Tag Archives: Marketplaces

Sustainable success as an e-commerce company

E-commerce sites across verticals use informational content as a way to differentiate themselves from their competitors. The reasoning is that if they attract visitors by providing informational content about the third party products they’re selling, once informed, these visitors will also purchase the products they were looking for on the same site.

At the margin, this is likely true. Providing a visitor with extensive informational content prior to making a purchase helps build trust which makes the visitor more likely to transact on the same e-commerce site. However, very often this earned trust isn’t enough to overcome differences in the price of the product on different sites. If the product is cheaper elsewhere, the visitor simply learns about the product at your site before transacting at the site with the lowest price.

This is especially true for commoditized product categories and verticals with strong third party brand names. For such product categories, the marketplace approach of aggregating and showcasing the third party products available from different suppliers, thereby letting the customer compare the prices of these products to buy from the supplier offering the product at the lowest price, is more defensible in the long term than the e-commerce approach.

This leaves the creation of a new proprietary brand as the remaining approach to achieving sustainable success as an e-commerce company.

Supply-side variety and disintermediation

The world’s most successful marketplaces share one core characteristic. Transaction frequencies, average transaction values, and the resulting market sizes are very important. However, for the impact of these attributesĀ to be amplified rather than contracted, one condition must be met. This is that the demand side of the marketplace must benefit from interacting with a variety of suppliers.

Passengers in a car hailing marketplace want to access the nearest car. That’s always a different car so there’s a benefit from supply-side variety.

Guests in a short-term peer-to-peer home rental marketplace need places to stay in the different cities they visit. They benefit from supply-side variety.

Diners ordering from a restaurant marketplace want different food options. Eating the same thing over and over again gets boring for most people so there’s a benefit from supply-side variety.

The advantage of operating a marketplace where demand benefits from supply-side variety is that it keeps demandĀ coming back to the marketplace for repeat transactions. This is in contrast to marketplaces where demand doesn’t want supply-side variety. Examples of this include marketplace providers of home cleaning and elderly care services. In these examples, once demand finds a supplier it likes, it wants to continue working with the same supplier. As a result, repeat transactions are likely to take place off of the marketplace. In other words, the marketplace is likely to be disintermediated.

Marketplaces where demand doesn’t want supply-side variety can still be successful. They can achieve this by taking steps to avoid disintermediation. Examples of such steps include building tools to handle payments, scheduling, security, and communications.

However, it’s an uphill climb. And as a result of this uphill climb, marketplaces that don’t benefit from supply-side variety tend to not get as big as ones that do benefit from this variety. The latter are running downhill.