Online marketplace series: Starting with your online marketplace
You’ve been thinking about starting your own online marketplace?
Well then, you’ve come to the right place! In our online marketplace series, we’ll uncover the whole topic of online marketplaces and make it easy for you to start.
In this episode of the series, we’ll talk about the starting steps. You’ll learn more about researching your industry and your users, planning your marketplace operations, and choosing the right monetization strategy.
It may get more complex than starting your eCommerce business, but it can be even more rewarding.
Before we get down to business, a small note here. If you’d like some professional help, feel free to reach out to us! We’re proficient in building successful online marketplaces, and we’d like to help!
And now to not keep you waiting any longer – let’s dive in!
Why should you start your own online marketplace?
First of all, if you’re not familiar with online marketplaces, here's a short definition.
In short, the online marketplace is an eCommerce platform where sellers offer their products for sale, while buyers can purchase products from multiple different sellers.
The marketplace handles all the payments and can generate its own revenue by collecting fees.
It’s a bit different than a traditional eCommerce store. Usually, the customer can purchase products directly from the store, while on the marketplace the customer can choose from many different sellers.
Hence the name – online marketplace.
Great examples of online marketplaces are Amazon and eBay. You’ve definitely bought something from those 2 platforms and you can already see how those marketplaces work.
So, we’re here to teach you how to create your own! It’s an exciting journey indeed.
Now, why would you start your own online marketplace? Just in 2019, $1.97 trillion was spent globally on the top 100 online marketplaces.
Online marketplaces are evolving and the amount of money spent is rapidly increasing over the years. Just 2 years before, in 2017, $1.47 trillion was spent on online marketplaces.
Meaning that in only 2 years, customers have spent half a trillion dollars more! Now’s the time to jump in!
Now, what are some concrete reasons to get into the online marketplace business?
One of the biggest reasons is the network effect. It’s incorporated into online marketplaces and it brings together both of the sides of a transaction. Both between the customer and the platform and between the platform and the sellers.
In short, the network effect is a phenomenon that as the user base grows, so does the value of the product.
This makes it possible to scale much faster while having several different revenue streams without the need to manage your own inventory and logistics (if you choose not to, of course).
It’s safe to say that starting your online marketplace is much different than starting an eCommerce business. And yet, it has some similarities.
Let’s say you have an eCommerce business and you’re selling fitness accessories. Switching to the online marketplace business model will allow you to grow your business much faster.
You could build a huge community around your online marketplace and allow other vendors to sell their own products. With new vendors, there will be new buyers.
Also, these new vendors will also put some effort into bringing in new customers and building a community. After all, their goal is to increase their profits as much as it gets.
And the best thing is – you won’t need to expand your inventory and invest in new warehouses. Of course, you could (as Amazon does), but you’re still far away from that decision.
And here we are – we’ve come to the first step you’ll need to take in order to get your online marketplace up and running. Market research.
Conduct thorough market research
Similar to researching the market when starting your eCommerce business, you’ll need to identify your users’ needs, their problems, and the solutions to their problems.
You’ll want to have a clear picture of the industry you’re entering and its competitors. There is no way around this.
Research the industry
When you’re trying to settle down in an industry, you’ll want to know about it us much as you can. After all, you’re trying to influence it.
Now, you need to know its size, its growth rate, and the latest trends in the industry. We’re keen on recommending the following sources when researching an industry:
These sources are highly authoritative, and the chance is that you’ve already encountered them while researching for ways to start an online marketplace.
So, give them a visit and start researching your industry as soon as possible.
Also, by researching the industry you’re trying to validate your business model. The size of an industry may be an important factor for you.
When you’re charging selling fees, for instance, it will be a lot harder to operate in a smaller market – even though it’s easier to enter it.
Next, you’ll want to know if there are some clearly defined niches in your market. It’s always a good idea to choose the most attractive niche you find in the market. But first, validate your business model!
To not get you discouraged, remember – Amazon, Etsy, and Eventbrite all started from small niches!
Today, Amazon is the largest online marketplace in the world, but it started way back in the 90s as a small online bookstore. The potential of your business is immeasurable.
Identify your competitors
Whatever industry you are trying to enter, you’ll have competition – either direct or indirect.
Without knowing your competitors, you’ll be fighting an uphill battle.
So, here are some questions to help you with your research:
- What niche is your competition in?
- How does their website look?
- What features do they have?
- How are they handling inventory and shipping?
- How do they describe their offerings?
- What kind of fees are they charging?
- How much effort are they putting into their marketing?
