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Types of Marketplaces: Complete Categorization With Examples

by GK October 11, 2017
Types of marketplace

An eCommerce marketplace is an online platform that allows customers to shop from multiple sources at a single space. It’s no different from a physical marketplace or a shopping mall, except you need not checkout from each shop individually, just a single checkout point for the entire mall.

Visit an online marketplace, pick products from different sellers/shops/vendors, but the products in a virtual shopping cart, take your cart to the checkout page, and complete your purchase.

Traditionally, a product or service marketplace acts as a point of connection between sellers and customers. If you own an online marketplace, you need not keep the inventory of the products that you list. You can allow vendors, who have the inventory, to set up their storefronts and sell to your customers. Your marketplace will simply facilitate the transaction and earn commissions from the sellers/vendors/shop owners.

The marketplace attracts as many customers for the sellers and earns commission. However, the commission is not the only source of revenue on an online marketplace. The modern internet and web technologies have empowered marketplace platforms with other ways to generate even better income:

  • Depending on the business goals, a marketplace operator/owner might also sell from his/her own inventory to increase the prospects and make more than just commissions.
  • Some marketplaces have also introduced customized subscription packages for sellers and customers respectively.
  • If you want to sell on a marketplace, subscribe to a seller subscription package. Example- Amazon FBA
  • If you are a customer, subscribe to a special membership, and you can get exclusive benefits like free shipping, same-day delivery, and access to the ecosystem. Example, Amazon Prime

It’s a complex architecture, and every popular marketplace follows unique strategies. Depending on different aspects and business goals, there could be N types of marketplaces. Keep reading this post to know about all of them.

Different Types of Marketplaces by Target Audience

A marketplace may target different kinds of audiences for business and revenue. Depending on who is the primary target, there are following categorizations of a marketplace business model:

1.Business to Business (B2B) Marketplaces

A B2B marketplace consists of three types of users: The Marketplace Owner; Businesses as sellers; Businesses as customers.

A B2B marketplace targets other businesses as their primary customers. For example, wholesalers and suppliers. Generally, a third party operates a B2B marketplace, not the actual manufacturer of the products or the service. It is open to both buyers and sellers from a particular niche. You can register to these marketplaces and get access to ads, quotations, and place bids on different products from your sector.

Examples: Rakuten, Alibaba, Mercateo, Global Sources, IndiaMART.

1.1 Business models of B2B marketplaces

A B2B marketplace functions as a platform to connect sellers and buyers at one place, which facilitate three major sources of revenue for such a business:

Commission-based business model

For every successful order a seller gets from the platform, he/she pays a percentage cut as commission to the marketplace. The marketplace may charge different cuts depending on the type of products, category of products, size of products, value of the cart, and other trade variables.  The commission is the primary source of revenue for most of the marketplaces. It always stays there, while the marketplace may choose to add some additional revenue channels to increase the products.

Subscription-based business model

The marketplace charges a membership subscription fee from the sellers to let them use its platform for business. Unlike the commission-based model, we cannot find this channel in every marketplace. It’s more common in gigantic B2B marketplaces with high volume products and tons of repeat customers. The marketplace may club some additional value in the subscription packages to attract more memberships. For example, lesser commission cuts, bigger product catalog, access to exclusive categories, logistic assistance, etc.

Note: The marketplace may also charge a membership fee from the customers for added benefits.  

Listing fee business model

It’s more like pay-per-view, which we see in video streaming platforms. Marketplaces that follow this model ask sellers to pay an extra amount as a listing fee for posting a product to sell. Marketplaces can club this channel with others to give more options to the sellers. No need to pay a subscription fee; pay for just the things you want to sell.

1.2 Challenges of building a B2B Marketplace

While the B2B marketplace is a great business idea, it has its own share of challenges that you must address for building a business of this sort.

Lack of brand legacy

The B2B market is hard. It’s even tough for a newcomer. As a new B2B marketplace, you would not have the legacy and identity, which this market needs. It’s not easy to build a perfect B2B solution and then get other businesses to believe in it. A B2B marketplace demands equal development on either side of the model: sellers and customers alike. You cannot appear biased to either side. 

The only way to overcome these challenges is to follow the basic pain and solution strategy. Before building your B2B marketplace, conduct thorough research, and discover the things you want to target. Identify the pain points of your target audience and create a solution around them.

Lack of trust

Unlike other types of e-marketplace, a B2B marketplace deals in bulk and big order values. Each cart consists of thousands and millions of dollars of investment by the businesses. For such big commerce, you cannot expect other businesses to start trusting you overnight. You have to work hard and spend a greater part of the money to earn that trust and building an authoritative figure in the market. Build an ecosystem that boasts of authority, security, and credibility of your business:

  • The robust user verification process
  • Legal documents and license verification
  • Review and rating system that goes both ways
  • Unambiguous explanation of your marketplace policies

2.Business-to-customer (B2C) Marketplaces

A B2C Marketplace consists of three types of users: The marketplace owner; Businesses as sellers; Direct Consumers.

