What is a digital marketplace? And how does it work? Find out how the platforms can help provide better services, more efficiently
Digital marketplaces, such as Amazon.com or Booking.com, are expanding to new markets in industries such as energy or freight forwarding. Europe aims to take a bigger role in this area of business by setting up its own digital marketplaces.
But what are digital marketplaces and how do they work. We asked Darragh Mac Neill and Salvatore Scagliarini, senior industry experts at the European Investment Bank who are at work to develop this sector.
What is a digital marketplace?
Darragh: A digital marketplace is a platform creating a venue for both buyers and sellers to transact over a product or a service. It matches potential buyers of a service or a product with providers of that service or product.
Salvatore: The energy industry is currently being turned upside down by the so-called three Ds: decarbonisation, decentralisation and digitalisation. A digital energy platform, which is a software/hardware system, encompasses all of these by matching the supply and the demand of electricity via the aggregation of so-called distributed energy resources to provide services to the electricity grid.
This is a totally new business model for the industry, so new that it’s not even regulated yet. Smaller distributed/decentralised energy resources like batteries of electric vehicles or rooftop solar PV cannot provide services to the grid on their own because of their tiny size. Moreover, wind and solar renewable energy sources feature intermittent energy generation because they depend on the sun and the wind to generate electricity. The purpose of a digital platform is to aggregate all these resources, build up scale and thus be able to provide and sell services to the electricity grid.
Grid operators and owners have the challenging task of balancing supply and demand of electricity on the grid in real time by removing any bottlenecks and imbalances. A digital platform addresses those needs, but it also targets power generators, the owners of the distributed energy resources, by adding value to their distributed assets.
In the old world of centralised electricity markets, utilities were both generators and distributors as well as sellers/traders of electricity. In the new decentralised markets, customers take a proactive role by generating their own electricity and selling/trading it into the market: this is what we call a prosumer, a producer/consumer. All this is enabled by giving the platform/aggregator access to the customers’ distributed energy resources and then selling bulk power and related services to the grid operators.
Darragh: The key concept around platforms is the network effect, which is a phenomenon whereby increased numbers of people or participants improve the value of a good or service. Market access is paramount and scale and the resulting transactional efficiency are what we’re aiming to achieve.
Salvatore: It’s nothing different than what happened in the early 20th century, when the phone and the telecom industry were really at their beginnings. The value of having a phone in the early 1900s was very low, because very few people had a phone. By building up scale and adding users, the value of a platform, of a network, increases and that’s the definition of network effect.
How does a digital marketplace work?
Darragh: A digital marketplace plays an intermediary role between buyers and sellers. It doesn’t own the assets.
Let’s take the example of freight forwarding. A digital platform matches truck owners who are available to ship loads from A to B with people who want to purchase that service.
The platform provides them the opportunity to identify additional providers of trucking services. With sufficient scale the platform also allows the intermediary to optimise the logistics network by identifying empty loads, one of the main headaches that trucks owners experience and proposing loads to make sure that they’ve optimised that trip they’re making. They can add value based on access to large amounts of data.
Are there data privacy issues?
Darragh: In many cases there are data privacy issues to be considered and we are fortunate in the EU to have the General Data Protection Regulation, which these companies need to adhere to. So, back to the trucking example, we need to make sure that appropriate technical and organizational measures are in place to protect the individual truck driver‘s data.
This will continue be one of the issues to be addressed and a lot of these companies put significant effort into ensuring that they are GDPR compliant, which may eventually give us an advantage in Europe compared with other jurisdictions.
What is the benefit of a digital marketplace?
Darragh: These platforms add a lot of value in highly fragmented markets, which is the case in freight forwarding. The ability of truck owners to get access to large shippers or people who require trucking services is limited. A platform gives access and transparency over clients that they would never have had access to, so it opens up quite different markets for them. In general, the more fragmented the industry, the bigger the opportunity for disruption through a platform approach.
Also for the end consumer, there are significant advantages. Let’s take another example where digital platforms are expected to have a big impact: the automotive industry.