- How are they communicating with their community?
- What kind of guidelines do they set for their new sellers?
These are just some of the starter questions you’ll want to find an answer to. More will come as you continue with your research.
A good practice is to identify your competitors’ strengths and weaknesses and find some gaps which they didn’t cover.
List it all down in a spreadsheet, as it will be much easier to have a clear overview of your competitors.
Also, be sure to identify the market leader. Take a look at their business and try to figure out how they became the market leader. What separates them from the rest of the competition?
Next, you’ll need to identify your users.
Identify your buyers and sellers
Without knowing who your users are – you’ll be working on your online marketplace without a clear roadmap.
So, here are some simple questions that’ll help you get started.
- What are your buyers’ and sellers’ main goals and main challenges?
- Where are they buying, why are they buying and what seller do they buy from?
- What motivates and influences them?
With the help of these questions, it’ll be much easier to create a few buyer personas and better understand your target audience’s needs.
Also, here’s a checklist on what kind of actions could you undertake to identify your buyer personas.
When you’ve identified your target audience, you’ll need to figure out what are their needs and what solutions can solve their problems.
You’ll want to find out more about your buyers and their shopping habits.
You could ask yourself the following questions:
- Are they shopping offline?
- Where are they shopping?
- Are they satisfied with their shopping experience?
- What else would they like to experience?
Also, when researching your potential sellers, you’ll want to get in contact with them directly. Ask them about their product offerings, how they plan to sell their products and what other platforms are they using to sell their products.
Find out how can you improve their experience as sellers and work towards that.
In the end, you’ll most certainly have a better understanding of your users. This will give you more insight into the market itself and make it a bit easier to plan the whole online marketplace business plan.
And now when you’ve researched your target market completely, it’s time to choose the business model for your online marketplace.
Choose the right business model for your online marketplace
Before launching your online marketplace, you’ll want to design a viable business model. Regardless of what industry you’re entering – this is necessary.
Here, you’ll want to decide how you’re going to monetize your online marketplace and what kind of revenue streams are you going to secure.
Here are some business models you may want to consider (including mostly different kinds of fees).
Charging sign up fees
By definition, a sign-up fee is a payment you charge your sellers to sign up to your online marketplace.
The good thing about this business model is that you can charge your sellers with sign up fees before your online marketplace starts booming. As long as your idea is viable and concrete, you can sell it to your sellers and make them a part of your great journey.
The problem with sign up fees is that they can’t scale. Also, you can’t charge the same seller twice for signing up. So, you’ll need some other sources of revenue.
Subscriptions may prove to be the best business model nowadays.
The world economy currently is thriving thanks to these subscription-based businesses.
For example, you could charge your sellers a certain amount regularly in order to generate revenue. It will keep your business running and the more sellers you have – the more revenue is secured each month.
Following, here’s a snapshot from Amazon Marketplace. They charge their professional sellers monthly for $39.99 while, also while charging them additional selling fees.
And if you go with a subscription business model, make sure your sellers get much more value than they’re paying for.
A fee of $50/month won’t mean much to them if they have an opportunity to earn 10 times the fee on a monthly basis.
Establishing subscriptions may be a bit difficult from a technical point of view. When dealing with subscriptions, you’ll want to have a payment gateway that supports subscription payments too.
But all in all, it’s worth it.
Charging listing fees
Besides sign up fees and subscription plans, you could charge your sellers with listing fees every time they list a new product.
The fee could be fixed or it can vary depending on the price of the product or its category.
Same as listing fees, they’re easy to collect. Still, they are much more scalable. For example, you could collect listing fees every time the product has been sold.
This makes it extremely scalable.
Charging selling fees
Selling fees are somewhat similar to listing fees but more scalable.
Every time your sellers receive and process an order, you’ll charge them with a selling fee. Meaning, the more orders come through your online marketplace, the more revenue you can collect in selling fees.
A downside of selling fees is that they’re a bit more complex to implement, technically speaking.
Here you’ll need to have a payment gateway that can split the buyer payments so you can get your fee every time the sale has been made.
And to keep your online marketplace running, you’ll need to have more and more sales coming in. When you’re just starting out, this could be a challenge.
Nevertheless, it’s a great way to monetize your online marketplace.
If you’ve secured enough traffic to your online marketplace and the sales are steadily increasing, you’ll find yourself in a great situation.
Many online marketplaces charge selling fees to secure their revenue. For instance, here you can see that Etsy charges a 5% transaction fee and a $0.2 listing fee.
