Questions to ask about marketplaces
In announcing its Costco-like membership model, Jet.com (yet to launch as of this writing) has positioned itself as the latest type of online retail marketplace. Considering that online marketplaces really go back to the days of CompuServe, Prodigy and Earthlink (extra points if you know what “dial up” means), I’ve been struck by how much marketplaces have been in the news lately. Think about Alibaba’s jaw-dropping $9.3 billion sales on Singles Day (Nov. 11) last year, or that 40% of the items sold on Amazon.com in 2014 were handled by marketplace retailers –- and the list goes on. Little surprise that ChannelAdvisor found that a hefty 36% of U.S. e-commerce sales last year came from marketplaces, up significantly from 22% in 2005.
Despite the increasing significance of marketplaces in total e-commerce sales, retailers traditionally have approached these potential partners with a degree of caution. How do I develop my marketplace strategy? Will I really acquire a new customer –- or simply facilitate a sale for someone with whom I can’t build a longer term customer relationship? How much of the sale will it cost me? Is my marketplace partner just watching and learning in order to compete with me directly down the road?
While these are important considerations, my advice to retailers: you’re starting with all the wrong questions. Know thyself – especially your business objectives. Just as your own business isn’t cookie-cutter, neither are marketplaces. Instead, your strategy for any marketplace partnership hinges directly on how clearly you have defined your business objectives. That self-knowledge will determine which marketplaces will – and won’t – be right for your business. In other words, there’s no such thing as a blanket “marketplace strategy.”
Do you want to develop brand awareness? In 2012, Forrester Research found that 62% of U.S. consumers at the time had bought something from a marketplace. The right marketplace can help you be in the right place at the right time to introduce your brand to a new audience.
Perhaps you’re sitting on aging inventory? Let’s say you have inventory that just doesn’t work on your site or in your stores any longer – even in the sale section. A marketplace partner may be able to help you get those goods in front of a new audience who will be excited by this merchandise.
Do you want to enter specific global markets? Expanding directly into global markets can be challenging – and some markets are not conducive to going direct at all, whether due to local customer habits and expectations, language and culture factors, logistics, and/or the retailer’s internal capabilities and experience. Even aside from other (important!) services that a global marketplace may facilitate, the sheer customer numbers are impressive: in China, Alibaba Group’s Tmall Marketplace and sister auction site Taobao had 334 million active buyers in 2014, while Latin America’s MercadoLibre grew its shopper base to 120.9 million in 2014, up 21.6% over 2013.
Maybe you simply want to create an ongoing cash stream to augment your regular business? The right marketplace partner can help you sell suitable products at an acceptable margin.
Retailers’ caution in evaluating marketplace relationships is not unfounded, of course.Retailers need to go into marketplace partnerships with their eyes wide open, factoring in considerations such as:
Access to customers and data may be (very) limited. If the marketplace doesn’t share email information with you, it will be more difficult to form a direct marketing relationship with that customer. This arm’s length customer relationship could be palatable in some markets where direct sales efforts otherwise would be difficult, but potentially a show-stopper for you in other markets. For a marketplace model to work, make sure that you’re making money on every sale, right from day one.
Depending on the product, you could wind up competing primarily on price. Highly commoditized products are likely to win primarily on price and much less on your brand or service levels. Assuming the product is right and your margin is still acceptable, however, this outlet may still be a good choice for you to develop that steady revenue stream you may want to develop (which in turn provides funding for strategic initiatives in other parts of your business).
You’ll need to meet potentially strict fulfillment requirements and service level agreements. Ensuring that you adhere to these requirements could potentially add to and even distract from your direct sales operations.
With the right questions and disciplined analysis anchored in your business objectives, marketplaces have the potential to yield revenue, operational efficiencies, new customers and even act as a launch pad to enter previously untapped global markets.
Vicki Cantrell works with members of the Shop.org Think Tank and is senior vice president for communities at the National Retail Federation and executive director of NRF’s Shop.org division.