Why Retailers Should Transition to a Marketplace Model
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For the past two years, a dominant trend has been reshaping ecommerce. Enterprise marketplaces — online platforms that allow businesses to integrate a network of third-party sellers into their ecommerce strategy — have taken hold in every corner of the internet economy. From established titans like eBay and the sprawling Amazon Marketplace to new players in highly specific industries, marketplaces are now competing to serve customers in every corner of the world.
Recent marketplace players include the iconic retailer, Macy’s, prominent U.S. grocery chain, Kroger, and Maisons du Monde, one of Europe’s most popular retailers for furniture and home goods. The marketplace model has also reached into B2B commerce, with major manufacturers and suppliers like ABB and Toyota Material Handling launching successful platforms.
Consumers may be surprised by how many of their favorite ecommerce experiences are delivered by marketplaces — so much so that they now account for two-thirds of ecommerce sales. The numbers don’t lie: For two consecutive years, enterprise marketplaces have grown at twice the overall rate of ecommerce.
It shouldn’t be surprising that marketplaces grew rapidly during the last two years of economic growth, as overall spending was bolstered by government stimulus packages and a competitive job market. But with the economy on the verge of a recession, has the moment passed for brands to take advantage of the opportunity? As consumers cut back on spending, will retailers see less ROI from their marketplace transformations?
There’s good news for latecomers to the marketplace moment: It’s not too late. In fact, transitioning to a marketplace model is even more advantageous during moments of economic uncertainty. Here’s why.
Related: How to Gain an Edge in the Ecommerce Marketplace
The current challenge
Many business leaders would be reticent to embark on a major technology investment during an economic downturn, and those doubts are understandable. With both private and public companies alike under pressure to reduce spending, how can a CEO justify taking such a big risk on digital transformation? What’s more, won’t a marketplace threaten to cut into revenues by dividing attention among a group of third-party sellers?
These are important questions to ask, but they miss the bigger picture. Our recent economic woes have been driven by several factors, but two of the most important are inflation and a tangled supply chain. The inflation crisis is significantly dampening consumer spending, causing shoppers to limit their purchases and look for lower-cost options on their favorite products. At the same time, political unrest and the long-term impacts of the Covid pandemic have made it more difficult for businesses to source, store and ship the products being demanded by their customers; these same factors also make it more challenging to accurately predict demand.
If you were given the opportunity to buy a product that addresses those problems, would you think twice about the investment?
Related: How Online Marketplaces Are Changing the Face of Entrepreneurship
Resilience and flexibility
The largest and most immediate benefit of the marketplace model is a sudden growth in product assortment. An enterprise marketplace may launch with 100 or more third-party sellers, increasing the product catalog from a few thousand to hundreds of thousands or even millions of products.
This broad product offering makes it possible for marketplace operators to avoid the potential consequences of an out-of-stock item or a sudden change in consumer spending power. When a popular product goes out of stock, the marketplace operator can call on one or more of its partners for a similar product. Likewise, if customers are no longer willing to pay for a premium product, a third-party seller within the same category will often have a similar product at a lower price point — ensuring that the marketplace operator can meet customers’ needs, no matter the price point.
The third-party seller network also provides a key benefit in terms of logistics. Typically, retailers are responsible for storing and shipping their entire inventory, relying on massive hubs to serve a national or even global customer base. With an enterprise marketplace, the burden of storing and fulfilling orders is spread out among the seller network. If a marketplace operator is struggling to find drivers to ship orders from its Sioux Falls warehouse, it can rely on a third-party partner in Des Moines to get the job done. More importantly, the operator doesn’t have to take on the costs of maintaining the additional warehouse space. The marketplace model offers both resilience and flexibility without requiring the operator to take on the risk themselves.
Related: This is the Reason for the Popularity of Online Marketplaces
Beyond the short-term benefits during tight economic times, the flexibility offered by enterprise marketplaces can put operators in a strong position as the economy recovers. The same flexibility that reduces supply chain and inventory risks for marketplace operators also allows them to take new calculated risks with regard to product lines and business strategies, which can then be used to inform long-term planning around first-party assortment and potential expansion.
Onboarding new third-party sellers allows brands to experiment with new products or categories. For grocery chains, that could involve introducing a line of home goods and decorations. For sporting goods retailers, third-party sellers could allow them to introduce camping gear and other outdoor products.
The advantage here is that these experiments carry fewer risks than if a brand were to introduce these product lines with owned inventory. If the grocery chain’s new line of decorations doesn’t prove popular with shoppers, they can quickly pivot without having to clear out warehouses full of inventory. Creative retailers can make several attempts at these product line expansions — when they eventually get it right, their customers will reward them.
Two years of eye-popping growth show that the marketplace moment is here. The clear long-term benefits of the marketplace model show that it’s here to stay.