The more value your seller can provide to the buyers, you’ll have more revenue coming in.
These are some basic ways to monetize your online marketplace. There are a few more monetization strategies and be sure to explore them before starting your own business.
After choosing the right business model, it’s time to start planning the technicalities of your online marketplace. Or so to say, start planning the operations in your online marketplace.
Planning the operations in your online marketplace
Managing your online marketplace can certainly get a bit complicated.
There is a large number of operations you’ll need to take care of and we’ll go through them in this section.
The main reason for this is that online marketplaces are two-sided businesses. You’re facing both the sellers and buyers. That means that you’ll need to take care of both of them and interact with them daily.
Let’s see how we can help you with this.
How to manage your sellers
Sellers are the main part of your marketplace and you’ll want to make sure that everything is in order regarding their operations.
You’ll want to be constantly acquiring new sellers and helping them while maintaining your relationship with the current sellers and bringing some value to them consistently.
First of all, your sellers will need a reason to join your platform.
That’s where the market research part jumps in. If you’ve done your research properly, you’ll know their strengths and weaknesses, their needs and wants.
After getting to know your sellers, create a set of landing pages just for them. Here, you’ll need to explain how your online marketplace works and why would it be great for them to join you.
Check out how Amazon creates its landing pages for their sellers. They’ve been doing a great job, considering the huge amount of sellers on their platform.
Here’s a video on how Amazon Marketplace works for B2B businesses. On their Youtube channel they’ve covered many topics regarding their business and marketplace in general, so feel free to check them out.
After you’ve set your landing pages, you’ll need to create a signup process. Here, you’ll decide who is eligible for selling on your platform and what kind of information you need from them.
Also, be sure to review every application you get, so there are no false registrations.
You’ll want to decide here just how much control will the sellers have over their stores. How much can they customize it and how can they execute their operations on the platform. What else will they do except for listing the products?
And a really important thing to remember here – you need to make it easy for them to upload their products. A too complicated process may just turn them away from your platform.
After you’ve successfully created a small community of sellers on your online marketplace, you’ll be dealing with a new challenge here – managing the products.
How to manage the products
In many cases, you won’t have to deal with your own products and your own inventory.
And still, you’ll need to take care of your sellers’ products, meaning you’ll have to manage their sold products.
To help you manage the products in your marketplace and keep your operations up and running, you may want to implement a product information system in your platform.
PIM systems will help you manage all of the products without all of the countless spreadsheets.
But, to make it clear from the beginning, there are 2 ways to manage your products and organize them.
- Every product belongs to exactly one seller (like eBay)
- Every product can be sold by multiple sellers (like Amazon)
This is an important decision, as it will have an impact on the selection of the software, the layout of your online marketplace, and the way your sellers manage their products.
So, you’ll want to make it as easy for sellers as possible to start selling on your online marketplace. You could offer them, for example, to import all of their products in bulk.
If they’re already running an eCommerce business, make sure to offer them a way to import their products from their website to your online marketplace.
How to process the payments
Processing payments for an online marketplace is a bit more difficult than processing payments for an eCommerce store.
You’ll need to allow your customers to purchase from several different sellers at once and split payments at checkout.
Here you’ll be collecting selling fees from every seller, depending on the product they’re selling.
To make sure this process works seamlessly, you’ll need to have a specialized marketplace payment gateway.
As you’ve already noticed, there are a few different types of payments and every payment has different requirements regarding implementation.
So, choosing the right payment gateway platform is a task of the greatest importance for your online marketplace.
In case you’re still searching for more info on payment gateways, check out this great video down below!
Keep in mind that you may need to take care of taxation, invoicing, and reporting as the owner of the marketplace.
Processing payments can get a bit complex when it comes to online marketplaces, and that’s one of the reasons why it would be good to find a reliable solution partner.
Next, you’ll want to know how to manage the logistics around your online marketplace. Let’s see what that’s all about.
How to handle shipping and logistics
Even though you’re not handling the inventory yourself, your sellers are.
That’s why you’ll need to make sure your online marketplace supports it.
You’ll need to define whether you’ll ship the products yourself and you’re going to leave that matter to your sellers.
Amazon is a great example of an online marketplace that handles the shipping through its Amazon FBA program. Check it out, it may serve you as an inspiration for this decision.
But it’s safe to say that if you’re handling the logistics yourself, it will get more complicated.
You’ll need to get the inventory from your sellers, store it in a warehouse and they ship it to their buyers. And for every different buyer, you’ll need to calculate the shipping expenses.
