History repeating? How digital marketplaces conquered retail

Take a walk through almost any town, anywhere, and sooner or later you’ll come across an open-air square somewhere near the centre, usually in the older parts of town. The marketplace. Regardless of whether this is a gentrified part of town, filled with open air restaurants and ringed by high price luxury apartments, or a noisy collection of stalls and traders, it makes no difference. The function of a marketplace is the same now as it always was, creating an interface between the economic forces of supply and demand. In the digital world, marketplaces are booming for exactly the same reason.

Over half of online transactions globally take place through marketplaces like Amazon and Alibaba. Google is transforming it’s shopping search offering into a new kind of shopping basket tool that could turn the whole internet into a marketplace. Millions of stores worldwide are becoming click-and-collect points to facilitate third party sales (and increase sales through the higher footfall) transforming themselves into a version of a marketplace, and research by Retail Week suggests around half of online retailers are now adopting marketplace models to increase their sales.

Is it possible that the brick-and-mortar store chains, franchises, boutiques and branded retailers with exclusive product lines – the kinds of store that fill most High Streets around the world – were a historical blip? Is the future of retail a return to the ancient marketplace model? It’s an intriguing thought…

What defines a marketplace?

A marketplace is not a retailer, it’s not a shop, a restaurant or a warehouse, it’s a mechanism that co-locates people who want to sell stuff, with people who want to buy stuff, and the marketplace owner takes a cut of sales. This represents the oldest form of retail commerce. Markets evolved wherever humans engaged in trade, where different tribes interacted around river crossings, fertile plains, mountain passes, places where today you’ll usually find towns and cities. Which is why, as the towns and cities grew, a formal marketplace, or souk, or bazaar can usually be found located at the heart of it.

The marketplace is, in essence, an economic model embedded into the community, and one of the building blocks of all subsequent economic and social development. No kidding. It’s how we got free markets, black markets, stock markets and marketing. It’s an economic concept that is also at the heart of politics and social issues. Markets create trade wars (mentioning no names, Mr. President) and force referendums and arguments about rarefied concepts like sovereignty (don’t mention the B-word). Marketplaces and the effects of marketplacing, are everywhere.

An example of a physical market place

The marketplace is, in essence, an economic model embedded into the community, and one of the building blocks of all subsequent economic and social development.

Why is online marketplacing so popular?

In a word, money. Running an online store was always a major undertaking for brands. Innovative solutions like Shopify work great for low-volume sales, but if you’re a brand selling thousands of units via brick-and-mortar retailers, or selling direct-to-consumer, running a branded e-commerce shop needs significant investment in robust tech and complex systems to handle payments, data, and customer services. And in the days of GDPR, a constant spend on legal compliance.

Selling via a digital marketplace, on the other hand, is simple. Sign-up to their seller programme, upload your inventory and you’re off. It’s a different ecosystem, usually with some complex baked-in optimization options, or promotional mechanisms, internal ads, sponsored listings and so on. As a result, prices tend to fluctuate much faster within online marketplaces than in brick-and-mortar retail, creating fierce competition. However, cost savings of marketplaces over e-commerce shops makes a compelling business case for many SME brands.

Innovative solutions like Shopify work great for low-volume sales, but if you’re a brand selling thousands of units via brick-and-mortar retailers, or selling direct-to-consumer, running a branded e-commerce shop needs significant investment in robust tech and complex systems to handle payments, data, and customer services

It’s not (just) about the money, money, money

There’s also a compelling user experience element to online marketplacing, which is arguably more important than the cost efficacy.  Marketplaces maximize the mental availability of products. Mental availability is a term coined by marketing sciences Professor Byron Sharp, to describe the ease with which a product becomes available to a shopper while they are intending to purchase. It’s a complex way of saying beyond brand awareness, or brand relevance to your shopping trip, the products shoppers are most likely to buy are the ones that appear in front of them while they are shopping. Mental availability is the reason why we might go to the supermarket for milk and eggs, but come back with a new BBQ and a bunch of pot plants.

In terms of brick-and-mortar stores, increasing mental availability is traditionally the role of point of sales installations. In-store concessions, nail bars and restaurants in department stores fulfil the same function. Within digital places (websites and mobile apps) this means serving-up your content in the places where people are shopping for your category of product. Those mentally available digital places are Amazon, eBay, Etsy, ASOS etc. (Yes, marketplaces… not branded standalone webshops).

Mental availability is the reason why we might go to the supermarket for milk and eggs, but come back with a new BBQ and a bunch of pot plants.

To put that into perspective, approximately 55% of product-specific web searches take place on Amazon (yes, more than Google) and sales conversions for Amazon pay-per-click listings are reported to be up to 10x higher than the average 2% Google PPC conversion rate for product sales (because if you’re Googling, you could be shopping, but if you’re Amazoning, you’re probably shopping).

