Something as Simple As a Virtual Marketplace Is Reshaping Retail

Gaining From the Virtual Marketplace Ecommerce Business Model

Virtual Marketplace
Virtual Marketplace. FingerMedium / DigitalVision Vectors / Getty Images

You know how an ecommerce business works. It is basically an online retail store. For instance, Amazon.com is an ecommerce website. But there is another related business model that I would like to explore in detail -- that is the virtual marketplace model. The most famous marketplace is eBay.com, though in all fairness Amazon.com too has its own marketplace.

What Is a Virtual Marketplace?

A virtual marketplace, also called an ecommerce marketplace, allows third party sellers to sell their wares.

These third party sellers could be individual traders, large-scale manufacturers of goods, or anything in between.

How Do Virtual Marketplaces Work?

Unlike conventional ecommerce websites, marketplaces transfer the burden of maintaining inventories, logistics, images, product descriptions, and pricing to the seller. There is more than one operational model for marketplaces, but the most common method involves marketplaces being merely an order booking mechanism.

Marketplaces display the seller's wares, collect orders and payments, forward orders to the seller, track delivery, and release payment to the seller after deducting a fee.

Why Do Sellers Opt to Sell on Virtual Marketplaces Instead of Selling on Their Own Websites?

Many sellers on virtual marketplaces sell on their own websites as well. So, this is not an either or situation. The reason marketplaces are attractive to sellers is that they tend to have huge traffic.

For the small seller to attract even a fraction of that traffic on her or his own website is an uphill task. In addition, selling on marketplaces does away with the requirement of having your own website, hosting, technology, payment gateway, accounting software, and other headaches.

The Advantages of a Marketplace Model

For the ecommerce player the marketplace model has the following advantages:

  • It can sell a large number of SKUs without maintaining any inventory.
  • Operational efficiencies improve as some overheads are transferred to the seller.
  • Being a marketplace provider allows you to focus on developing ecommerce technologies.
  • Margins improve.

All in all, it seems like a win-win to operate the marketplace model instead of the conventional ecommerce business model. But there are some serious flaws in the marketplace model too.

The Disadvantages of a Marketplace Model

The marketplace is not a bed of roses. Here is what worries me:

  • To begin with it is tough to differentiate your ecommerce business. In the marketplace model, the problem becomes still more acute as you are not even the seller of your own goods.
  • It is much tougher to implement product quality control in a marketplace model, as the seller is primarily responsible for the products. Of course, the customer will not forgive you, the marketplace, if the product quality is not up to the mark.
  • Probably the only sustainable competitive advantage that an ecommerce player can develop is a strong brand. With a multitude of sellers, brand salience is one of the first things to get hit in the marketplace model.

The Future of the Virtual Marketplace Model

Despite the disadvantages, most countries have seen the emergence of strong virtual marketplaces.

My opinion is that marketplaces are here to stay if one looks at the whole industry. In fact, the biggest ecommerce marketplaces could be bigger, and more valuable, than the biggest pure play ecommerce players. But the mortality rate of marketplaces will remain high.

Sellers are a fickle lot. They will change providers rapidly if sales do not come in. There is virtually no cost of switching marketplaces. Only the biggest marketplaces with the best traffic numbers will be able to sustain themselves.

(Note: There is another significantly different marketplace model, where ecommerce websites allow users to make their own products and sell them.

The dynamics of that model are quite different.)