Typically, once an end consumer purchases a car, they’re locked into the network of the brand for a number of years. There are a couple of different platforms looking to disrupt that relationship. In the future, fewer consumers are expected to own a vehicle, but rather purchase a service, which can be ordered on demand. For many consumers, that’s sufficient, as they don’t really care what type of car they’re in, particularly for shorter periods of time.
Isn’t this what a car leasing company does?
Darragh: Almost, but this is a pure pay as you go service, less expensive and much more flexible. It can be based on a distributed model where the vehicle is available in local neighbourhoods, rather than having to go a central location, such as the airport to pick up a rental car.
A private car owner can eventually monetise this asset that they have, whenever they don’t need to use it. Like this, the platform owns the customer relationship and is disintermediating the car brand and dealer. The car dealer no longer has access to the customer, but simply provides a vehicle as a service. That changes the whole dynamic in the industry — a perspective which of course makes car manufacturers very nervous.
Many legacy industries have a vested interest in maintaining the status quo. Often you see people coming from the outside—digital natives —and offering this platform service. A start-up organisation has very little to lose in the current structure.
It will be a challenge to get the major players on the platforms and that probably represents the tipping point for these platforms. Once a sufficient number of large-scale companies sign up, it becomes easier through the network effect mentioned earlier. More buyers on the marketplace attract more sellers and that attracts more buyers, so the cost can be amortised over a much bigger number of transactions, achieving cost efficiency.
There are many other examples from business-to-consumer markets. The travel industry has been hugely impacted by marketplaces in the last number of years. With Booking, Skyscanner or Airbnb, many consumers do not use travel agents anymore.
Salvatore: Right now the focus is on business-to-business (B2B) customers because they can quickly provide bulk quantities of distributed resources and scale. But in the future, when there will be millions of electric vehicles in the streets, everybody will look into that and that’s why car manufacturers are very keen to invest in this. The B2C (business-to-consumer) business model will then increase its attractiveness.
Is the purpose of such platforms to break monopolies in certain sectors?
Darragh: The purpose of such platforms is to use digital technologies and business models primarily to add value (cost, quality or experience) to consumers through the disintermediation of existing industry ecosystems. From an EIB perspective, it’s about supporting champions in these businesses and defending Europe’s position in the business-to-business space.
Digital marketplaces have migrated from media and entertainment, and retail and are more and more present in the business-to-business area, such as transport, logistics, manufacturing, energy and utilities. It’s a natural progression of these marketplaces through these various industries, a continuum. Rather than seeking to displace established players in the B2C space, we are looking at those industries where marketplaces will play a significant factor.
Salvatore: In the case of the energy industry, the shift from a centralised to a distributed business model, clearly breaks monopolies, but this will have a huge impact on the whole industry value chain. Indeed, there is currently a race to the bottom in terms of value generation for renewable energy generation, because of both sharply decreasing investment costs and intrinsic near-zero marginal cost of electricity production (the “fuel” is free of charge). Platforms might address this issue by augmenting the value generation proposition of distributed energy generation assets. To some extent, the same applies to the car industry because an electric vehicle by itself has up to 80% fewer components than an internal combustion engine car. Thus the increasing pressure on car manufacturers to find additional revenue streams in order to generate additional value.
Why and how does the European Investment Bank get involved?
Salvatore: All those transactions are extremely risky, since there is huge uncertainty around the forecast cash flows. Therefore, we are only able to finance this kind of projects with special financial products, developed jointly with the European Commission, which provides the necessary back-to-back guarantee.
Another issue is that these digital platforms are very light on capital expenditures, CAPEX. They mainly have operating expenses, mostly in terms of cost of salaries related to research, development and innovation. As a legacy public bank prone to infrastructure-based financing, our business model is very much built around CAPEX-heavy assets, which is to some extent an additional limiting factor in financing such innovative endeavours.
Recently, we closed our first transaction in the energy digital platforms aggregating different types of distributed energy resources: we financed The Mobility House, a Swiss-German start-up by providing a €15 million loan to the company in August. The company is currently targeting fleets, companies leasing and renting electric vehicles to other companies, a B2B business model. The company also aggregates other distributed energy assets.
