Driven to generate revenue in the post-covid economy, many retailers have looked to create retail marketplaces for growth opportunities. Companies from Kroger to J Crew have opened their eCommerce sites to third-party vendors to sell products through their website, expanding the products sold and creating more of a one-stop-shop for customers. While there are numerous benefits to this arrangement, there are several considerations retailers should weigh before investing in hosting a retail marketplace.
What is a Retail Marketplace?
Marketplaces have been around as early as the 1990s when eBay and Amazon showed viability in generating income while limiting the associated costs, and that same model drives today’s marketplaces. A marketplace is a webstore that allows third-party groups to list and sell products through a consolidated front. The provider of that marketplace is referred to as the host, and the third party doing the selling is often referred to as the seller.
With a traditional marketplace, the third-party seller retains the inventory and the associated costs of manufacturing and storing those items, while the marketplace host provides a location to list products and facilitates the customer transaction. Once the sale is completed and the third party ships the product, the marketplace often retains a portion of that sale and passes the rest onto the seller.
Benefits of Hosting a Retail Marketplace
A marketplace can help the host increase traffic to their webstore. By providing a larger selection of products, customers who would have to make their purchase across sites could instead purchase all their products from one place. This can improve the brand perception with the customer, increase conversions, and retain traffic when the customer makes a similar purchase in the future. This increases the surprise and delight factor for your customer. Depending on your relationship with your sellers, product offerings could be changing day-to-day which can encourage customers to come back to the site regularly and increase the likelihood of conversion as the products may not be there the next time the customer visits.
This increased selection can also allow an organization to evaluate the benefits of creating their own products in a category. If a particular item or set of items is generating revenue for a third party on the site, it could be worth introducing a similar product for your brand to sell. Similarly, marketplaces can allow retailers to evaluate creating wholesale relationships with sellers for high-selling products or categories. Wholesale selling can increase the margin for retailers and ensure a more steady income for the seller. Lastly, retailers owning a marketplace can generate revenue directly from sellers by selling ad space on the site, providing leads, or monetizing data from the website.
What to Be Aware Of
While there are numerous benefits to hosting a marketplace, there are also challenges that retailers will face. Vendor management must become a core competency of the business. Retailers must attract new third-party sellers to the site to populate the marketplace, define seller fees, and onboarding for third parties that may not yet exist within the organization. Organizations must also choose whether to create an open marketplace where any seller can join or a closed marketplace where sellers are only able to join by invite only. Decisions must also be made around how uniform the customer experience would be: do sellers have to match the shipping terms you offer on your products, do they need to have the same return policy, and do they need to provide customer service, or will you offer it on their behalf?
Beyond those management questions, retailers should consider the technical aspects of setting up the marketplace. Determining if they should implement a leading marketplace tool such as Mirakl, or if they would build their own homegrown solution is core to getting a marketplace off the ground. Backend integrations must be set up to facilitate the sharing of data between the marketplace system and your existing webstore. Additionally, the customer experience and UI throughout the website must be reviewed for changes and updated appropriately. Depending on your marketplace strategy, the marketplace systems must allow sellers to update products and pricing and allow your organization to provide approval for these changes if needed.
From a product perspective, retailers need to make choices around what products to include in the marketplace. Are vendors going to be able to sell any product they would like, or is it only in certain categories? Will those categories overlap with your existing offerings or do they have to be separate? Could vendors sell the same product at different price points? Marketplace owners must consider if they will be curating marketplace products before they appear on the site, and what metrics they will use in that review. Additionally, retailers must weigh product quality and risk of counterfeit by sellers, including ways for customers to report issues and defining standards for the marketplace.
Each of these decisions influences seller acquisition and customer perception, and tradeoffs between the two should be reviewed diligently.
What about Dropshipping?
Marketplaces and dropship (or direct fulfillment) are often confused as they sound similar, but they are different due to the relationship between the two businesses. In a marketplace, the seller of the product determines whether or not to sell a product, what price to sell it at, and other decisions around the listing of an item in addition to holding the inventory and fulfilling the order. In a dropship scenario, those decisions about product listing and price are owned by the retailer, and the vendor is simply fulfilling the order the retailer makes. While both scenarios involve a third party fulfilling an order placed on a website, the ownership of the decisions around the listing of the product delineates the two models.
The use cases for dropship vs. a marketplace are also different. Marketplaces allow a retailer to rapidly scale and offer products beyond their own, while dropship is often focused on core products that carry the retailer’s brand but may not be easy to store or ship.
Marketplaces are a growing option to generate revenue for retailers as marketplace hosts, but several considerations must be reviewed before getting a product into a customer’s hands. These challenges are tricky but companies that can do this well have a lot to gain. Sellers have similar considerations before listing their product on a marketplace as well, so be on the lookout for our companion piece on retail marketplace selling.
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