Speaker: Thomas McFadyen
In the face of a new era marked by the disruption of the platform economy, Thomas McFadyen reflects how countries, companies and organisations can leverage the marketplace business model to ride the wave instead of being flooded by it.
One of the biggest differences between traditional retail, or e-commerces and marketplaces - in areas such as groceries, transportation, general merchandise, software sales or industrial supplies (B2B) - is that many companies do not have physical stores or inventory any longer. Yet, the second ones have grown and scaled while the first ones have remained flat. According to Thomas McFadyen:
Marketplaces have more sales and higher valuations with less than 10% of employees and in less than 10% of the time than the traditional models.
Three factors are important to consider: First, successful platforms are typically multi-sided ecosystems. Traditional E-commerce follows a ‘pipeline’ model, meaning a sequential series of consecutive steps and many labour-intensive activities while platforms require a much smaller organisational team and the labour weight is shifted from the operating company to the third-party suppliers. Another factor is the existence of a nexus of rules, a standard ‘terms and conditions’ that apply to all sellers in that ecosystem. And finally, a scaling network effect. Activity outsourcing inevitably makes marketplaces exponentially scaleable.
In terms of Gross Margin Value, there is also a significant difference when transitioning to a platform. “In traditional e-commerce or retail, the margin is calculated from a ‘buy low, sell high’ perspective”, McFadyen states. In a marketplace business model, the seller usually sets the price, but the platform charges a commission fee.
The gross margin is the multiplication of that price by the percentage of commission so the profit is much higher. It’s a ‘help others sell and take a slice of pie’ perspective now.
Besides those fees, marketplaces can also monetize from advertising, data trading or cutting on expenses through generating a flywheel effect.
Presently, the top 10 largest retailers operate as marketplaces. We are talking about companies like Alibaba, Amazon or JD.com. In the U.S., the numbers are nine out of ten, a list led by Amazon, Walmart, eBay and Apple. Despite those being such big companies, when asked if there is a saturation of marketplaces, McFadyen believes there is still room for new companies.
The interesting thing about marketplaces is that there are so many niches that can be dominated, even more so in B2B.
However, identifying the best business model for each marketplace - considering hybrids as well - and thus finding its sweet spot is crucial for success. “It doesn’t make sense for some small businesses to run their own marketplace but they can and probably should be a seller.
Involvement in the marketplace ecosystem of the platform economy does apply to everybody in one way or another.
Taking those factors into account, McFadyen Digital created the Marketplace Maturity Model (MMM), serving as a guideline for maturing from traditional first-party e-commerce into a thriving metrics drive, multi-sided marketplace.
A key factor in the MMM takes the form of what McFadyen calls Marketplace Enablement Steps (MES). These steps are the building blocks for success that start with the business case and run from launch through operation, covering strategic, operational and technical areas of practice.
The biggest difference from traditional organisations, though, is the need to measure, manage, and nurture the seller side of this commerce ecosystem.
The concept of marketplace performance management comes into play: the need to measure key metrics for both buyer and seller audiences requires a specific plan for both operations and communications.
Written by: Gisela Giralt
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