Roughly twenty-five years back, when Pier Omidyar wrote code for eBay in Silicon Valley and started eBay, who would have thought that most of the highly successful Internet business model will actually be a marketplace but we did not have eye to see them as marketplaces. However, if you see today, from Google to Alibaba to Uber, everything is inherently a marketplace. So what exactly are marketplaces and why have they become more successful than other business models be it online or offline?
In nutshell, marketplace is a platform approach to any traditional business online. These business models primarily connect buyer and seller or demand and supply by offering tools, technologies, processes, common rules and shared resources. So, if you look around be it Google, Uber, AirBnB etc. they are all marketplaces. In India until beginning of 2013, almost 100% of the E-Commerce companies were inventory led but over time most of them morphed into marketplaces in some shape or format.
Why marketplaces work? Marketplaces work because they have 3 very strong and hard to replicate structural advantages i.e. 1) they are highly capital efficient business models, 2) they truly harness Internet technologies vs. just removing inefficiency of a brick and mortar business, and 3) they have strong network effects. Marketplace require low capital because they are neither inventory led model and nor the infrastructure play. In fact, they bring power of economy of scale and economy of scope and the cost can be applied to a large pool of stakeholders. Marketplaces not only address the limitations and inefficiency of brick and mortar but are truly build on Internet technology foundation. Finally, marketplace creates network effects and that means, more buyers and supplies join, the better it is for the entire marketplaces in terms of selection, rating and reviews, natural pricing correction, health competition etc.
What makes it difficult to create a marketplace? There are 2-3 things, which makes it difficult to build a marketplace online. First, not everyone can think a business as platform and build complex online technologies. Second, you need a different level of mindset and vision to build an ecosystem that is required for a marketplace to run. Third, how to start a flywheel for a marketplace has always been a tough net to crack i.e. chicken or egg dilemma i.e. buyer first or seller first.
What is a well-run marketplace? A well run marketplace is the one that has built world-class and scalable technologies, have done things to build and fuel the ecosystem, deeply integrated with disparate stakeholders, and creating a mechanism of carrot and stick so that self-policing or self-correction can take place, and finally, platform where every supplier has equal chance to win or ascend to top and every buyer has no fear of suffering from gaming opportunities by sellers.
As per my estimates, marketplaces have globally created over $1 trillion dollar in combined market capitalization, over 1 million direct jobs & 15 million indirect jobs, and enable nearly $500bn worth of economic transactions, and above all, they have not only removed the inefficiencies of brick and mortar but also given consumers more choices, pricing advantage and accessibility.
Finally, I believe that in next 3 to 5 years, globally at least 20,000 vertically focused marketplaces will come up and many will become Unicorn. Marketplace in my view is the most effective way to harness Internet technologies, build scale, create ecosystem and never ever need way too much capital.
Sandeep Aggarwal is a serial entrepreneur, angel investor, internet visionary and philanthropist. He is widely regarded as the father of marketplaces in the Indian Internet ecosystem – having founded ShopClues (2011) – India’s first managed marketplace, which became 5th Unicorn in Consumer Internet in India & Droom (2014) – India’s first marketplace for automobiles. Sandeep is passionate about Digitizing India through mentoring startups, especially on entrepreneurship traits and skills.
Twitter: sandeepagg