This project is not only about innovation and digitalization but also about decarbonisation. A digital energy platform aggregates intermittent renewable energies, which are decarbonising the electricity industry. The more value the platform creates by selling services to the grid, the bigger will be the attractiveness and market uptake of renewable energies and electric vehicles alike. Therefore, this is fully aligned with EIB’s climate action targets.
Darragh: With sufficient scale, it is possible to drive more value and higher levels of network optimisation, which again increases scale. The key is to have relevant, sufficient, quality data which is a big issue, as with poor data quality, poor decisions are made, and that frustrates both buyers and sellers. Which is where we see technologies like artificial intelligence and machine learning—it will not be individuals who are making the majority of these decisions but artificial intelligence.
Examples of digital marketplaces everywhere you look
With the massive e-commerce growth expected over the next decade, let’s take a look at the different types of marketplaces and the markets they serve. The marketplace business is vast and complex with room to take more on, serving customer-centric goals.
- Business-to-consumer (B2C) marketplaces – One of the most saturated categories with tons of players, including global giants such as Amazon and local leaders like TMALL and jd.com in China and Mercado Livre in Brazil and Latin America. Add niche B2C marketplaces (focused on specific categories like electronics, apparel, and home improvement) to this mix and voila! You’ve got competition galore.
- Business-to-business (B2B) marketplaces – Growth in sheer monetary potential can be found among B2B marketplaces. Notable examples include Alibaba and Amazon Business. B2B marketplaces are more niche and vertical industry focused.
- Peer-to-peer (P2P) or consumer-to-consumer (C2C) marketplaces – Notable examples include eBay, TaoBao, Mercari, Etsy, and even Airbnb. This is a marketplace where consumers are both sellers and buyers. P2P and C2C marketplaces are not an insignificant contributor to the marketplace juggernaut.
- Consumer-to-manufacturer (C2M) or consumer-to-business (C2B) marketplaces – The biggest and most noteworthy example of this type of marketplace is PinDuoDuo. In a few short years, this model has gained a 4% share of the global e-commerce business and is ripe to expand beyond China to be other parts of the world.
- Service-to-consumer (Se2C) marketplaces – This is a made-up label, but it’s a growth category with numerous local examples. Think HomeAdvisor and TaskRabbit in the United States, or UrbanClap in India, hipages in Australia, and so on. Power to the gig economy!
Making it easy to do business: Marketplace benefits
Digital marketplaces help businesses sell their products, grow, and be profitable. Operators of digital marketplaces have streamlined the process of selling and servicing, so it’s seamless and painless for everyone involved.
All the seemingly too-good-to-be-true benefits apply equally to marketplaces serving all types of consumers and businesses.
Easy. Amazon, just like all other marketplaces, has removed barriers for sellers to easily start selling on Amazon marketplace. Amazon provides a step-by-step guide to attract sellers to its platform. Quick onboarding, product uploads, pricing, promotions, and PoC trial balloons or propel-growth strategies are all key strategies for attracting sellers.
Access to a ready customer base. Sellers want marketplaces that provide a one-stop shopping experience to a massive, loyal customer base. This means that sellers and manufacturers can start and grow their business on marketplaces before branching out to other channels. Take the example of Anker Innovations, which started on Amazon Marketplace and today generates more than 90% of its online revenue on Amazon.
Fulfillment, payment, and logistics. Sellers can gain major advantages and save lots of money when the marketplace operator manages operational complexity. Sellers are relieved of the responsibility of warehousing, shipping, and payment collection – tasks all perfected by the marketplaces themselves.
Special events. Marketplace operators are masters at creating 365-day opportunities. For instance, Singles Day, an unofficial alternative to Valentine’s Day in China, accounts for $74.1 billion and is growing at a rate of nearly 50% year-over-year. Meanwhile, Prime Day on Amazon nets $6 billion globally and is growing at 60% year-over-year.
Innovation. Marketplaces are continuously innovating, making them the bleeding-edge innovators in e-commerce. For example, with the advent of smart speakers, voice-enabled search was quickly transformed into a tremendous e-commerce opportunity.
Special offers. Marketplaces also entice consumers and bind them to their platforms, with indirect services such as free shipping, video and audio streaming services, free books, and more. Some marketplaces offer annual memberships. These intangible benefits attract and ensure a more captive consumer base.
