Online marketplaces are revolutionizing the way consumers buy goods and services. By offering consumers greater choice, more transparent quality, and lower prices than offline transactions, they continue to steal share from offline sales. However, not all marketplace businesses are the same. Common attributes which differentiate online marketplaces include the number of consumers in the business’ target market, the average basket size, and the extent to which repeat purchases are made. For example, eBay, which connects sellers of everything from clothing to electronics to collectibles with buyers, is targeting a larger market than Etsy, which does the same only for handmade design items. The average basket size on Expedia, which connects airlines and hotels with customers, is greater than that on eBay. Finally, repeat purchases are greater on Just Eat than Expedia because we eat more often than we travel. The combination of all of these factors helps determine how attractive a marketplace is from the perspective of market size.
However, in addition to these fundamental factors, there is one more which is a critical predictor of the success of an online marketplace: the degree to which repeat transactions take place online. As customer acquisition costs through online marketing channels rise, it becomes increasingly important to increase the lifetime value of your existing customers by having them conduct repeat purchases. And since online marketplaces only generate revenue when a transaction is conducted online, it is very important that these repeat purchases also be made online. And therein lies the differentiating factor. Certain marketplaces naturally encourage repeat online purchases, while others are much more likely to see repeat purchases conducted offline.
So what determines whether a marketplace will experience repeat purchases online or offline? The answer lies in the buyer’s primary motivation for visiting the marketplace. More specifically, is the buyer looking for variety or quality? In each marketplace, buyers are looking for a mix of both variety and quality, so it is the extent to which they seek each attribute that determines how likely they are to make repeat purchases online. For example, buyers visiting Expedia clearly value variety more than quality. Although they may have a favorite airline that they prefer traveling with, if quality was their primary determinant they would book directly from that airline’s website. Instead, they choose to visit Expedia because it offers a variety of airline options at different prices. The desire to compare prices is an important driver of a buyer’s demand for variety. On the other end of the spectrum, buyers visiting Serviceninja, a marketplace for home improvement services, value quality more than variety. Their goal is to discover a carpenter who meets their quality standards. Although they may use Serviceninja to find this person, if they are satisfied with his performance they will use the same carpenter in the future. They will no longer need to go to Serviceninja to explore other carpenters. Repeat purchases will take place offline and Serviceninja will not be able to earn revenue from these future purchases.
If you’re an entrepreneur looking to build an online marketplace or an investor looking to back one, you’ve likely paid careful attention to the need for repeat purchases among your target customers. However, it’s equally important that these repeat purchases take place online. This doesn’t mean that you can’t build a successful business otherwise. For instance, although your online retention may be low, you may develop an incredibly efficient and low-cost customer acquisition engine. Or you may find a way to earn revenue from repeat purchases even if they take place offline. For example, you could try selling packages consisting of multiple purchases to your customers upfront. Just be aware that this will be an additional hurdle that you will need to overcome.