Online Marketplace Business Models

Online Marketplace Business Models

Marketplaces as physical gathering sites have a long and rich tradition in all economies. There, buyers and sellers meet to exchange goods for money. Public Markets are especially noteworthy. Madison’s Farmers Market, The Milwaukee Public Market, Boston’s Haymarket Square, Seattle’s Pike Place Market, and The Brooklyn Flee Market come immediately to mind as current examples. So do the local markets I’ve encountered biking through small European towns.

The Internet, however, has changed our notion of a marketplace. Markets used to require a physical space and, in the case of Public Markets, were created to advance a public good. Walking around Madison’s Capitol Square on Farmers Market Saturdays reinforced the Capitol as the physical heart of Madison and advanced the slow food, local small farming and buy local movements in Madison. Today, online markets pull us away from our communities in the same what way big box stores and malls pulled us away from Main Street. Online markets have also moved well beyond products to include the trade of services and even ideas.

Online markets benefit buyers in many ways.

• They make shopping more efficient. About 80% of B2B shopping is now done online before a buyer ever contacts a company representative. Why? It’s much more objective and efficient than speaking with representatives.
• They lower prices for comparable goods. The Internet has led to greater competition and more price transparency.
• They open access to sellers who would otherwise be impossible or too costly to reach. Rare book buyers have truly benefited from online used book markets.

On-line markets benefit sellers by expanding the reachable market, selling excess capacity, or lowering the cost of reaching, converting and serving customers. BOP, a Madison woman’s clothing retailer, became a successful online retailer and was eventually acquired by Amazon. BOP now reaches fashionistas around the world. It also recently closed its physical store. Dow Corning, as I have reported on in the past, sells excess capacity through its on-line business for commodity products, Xiameter. Expedia sells unused capacity for travel and restaurants respectively.

The valedictorian for creating an online marketplace is certainly Amazon. True, it had the unfair cost advantage of no sales tax requirements. Even with sales taxes, however, I’d argue that Amazon’s business model still would have won the day. It increased buying and selling efficiency, expanded potential customers for sellers, and improved access to products for buyers. The fact that Borders went out of business largely because of Amazon is proof of the value proposition to both sides of the book market.

Amazon has succeeded in offering its IT platform to other websites, a move consistent with its “marketplace” focus. Acquiring niche marketplaces like Zappos for shoes has also succeeded (at least in terms of revenue growth).

Where Amazon’s expansion efforts have failed (e.g., its phones and pads), Amazon has reached past its strategic role as an online marketplace. Shopping mall owners and tenants do not need to own the streets, buses and cars that enable shoppers to reach mall parking spaces. In a similar vein, Amazon does not need to own hardware to secure its customers. No wonder its expansion efforts along these lines failed: these are different businesses.

For the most part, online markets have mostly replaced or complemented physical marketplaces. Far more exciting to me is the trend towards new-to-market online marketplaces. SuiteHop rents unused suites in sports stadiums. Kickstarter campaigns make capital available to start-ups. ScienceExchange connects researchers to labs with excess capacity that can run experiments more efficiently and effectively, lowering the cost of science. Benefunder connects philanthropists to medical researchers. Airbnb monetizes unused rooms. These are but a few examples among many.

What are the downsides of on-line markets, beyond potential security and privacy issues? Buyers feel overwhelmed by too much access. Sellers complain of the challenge of getting heard amidst so much marketing message clutter.

What online marketplaces are in your future? Does your industry have a need not currently being met? If you are a non-profit leader, how might an on-line market better serve your target client or cause? The winning ideas will be those that reduce unutilized capacity, improve efficiency, open access to better products and services, or provide solutions previously unavailable.

More articles by Kay Plantes

Kay Plantes is an MIT-trained economist, business strategy consultant, columnist and author. Business model innovation, strategic leadership and smart economic policies are her professional passions. She resides in San Diego, California but still considers Madison home. She is the author of Beyond Price.

The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of WTN Media, LLC. WTN accepts no legal liability or responsibility for any claims made or opinions expressed herein.