marketplace in the world, with 4.8 billion visits per month. 

After starting out as an ecommerce bookstore, in 1999 Amazon evolved to offer a 3rd party seller marketplace. This ultimately allowed them to diversify and expand their product offerings— becoming the household name they are today. As an online marketplace, they offer buyers options and convenience. Today, it’s estimated that $300 billion of Amazon’s GMV comes from third-party sellers. 

Amazon’s popularity has set a precedent for the whole industry. According to a Salesforce study, nearly 70% of business buyers expect to have an Amazon-like buying experience on other platforms.

Other top online marketplaces

Marketplaces are growing in popularity. In fact, in 2022, consumers spent 3.25+ trillion dollars on online marketplaces. Here are some other popular marketplace examples:

eBay

eBay initially gained fame as a P2P auction website but has evolved into a comprehensive global marketplace featuring a wide array of sellers, brands, and retailers. It offers both auction-style and fixed-price listings across various product categories.

Rakuten

Rakuten, based in Japan, is a global marketplace that offers a diverse range of products and services, including a thriving marketplace, TV streaming services, and a messaging app. Rakuten also offers marketing research tools to sellers.

AliExpress

Originating as an agile B2B procurement platform, AliExpress is now a B2C marketplace facilitating direct sales from businesses to consumers globally. It offers a wide range of products primarily sourced from Chinese businesses, which can sometimes result in translation issues and long shipping times to North America.

Etsy

Etsy specializes in handmade, vintage, and craft supplies sold by small businesses and individual artisans. This niche P2P marketplace operates globally, providing a low-cost, entry-level online marketplace platform for sellers to showcase their unique products. 

Walmart

Walmart, initially a brick-and-mortar retailer, ventured into ecommerce in 2000 and launched its marketplace in 2009, offering a wide range of products. The platform has gained momentum in online retailing over the years, but unlike the other marketplaces on this list, it operates only in the United States and Canada.

The benefits of an online marketplace

1. Better product assortment

Online marketplaces are able to offer more product assortment, with less risk, than first-party commerce businesses. Because they don’t own the inventory, they can carry a wider range of products, appealing to more buyers. For example, a dietary supplement distributor might add an organic produce supplier to their B2B marketplace to attract organic-only buyers.

2. Reduced overhead

‍In a first-party model, you need to hold purchase inventory from suppliers, and hold it until it sells. In an online marketplace, third-party sellers are on the hook for warehousing. At a time when there’s an acute shortage of warehouse space in the United States, an asset-light approach is particularly significant.

3. Increased agility

‍Another benefit of operating an online marketplace is the speed with which your product assortment can respond to emerging trends. Hosting a diverse set of third-party sellers on your marketplace allows you to more easily meet the ebb and flow of consumer demands.

4. Less vulnerability to disruptions

Supply chain challenges have come to the forefront in recent years, whether it’s upheaval in the Panama Canal or escalating global conflicts. With an online marketplace, you’re cushioning yourself against the impacts of these events with third-party sellers able to pick up the slack.

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