Paradigm shift in E Commerce: Move from Product Sales to Service Marketplaces
E commerce growth till recently was dominated by product sales companies like Amazon, eBay, Walmart, Best Buy and Staples. (Laumeister, 2014). But recently the industry has witnessed a tremendous growth in service marketplaces which gives us a slight glimpse of how the industry is going to shape up in the near future Online marketplaces are transforming retail industry, creating huge value for some players in the market and huge challenges for some of the others. (Bellaïche, Chassaing and Kapadia, 2012)
The aim of this post is to analyse why service marketplaces are booming, why is it difficult to create a service marketplace, how did successful marketplaces overcome these difficulties and finally why are venture capital firms pouring huge money into these marketplaces. This closely relates to the discussion on E Commerce & Electronic markets and Platform Mediated Networks in the course.
Growth of service marketplaces (Laumeister, 2014)
There are several marketplaces which carved out new categories of e commerce. For e.g. Fiverr has created a category of micro services. It is a global marketplace where in customers can pay as little as $5 per service or task from a swarm of freelancers (Rao, 2012). Services marketplaces like Airbnb, Uber and E-lance are each expected to process over a billion dollars’ worth of transactions in 2014. The tremendous growth of existing marketplaces and emergence of new marketplaces raises the question ‘Why are these marketplaces booming?’
The primary reason for this growth is seen to be the focus that is being laid on solving the problem of buyers which is universal and removing the barriers that existed with transaction offline (by making the transaction online). Since the problem is universal i.e. customers across the globe are facing the same problem, these solutions are scalable with minimal localisation and grow exponentially after reaching a critical number of users (due to positive network effects). The other important reasons for the tremendous growth are focus that these marketplaces place on consumer delight and obsessive compulsive nature of these businesses. For online marketplaces the most important form of publicity is through word of mouth and hence it is important for them to not just serve their customers but delight them so that they are compelled to inform their friends about the service. In fact, the customers are most attracted to a services marketplace by their belief that the company thinks about the user experience, the services being provided and the benefits to the customer in an obsessive (details and more details) and compulsive (24/7) way.
Why is it difficult to create a service marketplace?
Building a service marketplace is difficult. These models work extremely well with scale but how does one achieve scale? If you have buyers in your system but few sellers, then buyers leave yet if there are no buyers than sellers won’t join. It is this chicken and egg problem that makes it extremely difficult to kick start. Thus it is easy to see that no service marketplace can be built overnight. It in fact takes 18-36 months for majority of these marketplaces to start growing into considerable size (Wertz, 2013). So if you are building an online marketplace how do you get traction and build your buyer and seller communities?
How do you overcome this problem? (Wertz, 2013)
Wertz, in his article on Forbes, lists 5 important tips for building a marketplace. Here is a brief summary:
- Don’t be too quick to pivot: Unlike eCommerce or SaaS product based companies, online marketplaces take 18 months to 3 years to gain traction since you need to establish both supply and demand side communities. So stay patient.
- Keep the burn as low as possible: Burn rate needs to be as low as possible which gives the business enough time to flourish. Money cannot buy speed when it comes to building out a marketplace. Most marketplace businesses only need two functions early on: people building product and people building the buyer and seller communities.
- Tighten your focus: Marketplace businesses need to build traction in smaller verticals before expanding into bigger markets. So ideally they should start by focussing on a particular category or sector or geography based on the tye of business.
- Focus on your most passionate users: Great marketplaces are built from the niche to the masses. By engaging your passionate users and catering to their needs, you increase the likelihood that they will tell their friends about the experience and your marketplace can spread outward.
- Believe in your vision: When trying to create a new marketplace or market category, you’ve got to believe in your idea even when no one else does. However, you should continually look for small signals that you’re on the right track.
In the last section of this post, the focus is on why venture capital firms (VCs) are investing heavily in marketplaces. This is an important aspect since VCs fund most of the online marketplaces, given the time needed for gaining traction and burn rate in these marketplaces. In 2013, Simon Rothman, partner at Greylock spearheading their $100 million commitment to investing in marketplaces, mentioned he factors that VCs typically consider while investing in a marketplace:
- Big (10s and 100s of billions of dollars) and broken market (an experience that doesn’t work or lot of rents being absorbed by supply chain)
- Passionate team with an emotional connection
- Structure of the marketplace – it should not shift too much as it is growing. It should start at the right place.
He also mentions that in the next 5 years the number of marketplaces would be greater than the number in last 20 years combined because there are many markets which are broken and with mobile and social platforms at their apex there is an opportunity to create online marketplaces in plethora of industries.
Any inefficiency (broken) in the market (in any industry) is leading to a disruptive billion dollar opportunity for online marketplace. With mobile platform and social networks growing stronger, it is easier to gain trust which is at the heart of service marketplaces. Next 5 years in the eCommerce space is likely to be dominated by online service marketplaces.
- Laumeister, G., 2014. Why Online Marketplaces Are Booming [Online] Available at: http://www.forbes.com/sites/groupthink/2014/08/20/why-online-marketplaces-are-booming/ [Accessed 04 10 2014].
- Bellaïche, Chassaing and Kapadia, 2012. Secrets of Online Marketplaces [Online] Available at: https://www.bcgperspectives.com/content/articles/digital_economy_retail_secrets_of_online_marketplaces/ [Accessed 04 10 2014].
- Wertz, 2013. 5 Tips For Building A Two-Sided Online Marketplace [Online] Available at: http://www.forbes.com/sites/ciocentral/2013/02/07/5-tips-for-building-a-two-sided-online-marketplace/ [Accessed 04 10 2014].
- Rao, 2012. Task-Based Marketplace Fiverr Raises $15M From Accel And Bessemer [Online] Available at: http://techcrunch.com/2012/05/03/task-based-marketplace-fiverr-raises-15m-from-accel-and-bessemer/ [Accessed 04 10 2014].