Everyone’s going marketplace?

There’s a surprisingly complex relationship between brick-and-mortar and online retail. For example, when they went bust, 20% of House of Fraser’s 2017/18 sales were online and growing. John Lewis just spent £500m on a massive digital omnichannel upgrade, yet they are having their worst year since 1954. Marks & Spencer, Debenhams, Tesco… no matter where you look you see brick-and-mortar giants investing heavily in online retail, but they’re still struggling. This year’s forecast for online sales growth in the UK is approximately 9%, down from 12.1% last year and 15.9% in 2016. So it’s not simply a case of online good, offline bad.

Slowing online sales, same as the struggling High Street, indicate bigger economic problems are to blame for poor retail performances in recent years, like slow economic growth, a weak sterling exchange rate, inflation, wage stagnation, rising rents and consumer credit card debts. It’s a massive and complex topic, but one effect the slow economy is having on brands is making it even more important to maximize sales and marketing bang-per-buck by placing products where user buying intent is highest, i.e., marketplaces. Which explains why marketplaces like Amazon and Alibaba are booming, but also smaller players like Ocado, which operates like a marketplace with a range of small suppliers, is the UK’s fastest growing supermarket.

The boom of marketplace models are also driving some major new initiatives in the retail world. Google is busy signing deals to partner with marketplace brands like Walmart, Chinese giant JD.com, and French supermarket chain Carrefour to develop new ‘retail ecosystem’ models (i.e. marketplaces). They are also launching Google Shopping Actions, a new programme with cost-per-sale pricing to (presumably to make-up for their low performing PPC sales conversion rate compared to Amazon) and build intelligent shopping baskets around users, with features like single checkouts for multiple stores, buy-it-again options, and built-in suggested items. Which sounds a lot like Amazon. Could Google be turning the whole web into Google marketplace? Hmmm….

The limits of marketplaces are defined by CX

Retail Week research suggests 44% of e-retailers are developing a marketplace model to replace their current e-commerce offerings, where they either buy third party stock but fulfill it via the third party’s own warehouse and delivery, or adopt a true ‘dropshipping’ marketplace model, taking commission sales via their front end while the third party fulfils the order themselves. By becoming a marketplace, retailers effectively increase their chances of attracting higher conversion-rate shoppers, and by placing their products within other marketplaces, they are more likely to surface products to high conversion-rate shoppers. Which is great, but there’s one thing marketplaces can’t do, and never could, and that’s give brands control over the customer experience they offer.

By becoming a marketplace, retailers effectively increase their chances of attracting higher conversion-rate shoppers, and by placing their products within other marketplaces, they are more likely to surface products to high conversion-rate shoppers.

Back in the old days, when a tribal chieftain or the Queen of Sheba (or whoever) wanted to go shopping for a new sword or crown, they didn’t nip down to the market. Nope. They had a craftsman visit them. In modern terms, that’s like buying luxury goods. It’s unlikely people will ever buy an Aston Martin, or artworks, or high priced diamond jewelry or luxury wristwatches off Amazon (yes, even Prime). In fact, there are many customer journeys that don’t fit well with online marketplaces.

Shopping at whole foods

Luxury brands have a huge investment in branding, so the generic UX and CX of a marketplace is unlikely to ever really work for them. Similarly, exclusive fashion brands, high end technology, certain fresh foods, groceries and beverages, are designed around touchy-feely customer experiences and expectations that only really work with direct sales via physical stores, or dedicated, specialist digital experiences.

So, finally, we reach the limits of the marketplace and discover, ironically, they’re the same now as they were in ancient Babylonia, around 3000 BCE when the first marketplaces were recorded. For the vast majority of products, and everyday customer needs, marketplaces work brilliantly. For certain categories of product and specialist customer needs, there will always be a role for bespoke, direct-to-consumer sales and exclusive retailers.

For certain categories of product and specialist customer needs, there will always be a role for bespoke, direct-to-consumer sales and exclusive retailers.

As Gartner predicted, price and product are becoming less important as brand differentiators than customer experience. The role of CX cuts both ways in retail, favoring the convenience and one-stop-shop ease of online marketplaces over visiting multiple online stores, and also favoring exclusive online and offline experiences for certain kinds of products. In terms of what this means for the High Street, we should expect a rebalancing effect, where more and more retailers merge into a mix of own-brand and marketplace stock, blending catering, warehousing, retail and services in new omnichannel store experiences.

That’s the power of market forces in the digital, omnichannel retail era. And you know where market forces started out, right? Yup.

Director of UX Design

Sutherland Labs
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