Strategy

What is a marketplace: In and out models

Lalo Aguilar
Lalo Aguilar January 25, 2022
What is a marketplace: In and out models

The constant growth of ecommerce has resulted in the emergence of various online sales modalities. Perhaps the most popular modality is the marketplace, a platform model that includes products from different industries and suppliers in a centralized site, just like Amazon, Mercado Libre, or Linio. 

These examples represent iterations of the out marketplace model, one of the two marketplace formats we will explore here. Both the out model and its counterpart —the in model— have completely different advantages and disadvantages, so it is important to know them before deciding if a marketplace is the right tool for your business to explore —or expand its presence in— ecommerce.

Growth formula

The marketplace model has been one of the constant elements in the growth of ecommerce worldwide. According to McFadyen Digital, about 50% of global online sales occur on marketplaces, and this number is expected to increase in the near future. 

The agency also said that it is not too late to launch a marketplace and that it can even be tried after the pandemic as shoppers are getting used to buying on that type of platform and are diversifying the sites they visit to purchase different products. This trend has helped ensure that sales are not just concentrated on global leaders like Amazon.

Out model

The simplest alternative for a retailer is to join an external marketplace —like Amazon and Mercado Libre, which we mentioned before and with which VTEX has native integrations— in order to have a digital presence. This business model is attractive to many companies, especially smaller ones.

The main advantage for these small retailers is the traffic that the big marketplaces attract. This makes it easier for products published on these platforms to have greater visibility than they would otherwise have if they were only published on the company’s site.

The centralization of supply means that users are used to going to these marketplaces to search for all kinds of products, which generates substantial and stable traffic from which retailers who sell their products there can benefit. In addition, companies that operate marketplaces often spend a significant portion of their budget on customer acquisition, which in turn increases traffic even more. Another advantage is that occasionally the website itself takes care of the technological infrastructure, and sometimes even the physical infrastructure.

The disadvantages of this model are mainly two: the fierce competition and the high commissions. Because it is a free-to-join model, there is no kind of exclusivity, and any product that is offered on the platform will have to compete for customers against multiple similar or equivalent product offerings. 

In this case, sales depend not only on the quality of the product offered but also on the brand’s ability to promote itself above its competitors and provide different values that allow it to differentiate itself. This promotion may be paid advertising, but good consumer ratings are often another factor in how well a product or vendor is positioned.

The costs to sellers depend largely on the business model of the marketplace. Charges may be a fixed fee per published item, a fixed fee per sold item, a commission on the final price of a sold item, or a combination of the above.

However, some successful marketplaces offer certain services in exchange for this commission, such as the logistical coordination of storage and delivery. This improves the customer experience and limits the moving parts for the seller, resulting in a win-win situation for all parties involved. The cost paid to the platforms may also be lower than having your own operation, depending on the size of the retailer.

In model

The marketplace in model is mostly used by retailers or brands that already generate interest and digital traffic among end consumers, so the implementation of this type of platform does not necessarily entail a large investment in digital marketing. 

That is, while the out marketplace model is selling your products on other platforms, the in marketplace is opening your own platform to sell products from other retailers. Companies like Éxito, Banco Inter, and Unilever have chosen VTEX to successfully power their global marketplaces. 

Companies that venture to generate their own marketplace not only have to worry about generating traffic but also about the logistics of payments, returns, and customer service.  These operation factors can also be delegated to the sellers, which increases the number of products available while preventing the operation from becoming more complicated.

The cost related to these activities can be very high at the beginning of the project, especially if you want to develop the necessary architecture and logistics from scratch, which can be very expensive. In cases like this, it is better to find pre-established solutions like VTEX’s native marketplace architecture, which will speed up the public launch of the site and reduce the costs related to its development.

Before a company decides to launch its own marketplace, it must also make sure that there is sufficient interest from third parties to offer products through the site because the viability of investing in a marketplace infrastructure depends on being able to attract interesting products for the end consumers. 

VTEX can also help in this regard: the VTEX Marketplace Network is a platform feature that helps connect sellers with marketplaces operating within the VTEX ecosystem. The Network not only facilitates the growth of the participating businesses but also facilitates communication between parties.

Which is the best model?

The simplest answer is that there is no one right answer for all companies, but there is one right answer for every company. Depending on the needs of each company, both options offer growth potential in the number of products and territories served, as well as a way to solidify an online sales channel. 

With the right planning, a marketplace can become the ideal tool for a brand to access segments that were previously out of scope, which helps the brand presence in the minds of consumers, in addition to bringing new audiences to existing products. 

Companies that decide to set up their own marketplace will also have full control of the operation. This means that the platform’s vendors, sales rules, and user experience will depend on the decisions made by the company, which will also have data as an asset to get insights that can be used to make future decisions.

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