What is an Online Marketplace?

Jun 12, 2019

You may find yourself using the term ‘online marketplace’, but do you really know what it is? Read on to find out.

Ah, the online marketplace… It’s, like, shopping online, right? Well, not exactly.

When you go into an actual store (Remember those? Yes, they do still exist. We’re talking about a brand’s brick and mortar store, like Old Navy, for example) or shop on their website, you’re buying a product manufactured and sold by that brand.

But an online marketplace is different. It’s like going to a farmers market, where different vendors might be selling one or many products, from any number of brands. Now picture that online: that’s an online marketplace.

EXAMPLES OF MARKETPLACES

There are many examples of online marketplaces. The top 3 in the United States are Amazon, eBay, and Walmart.

Amazon is the largest, with more than $160 billion in 3rd party sales and $117 billion for 1st party sales last year. For consumers shopping online, 9 out of 10 will check Amazon’s pricing before purchasing an item, and how’s this for an indication of popularity and ubiquity: 43% of teens say that Amazon is their favorite shopping site.

eBay and Walmart rank a distant 2nd and 3rd in size. Contrary to popular perception, and perhaps stemming from their roots as a place to get gently used goods, now 80% of items you can buy on eBay are new products, and 70% of those items ship for free. And although Walmart is the world’s largest company by revenue, it has a much smaller marketplace than Amazon or eBay.

SIZE MATTERS

There are a few components that determine marketplace scale: Amount of Revenue, Number of Sellers, and Quantity of Listings.

The amount of revenue is an easy one: how much money a brand or product brings in.

The number of sellers refers to how many 3rd party sellers (vendors who may be authorized or unauthorized by a brand to sell a specific product online) are carrying a product and competing with each other for sales. And lastly, quantity of listings refers to how many unique items are being sold.

So, what makes the Amazon marketplace different from its smaller competitors eBay and Walmart? Well, for starters, it’s huge. Amazon’s marketplace is even larger than their direct sales.

And unlike Walmart and eBay, in addition to selling its own brands, like Kindle and Echo, Amazon allows 3rd party vendors to sell other brands besides its own, and then it competes with them to get the lowest price. So, not only does Amazon price match externally to eBay, Walmart, Best Buy, Target, and many other online marketplaces (finding out what items are selling for on those platforms and then under-cutting them), it also matches the 3rd party sellers on Amazon, in effect pitting them against each other for the lowest price. Unimpeded, this drives the price of manufacturers’ products lower and lower, which can be good for consumers, but isn’t necessarily good for the consistency of a brand’s image.

By having their own brands, Amazon is not only competing on manufacturers’ listings, they may also be competing for market-share and product visibility. For example, if Amazon is selling their Basics brand batteries for lower than Duracell, they will bump up their own listings, and advertise them heavily. In this scenario, it’s more difficult for brands to introduce a new product at a price that can compete.

And while, as a consumer, getting an item for the lowest possible price may seem like a great idea, that doesn’t take into account the fact that while the majority of 3rd party sellers are legitimate, bad actors can take advantage of Amazon’s liberal seller enlisting process by introducing unauthorized foreign goods, expired and stolen items, and counterfeits. All of these can compromise consumer trust, brand consistency and a brand’s bottom line.

COMPETITION MATTERS

Competitiveness takes slightly different forms depending on the platform, but the nuances matter greatly, and the actions of one marketplace have the potential to affect others.

Amazon, unlike eBay, is both a retailer and a marketplace and their direct retail competes against their 3P competition by matching pricing. Walmart has a smaller marketplace and does not match pricing there.

eBay is 100% marketplace (they don’t manufacture discrete eBay products), and, since it does not sell items that it manufactures, it doesn’t compete against its 25m sellers. The way eBay catalogs and displays items is different from the other two as well. Amazon and Walmart display sellers of an item on the item page. So, 50 people selling the same item on eBay will have 50 item pages, but on Amazon and Walmart, all 50 of those items will appear on the same page.

Online marketplaces are not all the same. They have different dynamics and different scale, and each requires a different set of tools to properly address.

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