In part 1, we discussed the basic principles that drive online marketplace formation and growth, and we analyzed a few of the tensions that are inherent in online marketplaces. While the online marketplace variations that have arisen in response to these stimuli are nearly endless, this article will focus on two of the most prominent and influential trends in marketplace variation: management and hybridization. While these two trends are closely linked and some choose to use the terms interchangeably, we think it is helpful to examine them separately.
In every online marketplace, regardless of its complexity, there are a few elements that need to be managed by at least one party: product listing, inventory storage, and fulfillment. Marketplaces frequently differentiate themselves based on the degree of management they exert over each of these areas.
As an example, consider Craigslist, a major online marketplace that does almost no management in any of these areas. Their site establishes categories for users to post in chronologically and includes a posting search tool with a few simple filters, but beyond that, it is up to the individual buyers to sift through the postings. Craigslist also doesn’t manage the storage of any of the inventory for sale and has nothing to do with the delivery of the merchandise. For sellers, this creates a marketplace that is very cost effective because the lack of management cost enables Craigslist to allow most posts to be free and charge no transaction or referral fees. On the other hand, this creates a marketplace where the quality of products and services is inconsistent and fulfillment can be a hassle. Essentially, it requires each new seller and buyer pair to create, define, and fulfill a commercial relationship on their own, without any intervention from the marketplace. This flexibility and permeability makes Craigslist an ideal marketplace for used items, particularly those that are large enough to be cost-prohibitive to ship, and it tends to attract low volume sellers and buyers, who don’t do enough transactions to make efficiency a priority over flexibility.
On the other end of the spectrum, there is the highly managed Amazon.com. Everything, from the sequence and arrangement of the products the customer sees to the way customer orders are fulfilled is managed by Amazon. Because of this, Amazon offers both buyers and sellers an incredibly efficient experience, but its intensive management dictates a pricing structure that includes referral fees and fulfillment costs that are passed on to sellers and, directly or indirectly, to consumers. Because Amazon so closely monitors consumer experience in its marketplace, it also means that sellers are limited in their ability to individualize customer interactions, create loyalty, and deploy marketing campaigns. It’s highly managed system can also limit its flexibility and ability to attract sellers of low volume, used, or unstandardized items. To use a simple example, there just isn’t a good reason for your neighbor cleaning out his garage to try to integrate himself into Amazon’s fulfillment network. For him, a marketplace like Craigslist is likely to offer more convenience and flexibility, even though he might find it very inefficient at high volumes.
In between, there are marketplaces like Alibaba, Rakuten, and eBay, which provide managed payment services, some level of listing management, and offer some managed fulfillment services, but not on the scale of Amazon. These marketplaces seem to be trending toward Amazon’s end-to-end management model in an effort to compete with Amazon’s global market share growth, but none of them have reached Amazon’s degree of management over all aspects of its marketplace, which, even if it may cut into Amazon’s profit margin, continues to enable it to rapidly gain market share, particularly for items that are well suited to Amazon’s fulfillment system.
In many ways, Hybridization is the next logical step in marketplace management. It involves the marketplace owner actually selling its own inventory in its marketplace along with third party sellers. This allows the marketplace owner to exert unparalleled influence over its marketplace. From a business model perspective, it is very attractive because it allows the owner to strategically fill gaps in the products being offered in the marketplace and exploit marketplace dynamics to maximize profit margins on its own products.
The reason we choose to think of hybridization as separate from management is based on the driving factors behind the trend. While the trend toward greater management of online marketplaces is coming from existing online marketplaces attempting to maximize efficiency, and marketplaces such as Amazon have begun to arrive at a hybrid inventory model through those pressures, the most interesting and rapidly growing hybrid marketplaces are actually coming from existing brick and mortar retailers who are attempting to capture their share of the online retail market.
Unable to compete against the massive diversity of online marketplaces using only their own inventory, these retailers are opening up their direct-to-consumer websites as hybrid marketplaces — not only selling their inventory but having this inventory fulfilled by third party vendors. And that’s why we like to distinguish between inventory hybridization and other forms of marketplace management; these companies are hybridizing by adding third party sellers to their own inventory, not the other way around. In this sense, hybridization actually marks a move by the owners to control less over inventory, not more. Yet all the big names in brick and mortar retail: Sears, Walmart, Target, Nordstroms have opened up their online channels as hybrid marketplaces. While they are a bit late to the game, by 2016, 18 of the top 25 online retailers were traditional retailers who had extended into online retail, and a major key to their success has been the realization that they need to hybridize their inventory.
This hybridization movement among brick and mortar retailers has enabled them to capture a greater share of eCommerce revenue, and many of these companies are beginning to experiment with another form of hybridization. Traditionally, companies have seen warehouses and retail spaces as separate entities, but with the growth of networks of “fulfillment centers” located around the globe with the aim of reducing shipping times, some traditional retailers are beginning to view their storefronts as warehouses. The growth of “buy online, pickup in store” (BOPIS) was one step in this realization, and now some retailers are beginning to realize the advantages of using physical storefronts to strategically diversify inventory storage and provide faster fulfillment with little or no added cost.
In part 3, we’ll discuss how we think these trends in online marketplaces fit into overall eCommerce strategy.