In the earliest stages, marketplace platforms face a fundamental problem: How do you gain enough supply to satisfy demand? And how do you generate enough demand to make participation worthwhile for suppliers?
This is the essence of the chicken-and-egg problem. One of those user groups, customers or suppliers, has to come first. The right solution is often to “fake it ’till you make it” to jumpstart demand and then get suppliers to come your way.
All too often, retailers and distributors pour resources into the supply side first, trying to lock down the biggest sellers or handpick them in a way that ostensibly protects the core brand. But this isn’t how you build a true platform.
Enterprises wanting to build a durable marketplace from the ground up must either “fake it” at first or have the guts to disrupt themselves and open up the core of the business. That’s a scary proposition, but it’s how you build a marketplace platform that can scale and eventually dominate.
The natural impulse for many large companies embarking on eCommerce is to vet each and every third-party supplier to make sure the core brand and everything it stands for, such as customer experience and service standards, remain intact.
This is the approach taken by Target with its curated Target+ marketplace. It makes sense and might seem like a good way to insulate the core business from low-quality sellers and dilution of the customer experience. But this mindset is the enemy of scale, and when taken too far, tends to spawn faux marketplaces with limited potential.
When supply is the dependency from the start, you cannot achieve what the biggest marketplace platforms have going for them: high throughput and a big, constantly-growing product catalog. And if customers cannot find what they’re looking for through your eCommerce outlet, they will go somewhere else to get it. 55% of Americans go straight to Amazon first when they want to buy something online. If they go to your marketplace and don’t find what they’re looking for, they’re not coming back.
For retailers and distributors who want to dominate their niche industries or verticals by embracing the marketplace model, a different approach is required.
For a brand-new eCommerce marketplace, this could look like listing some initial inventory on your website that you don’t actually have, at prices you think you can get for it. In the beginning, you may have to manually hack fulfillment, and it’s common to lose money on those early sales. But this is what revs up the engine of a marketplace platform.
This is what Jet.com did at the start. Former Jet.com CEO and current Walmart eCommerce U.S. head Marc Lore made the pitch to early customers — again, solving for demand first — this way: “When we show you a product, it’s not because we are making money on it and not because we are closing out a line. It’s because we think it’s a good deal.” This included products that Jet didn’t currently have in stock.
That’s how an eCommerce startup might go about doing things. But what if you’re a large incumbent retailer with an existing eCom presence, and you want to play the game on Amazon’s level?
It might seem the way to go is to simply offer complimentary third-party products next to the merchandise you sell directly. For example, imagine a fashion brand like Nordstrom wants to offer complimentary electronics products to its online customers, who typically come to purchase apparel. To do this, Nordstrom might partner with an electronics retailer like Best Buy to offer complimentary electronics.
The problem? Electronics are not what Nordstrom is known for. The throughput to those third-party electronics sellers will be limited, and they will fail to see the value in joining.
The better path is self-disruption. This means letting third-party sellers compete with your internal buyers. Yes, you want them to compete with your products directly. To many brands create marketplaces to solve their problems, not to provide the best value to the customer. This focus is what leads too many down the path of complementary marketplaces rather than opening a marketplace where it will make a real impact.
It’s a bold move and it feels dangerous, but it’s a proven way to grow. You will immediately create an attractive proposition for the supply side. They will see that your 1P (linear, direct-to-consumer) process won’t edge them out, and that they’ll have a fighting chance within your marketplace.
On the demand side, your customers are treated to a large product catalog that only grows as more sellers come on board and compete with each other, driving prices down. And once the platform reaches a critical mass of buyers and sellers, your core business can simply benefit from the upside, allowing you to shrink resource-intensive 1P processes or leverage them to add more value to the platform. When done right, everybody wins.
As mentioned before, Jet.com “faked it” in the early days. Jet seeded demand first by listing products for sale, including those it didn’t have in stock, and taking customer orders online. If a customer bought an item Jet and its sellers didn’t supply, Jet would just go out and buy the product, including going to competitor sites like Amazon to buy the product and ship it to the customer. No matter what it took, Jet made sure it had the items customers were looking for, and it did whatever it needed to make sure they got them.
Once it had the demand coming in, Jet had a magnet it could use to attract more third-party vendors. From these humble beginnings, Jet’s platform grew and became valuable enough for Walmart to buy it for $3.3 billion.
Now Walmart has co-opted the technology, product catalog, and digital assets of Jet, and Walmart Marketplace is thriving. In 2019, Walmart managed to add 10 million products to its online catalog, with only about 500,000 of those products going through Walmart’s 1P fulfillment.
By embracing the self-disruption principle and continuing to support its eCom ecosystem with tech investments, Walmart’s marketplace has continued to grow at rate faster than Amazon. That’s been a big reason why it’s now hot on the heels of Amazon as the #2 player in a B2C marketplace duopoly.
To start a competitive marketplace, loosen the grip on the supply side and get some demand going. That means resisting the temptation to handpick sellers or overprotect the core brand. It also means being willing to “fake” the supply side if needed.
This chicken and egg problem is where most marketplaces fail, especially ones started by large enterprises. The main goal needs to be on delivering the best value to your consumer. If you don’t, those customers won’t come back and you won’t be able to attract more supply.
Show value to customers early on, get solid throughput going and then you can start to entice more and more third-party sellers to sign up.
Filed under: Platform Design | Topics: enterprise hacks
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