Unlike B2B, the customers in a B2C marketplace are direct consumers of the products and services. Here, businesses do not sell their products to other businesses but the consumers themselves. The businesses in this model are mostly retailers and small manufacturers who deal in retail and small orders.

Example: Amazon, AliExpress, Booking.com

2.1 Business models of B2C marketplaces

The business model of a B2C marketplace is not much different from B2B, except the revenue sources also focus on the customers of the platform:

Commission-based business model

Sellers can list their products on the marketplace, and when customers purchase these products, the marketplace owner gets a commission. The commission depends on the retail price of the product. However, the marketplace may decide to charge different rates of commission on different products, categories, regions, and sellers. 

Subscription business model

In most of the marketplace business models, the subscription model is all about charging membership fees from the vendors, not the customers. This model allows a marketplace owner to make the entire marketplace, or parts of it, exclusive to the vendors who pay a premium. For example, Amazon FBA. Sellers who opt for FBA membership on Amazon get additional benefits when compared to sellers with free accounts.

Note: Please note that Amazon Prime membership does not come under this category. Prime is for customers, not the sellers. However, selling membership for customers too is a great option if you can provide them with some valuable benefits like Amazon does.

Listing fee business model

It’s not seen much among the B2C marketplaces, but it’s a good option in certain scenarios. For example, Etsy charges a fixed fee for listing products. The cost of listing an item on Etsy is around $0.20. You can compare this business model with premium listings on Craigslist.

2.2 Challenges of building a B2C marketplace

Starting a B2C marketplace is comparatively a less troublesome task when seen side by side with the B2B segment. However, it doesn’t make it any easier.

High competition

B2C is the most common form of the marketplace; it’s crowded with competitors in almost every sector. Be a product marketplace or service marketplace, giants have claimed most of the market. If you have heard of Amazon, eBay, Etsy, Alibaba, Airbnb, TaskRabbit, and Thumbtack, then you know what I mean. Unless you are targeting an unexplored region or niche, it’s tough to gain a competitive advantage against these giants.

The best way to invest is by focusing on a micro-niche and establishing a unique identity within the same. With the right marketing strategy and competitive product pricing, it’s possible to win customers in a competitive market like this, too.

B2C pricing challenges

If anything that fluctuates every second in the B2C market is product pricing. When selling directly to the consumers, you need to respect each factor that influences a buying decision. However, you cannot just put the prices randomly. You need to coordinate with the sellers and ensure that none of your decisions regarding the price is putting you in a bad place with the sellers.

  • Know your market from inside out
  • Study your target group and competitors
  • Identify the scale of demand and current availability of the products
  • Define the loopholes you can fill with your set of products, services, and policies
  • Implement the variables on the ground and offer price differentials that they can’t resist
  • Review your prices regularly and update as per the demand and supply of the products

3. Peer-to-peer (P2P or C2C) marketplaces

A peer-to-peer marketplace, AKA P2P, or C2C marketplace facilitates commerce between users of the platform. The sellers of the P2P marketplace need not be a business, as individual users may sell or rent products and services to each other. As compared with B2B or B2C marketplaces, a P2P marketplace features a shorter sales cycle. Interestingly, a customer of the P2P marketplace can also become a seller at some point.

Example: eBay, Etsy, Airbnb, Uber, Lyft 

3.1 Business models of P2P marketplaces

There are some great ways to make money running a P2P marketplace. In fact, unique revenue channels of this sector are growing at a much rapid rate than the other segments.

One-sided Commission

Similar to other marketplace models, you can charge commission cut from whoever is the seller of the product or the service. For example, there are used-products marketplaces, which charge the transaction fee from the sellers, but customers need not pay anything extra.

Two-sided Commission

You can charge commissions or transaction fees from both the sellers and customers of the transaction. The service marketplace Airbnb is a perfect example of this revenue model. It charges a commission from the homeowners, while a transaction fee from the customers.

Paid Promotions

This revenue channel is viable in most of the business models. You can offer paid promotion services to the sellers. In return for a promotion fee, you can put their listings in Featured or Sponsored segments for better visibility. The seller would not mind paying extra for improved visibility on the platform. You can find such listings on eBay and Etsy as well.

Advertisements model

Since the sellers on a P2P marketplace are regular individuals, they might not feel comfortable sharing their revenue with you as commission. You can waive off the commission and make money by showing Ads on the website. You can adopt any of the Ads models that are suitable to you- CPI, CPC, PPC, etc.

