Are digital marketplaces the future of retail?

Profile picture for user barb.mosher By Barb Mosher Zinck October 30, 2018
The stats are in: digital marketplaces are surging. But who will be the winners - besides Amazon - when the holiday season wraps? Barb reviews new marketplace survey data, and gives her take on what will set successful marketplaces apart.

If you’re like millions of other people, Amazon is your go-to place online to buy pretty much anything. And if you are a Prime member, you get your products faster.

But Amazon isn’t the only online marketplace, and according to new research from Altimeter Group and Kahuna, the market is only going to get bigger.

In The State (and Future) of Digital Marketplaces Report, Brian Solis, Principal Analyst with Altimeter Research, takes an in-depth look at the evolution and current state of digital marketplaces like eBay, Amazon and the many others that serve wide and niche markets.

Digital marketplaces are booming

Just how big are these digital marketplaces? Consider the following from the report:

  • eBay, which today sells new and used products, has over 170 million buyers on its platform.
  • In April 2018, over 300,000 small businesses sold products on Amazon’s platform - and these products are more profitable than those Amazon fulfills directly.
  • Alibaba (the Chinese equivalent to Amazon) has 552 million users on its platform.

These are just a few of the big marketplaces. According to a recent study quoted in this report, marketplaces will account for 40% of the global online retail market by 2020.

We’ve been headed in the direction of marketplaces for a while now, but Solis suggested that it’s only recently that they have taken off and the potential for real growth has arrived. Technology is part of the reason: mobile, apps, location-awareness, device integration, personalization anytime, anywhere. All these advancements support convenience, choice, and simplicity - and the best marketplaces use them extensively.

Let’s add some revenue numbers to seal the story here:

  • ⅔ of marketplaces generate $50 million plus annually
  • ⅓ of marketplaces generate $100 million plus annually

Then, there’s GMV. GMV - gross merchandise volume - is the total value of merchandise sold to  customers through a marketplace:

  • 35% reported GMV between $500 and $999 million
  • 25% reported GMV between $250 and $499 million

There’s no doubt there’s an opportunity here.

Welcome to the platform economy

Solis said that we’ve arrived at the “platform economy” and that marketplaces are becoming platforms:

Marketplaces have become platforms and as a result, they’re enhancing product and service models and experiences between what sellers offer and what buyers demand. The effect is expanded business opportunities for sellers/providers and a broader array of choice and value for consumers.

Whether it’s a service marketplace (like Thumbtack or Angie’s List) or a product marketplace (Amazon, Touch of Modern), the dynamics are changing, and marketplaces are starting to face a lot of competition. Those that will ultimately succeed are going to have to rethink not only their value proposition, but the experiences they deliver to both buyers and sellers:


From the report The State (and Future) of Digital Marketplaces Report

Getting and keeping customers and sellers

Marketplaces are hard to manage partly because not only do you need to attract and retain buyers, you have to work hard to attract and retain sellers. And the two objectives are tightly integrated.

In this report, the top customer-facing challenges were competitive differentiation (39%) and buyer retention (32%). What does a marketplace offer that will make customers choose it over another similar marketplace? That differentiation isn’t only about the products/services. Buyers leave primarily due to a lack of sellers that meet their needs (53%) and logistical challenges like shipping and fees (49%). Interestingly from a marketing standpoint, 36% leave because they get too many irrelevant emails and push messages.

Keeping sellers happy has its challenges as well. The report notes the three main reasons sellers disengage: lack of differentiation (46%), insufficient sales (33%), and marketplace service fees (33%).

As Solis points out in the report, it’s a continual balancing act to attract the right ratio of buyers to sellers, and the right approach to keep both loyal and happy. He talked about the sweet spot of seller and transaction concentration as “80% of total transactions by 20% of sellers.” However, of the study respondents, 45% think diversity is good, and 60-79% of the sellers are driving 80% of activity. Maybe marketplaces will break with the norm.

What’s next: marketplaces as experiences

Every day you hear about a new digital marketplace. Brands are getting into it as well. For example, SocialMediopolis has created a services marketplace to connect social media marketers with companies who need their services. Bestbuy, a consumer electronics retailer, shows products available from partners on their e-commerce site. It seems like there is no limit to the type of digital marketplace you can create.

But what this growth means is that marketplaces will be under pressure to differentiate and provide experiences that go beyond selling products or services to becoming what Solis called “go-to discovery hubs.”

What’s next moves marketplaces beyond hyper-localized or nuanced product and service platforms into full experience centers. While consumers may want greater choices, they also want simplicity, utility, integration and value-added experiences(17). As a result, marketplaces will look beyond connecting buyers, sellers and service providers to unify platforms that deliver complete experiences as the product or service. This changes the value proposition as it starts by changing the problem statement.

Solis gave the example of a family looking at solutions for dinner. A marketplace that provides an experience that offers multiple options - restaurants, take out, etc. in one place, and combines other elements such as reviews, pictures, coupons, setting personal preferences; this is a marketplace that provides a complete experience - a hub - to find everything they need to make a decision on what to do for dinner.

It’s this holistic experience that Solis said is the next competitive advantage. And we aren’t there yet.

My take

There’s a reason I shop at Amazon. I like the variety of selection - one place to buy most of my Christmas presents. I don’t have to fight the holiday shoppers or shop around for the best price. Delivery is fast; returns are surprisingly easy. I also like Costco online for the same reasons.

Would I use a niche marketplace? I would have to be very sure I would get a similar experience as I do with Amazon or Costco. Trust that the products are good, the services and the sellers are trustworthy, the price is right, delivery of the product or service is fast and easy.

Yes, Amazon has set a gold standard, and while everyone might not expect the same level of experience, they will want to know they can trust the marketplace to deliver. But as more marketplaces spin up to take advantage of this way to sell products and services, most will struggle, and many will not survive because they won’t be able to deliver that holistic experience Solis talked about effectively.