This is the first in a three part eCommerce marketplace strategy series. Part one focuses on some foundational ideas about online marketplaces; part two uses those ideas to analyze the most recent variants and trends in online marketplaces; and part three discusses marketplace strategy from Vander Group’s perspective as an eCommerce solutions provider.

Marketplace Function

Buried deep in EM Forster’s prophetic yet largely forgotten 1909 short story, “The Machine Stops,” is a sentence that captures the two concepts that drive online marketplaces. In his story, Forster envisions a world that has developed a version of the internet and automated transportation. Midway through the perhaps too luddite plotline, one of his futuristic characters ironically comments that previous civilizations had “mistaken the functions of the system, and had used it for bringing people to things, instead of for bringing things to people.” In one sense, this is an almost preternatural prediction of the direction that commerce has moved over the last 50 years, yet any astute student of digital marketing will recognize the fundamental truth that Forster’s quote overlooks — the fact that, even in a period increasingly dominated by digital transactions and direct-to-consumer deliveries, merchants must still bring “people to things” before they can bring those “things to people.”

In a nutshell, that is how all marketplaces, including those housed online, function: they bring people to things and things to people. Almost every marketplace trend can be understood and predicted in terms of advancements in one of these two areas. As an illustration, consider the rise of eCommerce relative to the more traditional brick and mortar retailers as explained by these two principles. It simply is not possible for a physical marketplace to create or sustain the kind of customer traffic that an online marketplace can generate and handle digitally. In this sense, once the internet reached a critical mass, it was inevitable that online marketplaces would rapidly gain retail market share. They had an intrinsic competitive advantage: they were able to redefine what it meant to bring people to products in a way that circumvented the traditional retailer’s spacial limitations and enabled a much broader reach for a much lower cost. And, despite some initial disadvantages in terms of immediacy and bringing products to customers, online marketplaces were able to leverage this competitive advantage to the point that a single online marketplace, Amazon, now accounts for 25% of every new dollar of retail sales growth.

Marketplace Growth

With the existence of powerful search engines, the internet essentially becomes one giant online marketplace. Every online merchant with an eCommerce site is only a few keystrokes away from a potential customer. So why are dedicated marketplaces like eBay, Amazon, and Etsy dominating so much of online commerce? While a technical explanation is beyond the scope of this series, the intuitive answer can be understood by examining two perspectives: the vendor’s and the consumers.

From the vendor’s perspective, marketplaces primarily offer an efficient way to increase customer traffic, particularly among potential new customers. Think for a second about the origins of the traditional shopping mall as a marketplace: a collection of vendors selling a variety of products pool their customer traffic to create a single, unified shopping destination. Individual vendors, particularly those who lack the kind of product variety that would make them a shopping destination in and of themselves, benefit from the stream of purchase minded customers generated by the other vendors at the mall. Online marketplaces work the same way to increase and harness consumer traffic, and this dynamic largely explains why online marketplaces have grown so rapidly. It is simply much easier, faster, and, often, more cost effective for online vendors to acquire new customers by joining an online marketplace than it is for them to take the steps needed to generate increased traffic to their own webstore.

