Though the exact percentages are hard to quantify, the pandemic has truly rocketed ecommerce trends skyward out of necessity. Most consumer-focused trends such as contactless or curbside pick-up, same-day delivery, and free shipping mostly benefit the shopper by offering convenience unlike before. Brands have been impacted positively and negatively by these trends, but retailers have mostly benefited from the influx of online orders.
The online marketplace model is not new or a result of the pandemic, as it has been around for years. However, this boom in ecommerce has caught the attention of several retailers as a potential avenue that can maximize growth and sales. Walmart switched to this model back in 2009 and saw its total GMV (gross merchandise value) sales double in 2020. This was a direct result of the pandemic and the new structure. Compare this to the much slower growth of 35 percent pre-pandemic, and the proof is in the pudding.
Defining an Online Marketplace
So, what exactly is an online marketplace? To put it simply, it is an open model platform that allows third-party sellers and brands to sell products on a retail site. The big players that come to mind are Amazon and eBay, which have been using this operating model since launching in the mid-90s. Many things have changed since the days of mood rings and neon windbreakers, including the way that large retailers operate. Over the last several years, more and more retailers have adopted this open model. The pandemic especially pushed retailers to have a robust online shopping presence.
Amazon in particular has driven this transition. In fact, they own an estimated 37.9 percent of the overall US commerce market in 2020. This percentage has most likely decreased as big box retailers like Walmart and Target have shown a boom in online sales since the pandemic. Kroger, J.Crew, Urban Outfitters and Express have also all transitioned to a marketplace structure within the last few years. Macy’s is planning to reposition to this model in H2 of this year as well. Macy’s plans on going from a traditional DTC site to a marketplace model where the company will charge a percentage of each sale to sellers.
Choosing Online Marketplaces VS The Traditional Route
Why exactly are retailers choosing online marketplaces versus the traditional route? With online marketplaces, the retailers themselves do not own the inventory in the traditional sense. Instead, they simply help facilitate the transactions. Retailers can benefit from this structure in many ways, but one of the big reasons is that retailers make more profit long-term by spending less on operating costs and holding inventory. Building and maintaining a full ecommerce site for high-traffic retailers come with heavy investment and is associated with a variety of costs, such as hosting fees, site maintenance and upkeep. Inventory costs in the traditional commerce model can make up a giant portion of overall assets and the storage costs associated with them can make or break a balance sheet.
Retailers might make a smaller profit off of each transaction by allowing third-party sellers to own their inventory and take a fee for each sale, but this method is much more flexible and often generates more overall sales. These sales fees are how the retailers make their money. Fees can vary widely, but as these fees go up, so do the services that the retailer offers each seller. Higher fees usually involve assistance with fulfillment services like shipping assistance, storage, and packaging customization. Advertising offerings usually come with higher fees as well, as retailers will include basic advertising services with expanded offerings for a higher fee or incremental charge.
What Consumers Can Expect
The ecommerce model has traditionally been very positive for consumers, as the inherent competition with marketplaces like Amazon or Walmart pushes down prices. Convenience is a key driver as well. A quick look at the beloved rapid-fire shipping rates–some low as 1-day delivery–proves how much of an impact convenience has in the world of ecommerce. Buying online and picking up in-store is another trend that emerged from the pandemic. This trend was also made easier under the online marketplace model.
With a number of retailers moving to the marketplace model, additional routes for selling should expand the variety and breadth of products offered to consumers. Some drawbacks for consumers are receiving poor quality or knock-off products from 3rd party sellers, something that has been a consistent theme on Amazon since they moved on from only selling books.
What Sellers Can Expect
Historically, online marketplaces have worked both in favor and against sellers. It is a bit of a mixed bag depending on the category, brand, and specific situation. The advantage is that sellers can quickly and easily list their products on a platform with large consumer bases and daily users without the need to build this traffic out on their own. Selling and fulfillment programs offered by retailers can help smaller brands navigate these larger concerns when selling online. As companies like Amazon and Walmart have rolled out their advertising offerings, brands have another route to reach consumers. Investing in SEO can strongly improve sales over time as well.
The main concern? Fees. Fees charged to sellers can vary widely and eat into profitability, especially when retailers can dictate the price point that these products are sold. Amazon has come under scrutiny for pricing requirements the last several years, even putting brands out of business for forcing price decreases. Brands building their own DTC site offer a separate route, giving them the autonomy to dictate the prices that their customers ultimately pay. Owning and operating a DTC site has its own challenges and requires a large investment by the brand, not to mention the need for fulfillment and shipping.
As more retailers switch to the online marketplace model, the hope is that it will give sellers more options and relieve stress on pricing. The higher number of options for sellers should also have a positive effect on pricing restraints, especially within categories like clothing, which already has several active marketplaces.
Online marketplaces can offer another outlet to sell products beyond utilizing Shopify or other similar selling platforms. For many upcoming brands, this open format offers less friction to launch products and reaches large consumer pools from the start. Not all marketplaces are created equal though. For example, it’s much easier for Amazon to initially launch a product than Walmart because Walmart operates as an invite-only marketplace.
Final Thoughts
At Empower, we always encourage our clients to invest in DTC capabilities, whether it be through a platform like Shopify or investing and building the structure internally. Having true ownership over pricing means more control over profitability and, ultimately, sales growth. This route may not be right for all brands, as each retailer and sales channel will have its own challenges, advantages, and disadvantages. Since the priority for brands is driving overall sales and pleasing consumers, always consider the associated fees and pricing requirements before diving into a new online marketplace.
Sources
- “Amazon’s Share of online retail sales” statista.com, 2022
- “Amazon’s Marketplace Model Coming to a Store Near You”, Wall Street Journal, article, 2021
- “E-commerce vs Online Marketplace: What Are the Benefits for SMBs?”, HP.com, article, 2020
- “Selling on Online Marketplaces: Best Platforms for Selling Your Products”, Bigcommerce.com, 2020
