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Online Marketplaces: Platforms for Buyers and Sellers

Updated: Oct 22, 2021

By Malcolm Lee Wen Jie

Online Marketplaces Buyers and Sellers Sustainability

📖 Key Takeaway

  • Marketplace models are designed to connect buyers and sellers, thereby reducing inefficiencies in existing transactions

  • Marketplaces have two main groups of users (buyers and sellers), making it important to manage the supply of both users in order to be successful

  • Depending on the nature of the industry, marketplaces will require different features and matching mechanisms to bring value to the users

Description

A business which connects buyers to sellers for a certain product or service; both buyers and sellers are the platform's customers

Online Marketplaces Buyers and Sellers Sustainability

🔑 Key Terms:

Buyers - Users that are willing to purchase a certain product or service from the platform

Sellers - Users that are willing to offer a certain product or service on the platform

Matching mechanism - A way to connect both sides of the market

CAC - Customer Acquisition Cost, the cost required to acquire a new customer

LTV - Life Time Value, the revenue from a customer over its lifetime

🤵 Business Context - Customer Journey

A typical customer or buyer goes through the following illustrative user journey, which shows the process during the purchase

  1. Inspiration - Through marketing and advertising, customers will be intrigued and be interested in using a product/service

  2. Discovery - Once the customer has an interest, they will start to look for prospective sellers for said product/service; the customer is now window-shopping among different sellers

  3. Matching - The customer can be connected with the seller through a few methods; either the customer selects a particular seller, or a seller proactively reaches out to the customer

  4. Communication - Before committing to a purchase, the customer might want to discuss with the seller to understand more about the product/service; this presales section can make or break the purchase

  5. Booking - For big ticket items or services, it might be necessary to make a reservation prior to the purchase

  6. Transaction - Once the customer has decided to purchase, they will make the payment in return for the product/service

  7. Delivery - After the payment has been made, the seller will have to deliver the promised product/service to the customer

  8. Reviews - After using the product/service, customers may want to leave a review (if possible) to encourage (or discourage) other buyers from working with this seller

❔ Why Implement Marketplace Models?

Marketplaces, once successful, can be very beneficial. Some reasons include

  • Lower cost for buyers due to removal of the middleman in the purchase process

  • Improving information transparency between buyers and sellers

  • Create a network effect of buyer and seller to benefit all the users in the network (eg. buyers are able to bring other buyers through recommendations, sellers can improve their offerings through feedbacks)

  • Data capturing to support new value creation


Online Marketplaces Buyers and Sellers Sustainability

📊 Different types of Marketplaces

Horizontal Marketplaces - Marketplace that offers a range of products/services across different categories, catering to a large group of customers

  • Typically offers similar and undifferentiated services to customers

  • May lead to repeat buyers working directly with sellers once trust has been established, resulting in the redundancy of the marketplace platform

  • Examples: Amazon, Carousell, eBay, Craigslist


Vertical Marketplaces - Marketplace that focuses on one specific type of product/services, allowing them to better cater to buyers

  • Typically offers superior features to better support users according to their needs

  • Book marketplaces → book recommendations from similar genre/authors

  • Car marketplaces → financing calculators, insurance purchase, workshop recommendations

  • May lead to repeat buyers working directly with sellers once trust has been established, resulting in the redundancy of the marketplace platform

  • Examples: Helpling, Carro, Book Depository


"Uber for X" - Marketplaces that automatically matches buyers and sellers, creating a complete and seamless experience for both buyers and sellers

  • Very important for such marketplaces to be able to create a seamless experience, which typically includes

  • Automated matching with sellers → this also implies that the supply of sellers has to be readily available

  • Setting prices that are agreeable to both buyers and sellers

  • Handling transactions

  • The platforms typically own the customer relationships, resulting in the commoditisation of the sellers

  • Examples: Grab, Deliveroo

Online Marketplaces Buyers and Sellers Sustainability

📍 Setting up marketplace businesses

Before launching a marketplace business, some of the things to consider include: Market served - which vertical is your marketplace going to address?

  • The general trend is for marketplaces to tackle specific verticals due to high user engagement

  • The narrower the vertical, the more tailored the features can be (for eg. selling local agricultural produces vs selling locally grown salad greens)


Matching mechanism - how will you connect buyers and sellers?

  • Depending on how involved the platform is in matching the users, the user experience will vary greatly

  • Some modes of connecting buyers and sellers include:

  • Listing sellers (Shopee displays all products on its platform openly)

  • Filtering sellers (Carro allows filtering of sellers based on the cars that buyers are interested in)

  • Recommending sellers (Deliveroo recommends sellers based on previous purchases)

  • Automated matching with sellers (Grab automatically matches drivers and riders based on distance and route)

  • Automated purchasing from sellers (Treedots automatically prepare the basket of vegetables for buyers from their suppliers)


Platform features - what are the features that you want to include to engage with the users?

  • Depending on the users of the marketplace, the features available can either be very bare-bones or very fancy

  • Features need to be tailored to the users who will be using it as well

  • For a marketplace focused on books, it makes sense to recommend books from similar authors. The same recommendation engine will probable be less relevant for a marketplace focused on used cars

Monetisation - how are you going to make money?

  • To select the best monetisation, first understand who needs the platform more (buyer or seller?). Based on that, the platform should charge the one who needs the platform more

  • Some monetisation method include:

  • Advertisement - placing an advertisement on the platform, allowing the company to offer their platform for free to the users while charging the advertisers

  • Freemium - offering certain features for free while locking other premium features behind a certain fee

  • Subscription - charging users a certain fee for access to the platform

  • Commission - charging buyers or sellers a certain percentage for every transaction


Launch - which should you focus first when going from 0 to 1?

  • Marketplace platforms typically face the "chicken and egg" problem as a result of them being a two-sided business

  • Without enough sellers, few buyers will go to the platform. Conversely, without enough buyers, sellers are not incentivised to use the platform

  • Once again, it is important to understand who needs the platform more (buyer or seller?) in order to determine which part of the marketplace to work on first

  • Anecdotally, it is more important to build a good base of sellers. If the buyers are accurately defined and they are highly interested in the platform, they will somehow find their way onto the platform anyway.


Scaling - which should you focus next when going from 1 to 100?

  • Once the value is validated through healthy buyer-seller engagements, it is time to scale the network

  • Many platforms start to drive up their marketing campaigns in order to capture more buyers from the market in order to scale quickly; other companies focus on improving their marketplace platform in order to better engage users and retain them

  • Marketing campaigns typically build users quickly, but incur higher CAC for the company

  • Improving platform usually take a longer time to generate higher returns on investment, but is typically more sustainable for the business

  • Neither is better than the other since the best option is often situational


🔖 References: https://a16z.com/2018/11/27/services-marketplaces-service-economy-evolution-whats-next/ https://productmint.com/the-marketplace-business-model-a-complete-guide/#Definition

Online Marketplaces Buyers and Sellers Sustainability

Here's the deck for those interested!



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