Some retailers lament the woes of Amazon and other marketplaces cutting into their sales, profit, market share and valuation.
Some retailers launch their own marketplace to become the disruptor instead of the disrupted.
Retailers large and small have transformed their businesses with the marketplace business model and technology. Walmart, Target, Home Depot and most big box retailers run their own successful marketplaces. Many mid-size and specialty retailers like Urban Outfitters, 1-800 Flowers, Oriental Trading and Giant Eagle also operate marketplaces.
New entrants to the retail space that are basing their business on the marketplace model have been quick to disrupt the retail segment. For example, within seven years StockX and GOAT have each grown from nothing to multi-billion-dollar valuations selling sneakers by launching their own marketplaces.
But how can a retailer launch its own marketplace? It is important to understand both the business implications and the technology platform requirements. The Marketplace Maturity Model (MMM) defines the evolution of the retail business model from basic first-party goods through five stages of evolution. The technology aspect can be simplified by selecting one of many available marketplace platform vendors.
The Marketplace Maturity Model (MMM) is the industry standard assessment of marketplace capabilities and details five levels of sophistication of digital commerce and marketplaces.
- Level 1 — 1st Party Ecommerce: At this level, the site operator sources products, negotiates purchase contracts, merchandises, carries the inventory (physically and financially), determines pricing, ships products and handles the logistics and returns on its own. This approach requires dedicated human capital from the buyer, as the business will need to internally manage most day-to-day marketplace operations.
- Level 2 — Dropship: Drop shipping adds third-party products without the need to physically or financially carry the products. However, the ecommerce operator must still source products, negotiate contracts, merchandise, price and support products. In this instance, the site operator functions more as a middleman between product and consumer than a representative of the company that is directly producing the product or service in-house.
- Level 3 — Third-Party Marketplace: With this approach, the site operator enables others to conduct transactions on their commerce platform, which in turn creates a scalable network effect ecosystem. Third-party sellers source products, merchandise, carry, price, fulfill and often support products, while the marketplace operator receives a commission for facilitating the transaction. While more of a hands-off approach in terms of transactions, most work at this level is focused on developing an efficient and reliable platform.
- Level 4 — Quantitative Management: Automation is essential to quantitative management. Operators can run a marketplace by leveraging data and automated platforms to scale their business. Massive amounts of data can be collected, monitored and used to fine-tune processes such as seller management, product curation and user experience (among other aspects).
- Level 5 — Optimizing: Leveraged by Amazon and other leading marketplaces, this level involves continuous innovation when it comes to new features, business models, markets and integrations. An example is selling third-party services, such as electrical work, in addition to a third-party product such as a ceiling fan. This unique combination is used to deliver an all-encompassing customer experience.
Many strategic business decisions and activities are needed to evolve to the next stage. These include category selection, curation policies, commission structures, seller terms and conditions, seller recruiting, hiring for a marketplace organization, seller management and much more.
All the marketplaces that we built and launched five to 15 years ago were expensive and lengthy custom software builds. However, in the past five years many marketplace software vendors have launched platforms that simplify and accelerate launching a marketplace. The challenge now is selecting one of the many vendors.
The Marketplace Suite Spot report provides a detailed evaluation of seven marketplace vendors and an overview of 10 others. The leading vendors offer varying degrees of features, customization and cost, which is usually a combination of a one-time setup fee, a recurring fixed subscription fee and a percentage of GMV.
Vendors’ marketplace platforms fall into two main categories. “Point solution” or “Best of Breed” vendors offer only seller-facing marketplace features and must be integrated with a customer-facing ecommerce engine (like Magento, Salesforce Commerce Cloud, etc.). “Full stack” vendors offer both a customer-facing ecommerce engine and a seller-facing marketplace engine. Generally the point solution vendors offer more robust marketplace features, while the full stack vendors offer other capabilities (some also include an order management system).
Mirakl, Marketplacer, Unirgy and Webkul are examples of enterprise marketplace point solutions. VTEX, Spryker and Ultra Commerce are examples of full stack vendors.
Another important vendor evaluation criteria is Marketplace Scale. Common industry benchmarks used to determine scale include gross merchandise value (GMV), or the total dollar value of annual online sales (combining first- and third-party sales), and SKU counts, which include total variants of all products. Other benchmarks to consider are the total number of sellers (all third-party vendors selling on the marketplace) and project budget, which is usually the first-year budget allocated to build and launch a marketplace, including the cost of software. The project budget is typically structured to include a one-time upfront fee plus 12 months of recurring fees, as well as professional services for design and implementation.
The marketplace transformation requires addressing both the business and technology aspects of the journey. Many retailers have navigated this process with the assistance of a digital marketplace consultancy in the stages of strategy formation, technology stack selection, technology implementation, launch and marketplace performance management.
Tom McFadyen is CEO, Analyst and Author at McFadyen Digital. Over the past quarter century, he has overseen hundreds of ecommerce and marketplace projects, which cumulatively generate tens of billions of dollars of annual online revenue. After starting McFadyen Digital 35 years ago, he grew it to several hundred employees operating globally across the U.S., Brazil and India. McFadyen Digital is currently a leading advisor and implementer of award-winning digital marketplaces. McFadyen is also a board member or committee leader in NRF, YPO and EO, and has authored two commerce-focused books, including the Amazon best-seller Marketplace Best Practices.