Jan 10, 2020 09:51

Online marketplaces - understanding the business models for operators and retailers

By Ulrika Stroth Karlsson

The business model used by online marketplace operators is called platform commerce, and is central to giants such as Amazon, Apple, Uber and Airbnb. These companies connect buyers and sellers at a global scale and are growing faster than we have ever seen businesses grow.

In this post we examine platform commerce from two perspectives:
  • The business model for the marketplace operator
  • The business model for retailers selling their products on the marketplace 

What is the business model for online marketplace operators?

The principal revenue model for a marketplace operator is based on sales commission. When the retailer sells a product on the marketplace, the operator takes a percentage commission on the transaction, or a flat fee. 

The marketplace operator doesn't own the inventory. Instead, they provide the means for customers and sellers to find each other and complete a transaction. As a result, the platform operator doesn't have to worry about buying low and selling high and is not running any logistical or stock risk. The commission is often pure profit. By being able to offer more products, at more competitive prices, the operator is also guaranteed customer loyalty. 

 

What is the business model for selling products on an online marketplace? 

In short, you can profit from increased sales as a result of wider reach and by saving a lot of money on expenses and working hours.

However, the commission for each product sold can range from 5 to 20%, so make sure you investigate the numbers and calculate the profitability before you start selling on a marketplace.

The three models for selling items on Amazon

Increased sales through wider reach

When you are selling on a marketplace, the number of people who have access to your products and services is the biggest advantage. Especially if you are selling with giants such as Amazon, the exposure is massive, with millions of monthly users, and your business will benefit from the massive investments Amazon puts into paid Google search.

You have access to big volumes of traffic, national and international, which means that you can start selling larger volumes abroad without additional effort.

Customers love marketplaces because they can find the products or services they want at a competitive price, and tend to come back for more, so customer loyalty and repeat business is often an included perk.

The other side of that coin is that the competition between sellers on a marketplace is fierce. Price wars are common and you will have to revise your prices regularly, or see the marketplace adjust prices without your control, which could reduce your margins.

 

Reduced risk and cost of marketing and technical infrastructure

You can save working hours, time and expenses on

  • Advertising and marketing costs -they are entirely assumed by the operator
  • SEO positioning
  • Web design
  • Technical infrastructure 
  • Payment methods
  • Logistics (not all marketplaces manage the logistics, but Amazon offers this service for a fixed fee)
  • Returns and complaints

The other side of the coin of not having to manage these things yourself, is that you are losing control over how your products and your brand is displayed online. If you are selling your own brand, make sure that you can provide information about brand identity and promises. Read more about marketplaces and brand credibility: 5 hands-on tips to start selling on marketplaces

 

Do you need to optimize your business in relation to marketplaces?

Avensia offers support in your marketplace endeavors, customized according to your needs.  We can help you with everything from strategy, new organizations and concepts to customer communication, solution architecture and implementation. 

Read more about our Strategic advisory offers for online marketplaces.

  

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