• Raveen Kuhadas

Insights – Why Marketplaces Succeed in eCommerce

Muso is a marketplace connecting music artists to venues for live gigs. I loved the founders’ thoughtful design of their marketplace and believe this is one of the most attractive features of their business.

What’s behind my excitement? Marketplace business models are behind some of the most valuable internet companies. A key reason is that they are magnets for customers, the lifeblood of any business.


A vivid illustration of this is in the eCommerce space. This article will explore eCommerce businesses, online customer acquisition and why marketplaces dominate the eCommerce landscape.


This is a case study showing how businesses can succeed even in the competitive online space using the power of the marketplace business model. It also gives a sense of Muso’s potential.


Table of Contents

  1. eCommerce – The 2 Most Important Things to Selling Online

  2. The Sales Funnel and Why it’s So Hard to Get Customers Online

  3. Marketplaces – The Power to Break Through

  4. Conclusion


 

eCommerce – The 2 Most Important Things to Selling Online


The first retail transaction on the internet was thought to have occurred in 1994. A then 21-year-old college student Dan Kohn sold a CD copy of Sting’s 1993 album Ten Summer’s Tales to his friend Phil Brandenberger via a secure online credit card transaction for $12.48.


Where it all began: Sting’s 1993 album, as shown on Sting.com


From those humble beginnings, the global eCommerce market is expected to be $5.55 trillion in 2022. It will make up 21% of total retail sales and grow by 10% per year to 2025.


Just like a retail store, the key drivers of an eCommerce business are:

  • Product: Selling something that people want.

  • Marketing: Letting people know that you have what they want.


This can be seen in eCommerce retailer Adore Beauty, an online beauty store selling mainly 3rd party products (e.g. L’Oreal and other brands). Its cost structure clearly shows the importance of product (Cost of Sales) and Marketing.


Adore Beauty cost structure – Product (Cost of Sales) and Marketing are the largest activities.


The importance of having great product that customers want is obvious. A more interesting aspect of eCommerce businesses is their marketing activities.


Traditional retailers typically rely on foot traffic (i.e. people walking past their stores). For this reason, they may be willing to pay high rents to have their store in a popular mall.


By contrast, online eCommerce stores pay for digital advertising rather than rent. Given its importance, they have this down to a science, as seen in the next section.


The Sales Funnel and Why it’s So Hard to Get Customers Online


How does a business allocate its marketing budget? eCommerce businesses use a framework called the Sales Funnel to allocate their customer acquisition spend. I will outline a few key stages of the sales funnel to simplify and illustrate this concept.




A brief explanation of these stages is as follows:

  1. Discovery: How do the customers discover that the eCommerce brand exists? This is about attracting consumers' attention to the website or brand. Common measurement metrics include ad impressions, social media followers, subscribers etc.

  2. Consideration: A potential customer now knows the eCommerce brand exists! The next step is to educate and engage the customer. The aim is to build the customer’s confidence in buying the product. Common measurement metrics include social media engagements (likes, comments) etc.

  3. Conversion: Where the rubber hits the road! This is about making it as easy as possible for the customer to purchase. Common metrics include sales conversion rates, average order values, check-out abandonment rates etc.

  4. Retention and Advocacy: It’s much cheaper to retain an existing customer than to attract a new one. This is about providing a great after-sales experience. Common metrics include repeat purchases, NPS scores, loyalty program sign-ups etc.


While the goal is to get customers to purchase or convert, eCommerce stores must spend their marketing budget on every stage of the funnel. This means first getting customers to their website. An estimate of the sources of website traffic is shown below:


Source: The Wolfgang 2020 KPI Report


The social media share of 8% is likely understated as it is difficult to track. Search and social are therefore, major channels of customer traffic. Particularly in the awareness and consideration stages. However, these channels can be expensive due to the dominance of Google and Facebook.


Google and Facebook dominate search and social. Source: Statcounter GlobalStats and Statista.


This has led to the sentiment that eCommerce or selling direct to consumers (DTC) online is a hard business.


Twitter post by Vibhu Norby, Venture Partner at Interlace Ventures.


Interestingly, both Google and Facebook have business models which benefit from powerful network effects.


How can eCommerce businesses succeed if Google and Facebook have so much power? As it turns out, by using the power of the marketplace business model.


Marketplaces – The Power to Break Through


An online marketplace connects eCommerce sellers and consumers in exchange for a fee. By combining sellers in one place, marketplaces benefit from:

  1. Network effects - More sellers increase product selection. This attracts more customers, which attracts more suppliers etc.

  2. Brand Recognition – Customers know they can find what they want in the marketplace and get a consistent experience (e.g. delivery, returns etc.).


From a marketing perspective, marketplaces combine the efforts of several sellers in one place. This includes the large product selection and marketing activities from individual sellers. As a result, they act as magnets for customers.


Having the buyers and sellers in one location allows marketplaces to focus on the sales funnel's lucrative ‘conversion’ stage. For example, Amazon has a 10% conversion rate compared to just the 1-2% that Google has.


Marketplaces, therefore, dominate the eCommerce landscape with over 60% market share. This is shown below:


eCommerce market share of leading e-retailers worldwide in 2020, based on GMV. Source: Statista

Marketplaces are thus able to succeed even in the competitive online space because they attract what every business needs – customers.

Conclusion


The design of Muso’s marketplace business model is one of the most attractive features of their business.


Why are marketplaces so powerful?

  • They are magnets for customers thanks to their network effects and product variety.

  • They have much higher conversion rates from having all the customers and sellers in one place.


This has been a case study showing how marketplaces can succeed even in the face of the dominance of Google and Facebook.


Ultimately, marketplaces succeed because they have what every business needs – customers. The best marketplaces are designed around a firm understanding of their customers’ needs. Muso is no different. I hope to showcase this in a subsequent article.