Considering all of this, we can say that Amazon is the number one online marketplace for a very good reason.
And in the other case, if your sellers are the ones responsible for shipping their products, you’ll want to make it easier for them. They will need a convenient way of managing the delivery of their products.
To make it more simple, you can use a flat rate, price-based, or even weight-based rules for shipping costs.
Keep in mind that every seller can specify different shipping rules to different locations. It largely depends on their choice of transport partners.
In any case, there are some important questions you should ask yourself, regardless of how you’re going to handle the logistics.
- Are you going to need some 3rd party tools?
- How are you going to track your shipments and handle the tracking numbers?
- How can you establish a standard SLA across your whole online marketplace?
When you’ve got this part of marketplace operations set, next you’ll need to make sure there are people constantly selling and buying on your marketplace.
And the number needs to be increasing.
How to handle marketing operations
Thanks to the network effect, your online marketplace will get enough traffic in order for you to enjoy a constant stream of revenue.
But still, you’ll need to make your online marketplace as visible as it gets. Especially in the early stages when you’re just starting out.
So, first, you need to find out how you can attract new sellers and buyers and make sure they stick with you.
Once you launch your online marketplace, you’ll want to think about how your online marketplace can keep growing.
You’ll achieve that through both organic and paid marketing campaigns.
Here are some common marketing channels you’ll want to get familiar with.
You’ll want to pay full attention to search engine optimization. Your online marketplace needs to be visible on the internet and putting in extra SEO efforts will make it worthwhile.
Many sellers on your marketplace won’t optimize their every listing for search engines, so make sure you make it as easy as it gets for them.
Otherwise, your online marketplace can be poorly optimized for search engines, and it won’t have any positive impact on your revenue.
You could even turn to voice search optimization and optimize your product listing for voice search!
The next thing you’ll want to do is make it easy for both your buyers and sellers to create content on your marketplace.
Your online marketplace could feature content such as product reviews, questions and answers, blogs, user-made collections and so on.
Also, you’ll want to avoid any low-quality content. Content moderation steps in to help you with this.
Not to mention you could get penalized by Google for having duplicate content.
All in all, you’ll need to overview all of the content created on your platform and make sure it’s relevant and high-quality.
Even though organic marketing channels will bring you great profits in the long run, you’ll want to use paid marketing tactics.
By using them, you’ll be able to improve your brand awareness and attract new buyers and sellers. How you’re going to use paid marketing channels depends mostly on your research.
And the final part of your online marketplace operations refers to managing relationships between your buyers and sellers.
How to manage buyer/seller relationships
Attracting both buyers and sellers is just the beginning.
You’ll want to make sure they are happy with your online marketplace and they’re loyal to your platform.
You’ll be interacting with them on a daily basis, helping them with their challenges, and answering their questions.
So, it would be really good if you’re prepared for these situations.
Every day, you’ll be bombarded with questions from your users, and to be honest – you’ll want to avoid being completely involved.
There will be questions regarding technical support, order-related questions, and even some disputes between your buyers and sellers.
To make it easier for you, you’ll want to ensure that your buyers can communicate directly with your sellers. Allow them to solve their disputes without you being involved, as the marketplace owner.
Provide your users with a range of communication options. Offering them more options to communicate will lower the chance of you getting directly involved.
Also, it’s important to ensure you can notify all of your sellers about some new changes in the marketplace.
For example, if you’re publishing some new features to your online marketplace, you’d want to notify all of your sellers of the new opportunities you’ve just created.
Online marketplace features may differ from some traditional eCommerce website features, but you’ll see some similarities.
In essence, you’ll want to create a community around your online marketplace and turn it into a living organism.
It will grow and develop continuously, thanks to both your buyers and sellers. Sellers will most likely encourage you to bring some new changes to your marketplace that are going to positively affect their sales.
So, be sure to listen carefully!
Wait, there’s more?
This has been a long ride and here we’ve slowly come to the end of our first episode in our online marketplace series.
To recap, in this article we’ve talked about researching the industry and your users, choosing the right business model for your online marketplace business, and ways to plan your online marketplace operations.
And if you’d like professional help while building your online marketplace – don’t hesitate to reach out to us!
We’re skilled in building successful online marketplaces and we’d like to help you.
Be sure to check out the 2nd and the 3rd article in the online marketplace series. In our 2nd installment of the online marketplace series, we talked more about some essential features, payment solutions, different types of marketplace software, and finally – assembling a winning team!
After catching up with that – move on to the 3rd and final installment of the series where we focus on launching your online marketplace.