It has been twenty years since Ebay arrived on the scene and showed what happens when you bring people together over the Internet to do commerce. Since then, there has been tremendous innovation within online marketplaces. Startups have honed in on every vertical imaginable, branched out from product to services, and tested out new paths to profitability.
I launched my first marketplace a few years after Ebay. Since then, I have been investing in and closely watching marketplace activity. Over the past few months, Version One has been diving into every detail of marketplace strategy while putting together a handbook on “Building Marketplace Startups.” Through the process, I was struck by just how much marketplaces have evolved since eBay sparked the first wave of product-focused marketplaces in 1995. Here are the top six changes, and there are many more to come.
1. Standard commerce tames the wild west
In many ways, Ebay is the wild west of marketplaces. It’s a virtual free-for-all where everything is in the hands of the sellers, from pricing to packaging and shipping times. The marketplace itself is very hands-off, as any buyer who tries to contact Ebay’s customer service soon realizes.
Amazon introduced many traditional commerce elements to its marketplace to make buying from a marketplace seller almost as easy as buying from Amazon itself.
On the service side, we have seen consumer preference for standardization (Uber) over the wild west (SideCar). Every Uber driver will charge you the same rate to take you from Point A to Point B. Yes, you have a better chance of finding a cheaper ride with Sidecar, but you’re going to need to spend time browsing through a lot of choices (lowest fees, larger cars, etc.) in order to find what you want.
2. Managed marketplaces unlock new supply
Over the past few years, we’ve seen marketplaces take on additional parts of the value chain to deliver a better overall experience. For example, Beepi, a peer-to-peer marketplace for buying and selling cars, inspects every car listed on the platform, and gives sellers a guarantee: Beepi buys the car if you don’t sell it within 30 days. Other examples are Threadflip and Real Real, which handle the logistics/cataloging for their sellers in women’s clothes and luxury products respectively.
By adding concierge/logistics support, these marketplaces unlock new supply. Most sellers of luxury items aren’t inclined to go through the time and trouble associated with cataloging and listing their clothes on a marketplace. But a managed marketplace takes care of all the hassle.
Managed marketplaces also create new demand by helping buyers overcome the trust issues associated with peer-to-peer marketplaces. There’s a big difference in trust levels when buying a car via Beepi vs. Craigslist.
3. Mobile unlocks new use cases
Since the launch of Ebay, nothing has had a bigger impact on our buying and social habits than the rise of the mobile phone. Today mobile-first marketplaces, like VarageSale and OfferUp, are creating new categories of Craigslist competitors.
In the age of mobile where long-tail discovery (whether paid or organic) is less important, becoming a “home screen” app is critical to building a moat against the competition. Uber and Lyft do a great job locking in customer mindshare by becoming a home screen app on their customer’s mobile phones.
4. New models emerge for monetization
Traditionally, marketplaces made their money by charging sellers listing or transaction fees. The problem is that any kind of fee adds friction to the marketplace and encourages sellers to take their transactions off-platform whenever possible.
We’re now seeing SaaS’ Freemium model come to marketplaces where the base listing is free or very low and sellers pay for enhanced services like better placement. The low entry cost encourages more suppliers to list (increasing liquidity), but revenue can be hard to come by this way since only a small percentage of suppliers will choose to pay for the better placement.
5. The rise of transactional service marketplaces
Uber inspired a whole new generation of service-based marketplaces. But compared with their product-focused marketplaces, service platforms face a serious monetization hurdle. It’s hard for a service platform to stay in the loop and know when the service was performed and for how much. That makes charging by transaction fees tricky.
The first service marketplaces were primarily lead generators. They made money by charging providers to contact customers. But the new generation of service platforms is trying to be as transactional as possible. In order to do so, you need to commoditize the service, with boxed offerings that include pre-defined scope, duration, pricing, deliverables, etc. This simplifies the end user experience, enabling customers to complete a transaction in just a few clicks. The less back and forth between provider and customer, the more likely they are to complete the transaction on platform.
6. Decentralized marketplaces emerge
Over the past year, we have seen the evolution of virtually fee-free decentralized marketplaces – such as OpenBazaar, Lazooz, and Openname. These marketplaces flatten hierarchies and centralize control: anyone sells, anyone buys. Everything – from trust, rules, identity, and payment – are at the peer level.
Today these deep web marketplaces are known as places for selling/buying drugs, weapons, and other illicit goods. But there are some who are betting that the decentralized model will revolutionize all online commerce – and not just be limited to the stuff that can’t be sold on eBay. It’s still early, but with the emergence of blockchain, there is a huge potential to disrupt global commerce.
The bottom line
Considering that buying and selling goods and services are such an integral part of daily life, there’s still great opportunity for innovation in new verticals, models, and monetization strategies. I believe there’s a lot more room for new entrants and disruption. Some of the world’s next billion dollar companies will be marketplace startups.