Why The Fastest Growing Companies Leverage The Marketplace Model

What do Amazon, Wayfair, Walmart, Airbnb, and Uber have in common? 

Explosive growth? Definitely. 

High-traffic ecommerce websites? Absolutely. 

Users of the marketplace model? Also, yes.

The largest, fastest-growing companies in the world leverage the marketplace model. In fact, nine out of ten of the top U.S. retailers are marketplaces.  And more are hopping on board.

So, why are companies that leverage the marketplace model doing so well? How are they growing so fast? And most importantly, how can you get in on the goods?

Marketplace giants have made their billions by capitalizing on two phenomena: the network effect and the flywheel effect.

What is the network effect? 

‍The network effect is a phenomenon where a product or service becomes more valuable as more people use it. In other words, the greater the number of buyers, sellers, or users, the greater the value created by the offering. 

When a company leverages the network effect using a marketplace model, demand grows as the marketplace grows. From here, a few things happen: 

• The company experiences rapid growth 
• Once ahead, the company stays ahead
• The company captures more market share
• The company's prominence makes it harder for new participants to enter the market
  

What is the flywheel effect?

Once a marketplace gathers traction among consumers, it steps on a treadmill of self-perpetuating growth. More sellers jump on board, which means there's more inventory. More inventory attracts more buyers, which attracts even more sellers, which means more inventory, and more buyers — and so on. 

The network and flywheel effects join forces, enabling marketplaces to establish prominence and gather market share that far exceeds competition using single-seller business models. 

Below we dive into why.

How Marketplaces Benefit from the Network and Flywheel Effects

Customer Reach

There's a reason Amazon records nearly 2.5 billion visits every month.

As the gears to the network and flywheel effects start spinning, sellers hop on board with their products. This increases the inventory and SKUs consumers can access in your marketplace and optimizes your search engine ranking.  

Search engines pick up on your growing range of products and existing web traffic. As your marketplace becomes relevant to more searches, the search engine drives traffic to your site. This is the process at work when you type "Kitchen Blender" into Google. Chances are Amazon will be among the top results.  

Understanding this, it’s unsurprising that the 2021 Enterprise Marketplace Index found that retailers with marketplaces increased web traffic by 34%.

Customer Retention

You know the age-old adage, it's cheaper to keep a customer than to get a new one. As a marketplace grows, it becomes a self-sustained ecosystem of like-minded products for like-minded consumers. The marketplace increases the probability of sellers making a sale, and buyers finding what they're looking for. The result? Return business.

For example, if you've successfully sold used clothing on Poshmark, you'll probably go there first the next time you tire of a sweater. 

When buyers and sellers know the marketplace is a sure thing, everybody wins. And importantly, everyone comes back. 

Asset-Light Approach

Marketplace models can connect customers to products or services without the heavy lifting of product development or the capital investment of manufacturing. Multi-vendor marketplaces are asset-light because they outsource parts of their offering. 

How asset-light can a marketplace be, you ask? Well, how light do you want to go?

• You could complement your chic adult fashion line with an equally chic kids line, a la Anthropologie and Rylee + Cru. 
• You could pass fulfillment and distribution to third-party suppliers using a dropshipping model.
• Or you could just not sell physical things at all, like Airbnb and Uber.
  

An asset-light approach lowers your costs while enabling you to run lean, stay agile, and focus on what matters most to your business. 

Think of it this way: You can have your cake (the product your consumers want) and eat it too (sales) — without having to bake the cake (everything else).

Higher Profitability

At first blush, the marketplace model might seem less profitable than single seller models. You're only taking a cut of sales, after all. 

But as the flywheel effect ushers more sellers and inventory onto your digital salesfloor, your offering expands without additional operations, capital expenses, or supply chain costs. 

There are also many ways marketplaces can be monetized, including through subscriptions, commissions, advertising, and listing fees.

As proof, marketplace retailers outperformed peers and competitors in 2020, growing 81% year-over-year – more than doubling the rate of overall ecommerce growth. Retailers that use a marketplace to complement their existing offering could experience an increase in digital revenue upwards of 10%.

(Of course, the key to this reimagined income is that the sellers must be reliable, self-sufficient, and offer an end-product of comparable quality.)

Product Depth and Available Inventory

Retail companies that once operated on a four-season calendar now face 52 micro-seasons. It's normal to choose between ten mustard brands at the grocery store. 

Consumers want choice, which poses a challenge to retailers who must keep up. Using the marketplace model, you can leverage seller relationships to provide consumers with the selection and options they desire much faster than single seller companies — especially in times of supply chain constraint. 

We don’t have to look far back in time for an example. 

In May of 2020, evolving public health guidance resulted in a mask shortage due to high demand and low supply. Etsy came to the rescue for many consumers, reportedly selling more than 12 million masks, totaling $133 million. The company’s ability to pivot, onboard sellers, and get the flywheel turning meant they could take advantage of a massive gap in supply and demand. 

Marketplaces are uniquely positioned to fill market gaps on a whim because they can diversify access to inventory through a network of sellers without having to develop products themselves.

With these benefits, combined with the consumer’s pandemic-induced dependence on ecommerce, it's no wonder marketplace-based organizations are stealing market share.

It begs the question: is there any marketplace market share left for you? Of course, there is. Amazon's concept is taken, but there is more than one way to start a marketplace or use a marketplace to optimize your existing offering.

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Alternative ways to leverage the marketplace model for your business

Use a recommerce model

Think Lululemon's Like-new, The North Face Renewed, and Patagonia's Worn Wear. 

Retailers can use marketplaces to take control of their brand when it re-enters the market as a used product — monetizing the resale. Joining the circular economy offers many upsides. It increases customer reach. It allows you to re-engage with your customers. And it gives you control over what goes back on the market — and what gets recycled.

Learn how to use a marketplace to resell used goods in our ebook: Leveraging the Recommerce Model

Add selling partners to your ecommerce site

Think Curated by Anthropologie, Madewell Marketplace, and J. Crew Marketplace.

Retailers with a product line can benefit from the marketplace model too. Adding partners to your ecommerce site expands your offering, allowing you to take commissions, benefit from the flywheel effect, and reach new consumers — while maintaining your primary product line. 

For more on how to increase revenue by adding a multi-vendor marketplace alongside your existing offerings, read our report: Leveraging the Multi-Vendor Marketplace Model

Sell ancillary products 

Think: The Apple app store, the Android app store

Electronic technology companies have built marketplaces full of ancillary products that enrich their primary product offering. 

Without apps like Instagram, Wordle, or Space Weather Live, your smartphone is just a phone, a camera, and messaging device with the internet. With these apps, your phone becomes a public visual diary, an entertaining puzzle, and a gateway to seeing energized particles from the sun slam into the Earth's upper atmosphere.

In short, an ancillary marketplace increases the value of your primary product. Plus, you benefit from another revenue stream and improved customer loyalty.

If you're looking to build a marketplace, use a multi-vendor marketplace platform

Whether you're looking to build a unique marketplace concept or enhance your existing offering, marketplaces are proven to foster growth, profitability, and retention. The best part? You don't have to spend millions creating custom technology or years reconfiguring your existing ecommerce platform. Using a multi-vendor marketplace platform, you can validate your business model in as little as 90 days.