Marketing, analytics, and personalization. Successful marketplaces offer an array of marketing and personalization opportunities. Many use a customer data platform to hyper-personalize customer experience through complex, AI-based technologies. Most marketplaces enable one-on-one relationships with their buyers. The ability to use sophisticated analytics to gauge the competition and adjust pricing, promotions, and offers is priceless. Using data to drive certain product lines, ramp up manufacturing, and optimize operations to meet demand is crucial.
Post-sales support. Marketplaces are laser-focused on overall customer experience, which includes post sales. This ability make customers lifelong fans is managed by the marketplace operator.
Global reach. “Think globally, act locally.” In a global economy, businesses can have global reach with marketplaces that have international breadth. Local marketplaces serve as a launching pad, but any seller with growth ambitions can appreciate the opportunity to cater to consumers on a global scale and boost revenue.
All these advantages don’t apply equally to all the different types of marketplaces, but are an important consideration for any seller. For example, B2B marketplaces have their own unique challenges, such as payment, financing, logistics, and fulfillment needs that must be catered to differently. Successful ones such as Rekki and Faire understand these challenges and provide targeted solutions.
Digital marketplace strategies and mantras to live by
Encourage healthy debate to really gauge the work, cost, benefits, customer expectations, and competition to narrow your marketplace strategy. Go all in, test the waters with organic participation, or participate only in distress marketplaces for unused inventory.
At the same time, pay heed to an increasingly popular strategy among premium businesses that don’t sell on marketplaces. Nike, for example, stopped selling on Amazon in November of 2019 to protect the integrity of its brand. Today, the company sells only on its own Nike-direct channels, which has enhanced the consumer experience.
Or perhaps take the old adage and flip it – if you can’t join them, beat them! That is, start your own marketplace.
As Jay-Z once wrote, “I’m not a businessman/I’m a business, man.” Today, this mantra applies equally to marketplace operators. Marketplaces don’t just operate a business; the marketplaces are the business. This needs to be a conscious and tacit underlying thought for any business considering becoming marketplace operators.
Here are some reasons you may want to build your own marketplace:
- As a retailer, you already have a brick-and-mortar presence that sells third-party products, and now you want to expand to a digital platform.
- As a commerce operator, you’d like to grow your customer base by expanding the assortment with products from third parties and in turn push your own brand and product lines.
- As a B2B commerce operator with a wide first-party dealer distributor network, you want to build a marketplace to gain tighter control over the network, the products and services offered, and the overall customer experience.
- As a commerce operator, you have a big OEM supplier base that you need to manage to ensure quality.
Marketplaces will fight to acquire control and exclusivity of the top sellers. Winners get the prize, and that prize is more sellers. Marketplaces need this influx of businesses since their primary source of revenue is based on commissions. More sellers mean a better the assortment of products, better brands, and more consumers.
Digital marketplaces take years to build their reputation, but if a business has the strategy, vision, and talent to become a marketplace operator and sell third-party products, then the opportunities are endless.
All e-commerce SaaS cloud platform providers provide either built-in marketplace management capabilities or strong partnerships with SaaS marketplace platform providers to enable setup.
Gaze into the e-commerce crystal ball
Digital marketplaces will become more fragmented. Sellers will be more and more discriminating in which marketplaces they will compete. At the same time, watch out for consolidation, as smaller, local, niche, and disruptive marketplaces get acquired by larger players.
Commissions and value-added services will become the new battleground for attracting business to marketplaces. Delightful and new consumer experiences will play an even bigger role in attracting businesses and consumers.
In turn, brands will reserve their best assortments and experiences for their own direct e-commerce stores. They may even use marketplaces as affiliate marketing networks.
And finally, social networking companies could become marketplace operators in their own right. Imagine LinkedIn as the top marketplace operator for B2Bs. (It totally could happen!)
If you want to be a contender in the marketplaces of the future, now is the time to start thinking. Take the time that you spend browsing your favorite B2C marketplace and apply it to your organization’s marketplace strategy. After all, the fact that you’re spending any time at all on Amazon or others like it speaks volumes about the enduring importance of marketplaces and their growing promise in the digital era.