For a consumer, online marketplaces primarily offer advantages in terms of convenience and confidence. Online marketplaces, like the department stores and malls before them, are convenient because they offer one stop shopping for a wide variety of products. Beyond that, their wide selection gives them an advantage in terms of return shoppers. As Thoreau puts it, “The surface of the earth is soft and impressible by the feet of men; and so with the paths which the mind travels.” People seek out marketplaces precisely because they have traveled to those marketplaces before and have been habituated to mentally equate particular sets of goods or services with those marketplaces. And online consumers — trained by shopping districts, department stores, and strip malls — are ready to transfer their expectation of a localized and unified shopping experience into the digital realm. This familiarity, as well as the common conception that larger organizations present less risk because they have been more thoroughly vetted, breeds the consumer confidence needed for making an online purchase. In this sense, online marketplaces are the answer to the inherent uncertainty that comes with purchasing items that are not physically present using highly personalized payment information that must be kept secure. This confidence is especially important at the beginning of a vendor relationship, which is partly why online marketplaces are such an attractive play for companies looking to increase their customer base.From the vendor’s perspective, marketplaces primarily offer an efficient way to increase customer traffic, particularly among potential new customers. Think for a second about the origins of the traditional shopping mall as a marketplace: a collection of vendors selling a variety of products pool their customer traffic to create a single, unified shopping destination. Individual vendors, particularly those whose the kind of product variety that would make them a shopping destination in and of themselves, benefit from the stream of purchase minded customers generated by the other vendors at the mall. Online marketplaces work the same way to increase and harness consumer traffic, and this dynamic largely explains why. It is simply much easier, faster, and, often, more cost effective for online vendors to acquire new customers by joining an online marketplace than it is for them to take the steps needed to generate increased traffic to their own web store.

Once a marketplace has established a significant customer base, it makes sense that smaller vendors will flock to it to get a slice of its traffic, which in turn will create greater consumer traffic driven by the increased selection and perceived reliability of the marketplace. Theoretically, this should quickly create a recursive growth process. In the physical world, this process would eventually become self-limiting based on practical considerations. But, at first glance, the digital realm seems to hold no such limitations, which would dictate that larger online marketplaces should continue to cannibalize smaller ones until, theoretically, only one remains. Yet, while Amazon is certainly making an attempt, we have not seen a single marketplace monopolizing all eCommerce traffic, and we regularly see brand new marketplaces emerging.

Marketplace Tension

In part, this is because marketplace growth produces tensions for both consumers and vendors. For a consumer, as a marketplace increases its number of vendors and products, it becomes both more and less functional. That is, it brings the consumer to more things, but it also makes it more difficult for the consumer to sort through those things and determine what to buy. Online marketplaces continuously attempt to mitigate this tension through search engine innovation and the introduction of categories, rankings, and other sorting features that attempt to reduce consumer choice to a manageable level. Still, from a customer’s perspective, a bloated marketplace is nearly as undesirable as a starved one.

In a psychological sense, there is also, in the words of CS Lewis, a “horror of the same old thing” among many consumers, which runs contradictory to the power of customer habit. Particularly for certain products, consumers are looking for a novel experience as much as they are looking for efficiency, and this drive can lead them to seek out new sources for goods that may be less established than those marketplaces they are most familiar with. Similarly, many consumers exhibit an almost snobbish avoidance of the commonplace as it relates to matters of personal identity or relationship, which are both powerful forces in the current consumer economy. (To get an idea of this, think of many people’s resistance to buying their wardrobe at Walmart or purchasing an engagement ring at Costco). We feel that as internet shopping becomes more and more normalized, highly diversified online marketplaces run the risk of becoming commonplace unless they very carefully balance the pursuit of efficiency with a calculated program to individualize sellers and brands.

From a vendor’s perspective, a marketplace is also fraught with tensions. While it offers the traffic needed for survival, it presents some downsides as well. For most products, marketplaces juxtapose vendors extremely closely, forcing them to drive down prices lower than they would ordinarily. Highly managed marketplaces like Amazon go so far as to require sellers to price products at or below all other posted prices, effectively limiting seller profit margins on all other channels, which can be a steep price to pay for increased sales. Marketplaces also tend to remove some of the control sellers might normally exert over customer relationships, sales, and product distribution processes, which can lead to an erosion of brand, a vital aspect in maintaining customer loyalty and long term profit margin.

Because of these factors, as well as more nuanced shifts in retail dynamics, customers and vendors are constantly consciously or unconsciously re-evaluating their relationship with specific marketplaces, which creates a shifting landscape within and between those marketplaces. In part two, we will examine how this creates marketplace variants. In part three, we will examine how these ideas can be applied to develop a coherent eCommerce strategy.