3.2 Challenges of building a P2P marketplace

A P2P marketplace is entirely a different concept. Building such a platform requires unique features and revenue channels. Let’s understand these challenges in detail:

The marketplace doesn’t solve a real problem

Both the customers and sellers of a P2P marketplace are common people. Unlike professionals and businesses, it’s tough to convince an individual for using your platform for business. Things get worse when marketplaces fail to solve a problem and cannot portray the reasons to use. A P2P marketplace requires extra efforts on identifying the target audience and target products or services. You can’t just start listing stuff randomly. It took years for Airbnb to convince the homeowners to rent their properties to strangers and vice-versa for the consumers to stay in a stranger’s house.

Too broad of a focus

Business owners often make this mistake and start listing a broad range of products and services to maximize their prospects. It’s a big mistake. As I said, Airbnb started in a niche, yet it took ages to establish its credibility. Just think if you list all kinds of products, how difficult it would be to convince everyone at once. TaskRabbit did the same mistake when it began with a horizontal model, as it gave them a hard time scaling up their business. It’s always wise to select a niche in the beginning and work towards building a credible identity into it.

Comparison of major marketplaces types

Factors B2B B2C P2P/C2C
Marketing Strategy Building Relations Unique Products Building Trust
Types of Customers Other Businesses Consumers Consumers
Types of Sellers Businesses Businesses Individuals
Average Sales Value Thousands to Millions of dollars Tens- Thousands of dollars Tens- hundreds of dollars
Cycle of Purchase Daily to Months Weeks to Months Hours to weeks
Customer relationship Long term Short term Very short term

Marketplaces by focus

Business models differ and so do the types of marketplaces that follow them. However, when you sub-classify these business models based on their target customers, you will find two major sub-categories in each classification, be it B2B, B2C, or P2P.  

 Horizontal marketplaces

Horizontal marketplaces offer products and services from various segments and industries to customers across different regions. In short, a horizontal marketplace is a one-stop destination for all your needs. Just like shopping malls with different kinds of stores, only it’s online. Amazon, eBay, Etsy, Best Buy are the perfect examples of such a marketplace model.

  Vertical marketplaces

Vertical marketplaces focus on a particular niche, rather than selling all kinds of products and services to everyone. If you narrow down your catalog to specific goods and services for specific customers, you get a vertical marketplace model. The technical requirements differ for such marketplaces, as products and services from every niche offer different ways to attract sales. By focusing on a niche, you can carve out a more refined eCommerce website and adopt focused strategies to overcome the competition in the general market.

Take Etsy and Amazon for instance. Out of the two, Etsy is a perfect example of a vertical marketplace. Unlike Amazon, it does not sell all kinds of products. It has focused on selling craft and craft supplies. With focused marketing and unique experience, Etsy was able to establish its brand as a go-to destination for craft and handloom goods.

Even though Amazon is a bigger brand, nobody can deny that Etsy is the first choice of customers and sellers, when it comes to the craft.

Marketplaces by the management approach

The management approach is the term that we are using here to identify the level of responsibilities a marketplace owner takes in the entire operation. Based on how much the marketplace involves itself in managing the operation and transactions between the customers and sellers, we can classify three different types of marketplaces:

Unmanaged

Such marketplaces allow the stakeholders (sellers and customers) to manage the marketplace operations by themselves. The marketplace owner is responsible for providing the platform, managing the online transactions, and maintaining records of everything. While everything else, such as background checks, quality assurance, and feedback management, etc. is managed by the stakeholders themselves. By circumventing the management of complex tasks, such marketplaces can offer their services at competitively lower prices.

For example, eBay. eBay does not conduct any background checks of its customers. If you want to know if a seller is trustworthy, you have to trust the reviews and ratings submitted by other customers. 

Mostly P2P types of online marketplaces follow this model.

Lightly managed

Marketplaces like Airbnb do not interfere much in the operations between the stakeholders, but they do invest in quality assurance by supporting the stakeholders on important aspects. For example, Airbnb lets the homeowners and customers conduct commerce, but it also ensures that the properties are good and secure. It conducts background checks, too. Besides, it also offers property photography to homeowners.

In short, some marketplaces offer partially managed services to the stakeholders to ensure a smooth operation.

Mostly P2P service marketplaces follow this model with additional guarantees for the customers.

Fully managed

The products and services in fully managed marketplaces go through strict intervention from the platform. The marketplace does that to ensure quality. Such marketplaces are consumer-focused and try their best to make their brand trustworthy. They also cover wholesale, logistics, and other processes for their sellers to ensure a smooth operation.

For example, Amazon FBA. A seller under the FBA service gets all kinds of support from the marketplace. Yet another example could be a real-estate marketplace like Zillow. The marketplace verifies all its listed properties and sellers.

Mostly B2C types of online marketplaces follow this model.

The marketplace is a massive segment in itself. It is profitable and offers better alternatives to own an eCommerce business without investing in the inventory. However, it’s not simple in any form. One needs a next-level dedication to set up a business in this model. If you are considering setting up a marketplace startup, be particular about the multi-vendor solutions you are going to use. You don’t change your marketplace software every day. It’s a long-term commitment. So choose your business model and act accordingly.

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