Online marketplaces: What will separate the winners and also-rans

As the sharing economy continues to see rapid growth, Natasha Frangos looks at the key defining characteristics of successful online marketplaces

In 2015, the Royal Mail’s annual tracker study found that UK small and mid-sized online retailers would target growth through increased use of online marketplaces, with one in four of those surveyed saying they would start to use an online marketplace as an additional sales channel.

An online two-sided marketplace is a platform connecting buyers and sellers and hugely successful examples include Amazon, eBay, Airbnb, notonthighstreet.com and Uber. Online marketplaces also make international expansion much more accessible to retailers, providing well-established consumer channels and a strong offering of repeat customers.

The increasingly popular reference to “The Sharing Economy” has no doubt added fuel to the growth and opportunity in this sector and we have seen some incredible company valuations as venture capitalists (VCs) and other investors look to back this changing, exciting space.

However, conversely, this has led some to question whether we are in a bubble as the sector becomes immensely crowded and so it becomes more important to ensure a new online marketplace gives itself the best chance of success.

With a broad range of specialist marketplaces, from everything including food delivery, car sharing, cleaning services and antiques, the appeal and opportunity to start, back and utilise online marketplaces continues. Businesses such as Deliveroo have become incredibly popular recently, although optimising long lasting success will depend on a number of factors including those outlined below.

Liquidity

The absolute lifeline of a marketplace, this represents the traction a site creates between those it is connecting. A key performance measure of a marketplace and the reason why most businesses will closely track gross transaction value (GTV), as opposed to turnover as reported in statutory accounts (which would just be commission/fees earned).

Merely increasing the number of buyer/seller sign-ups alone is not indicative of growth, unless GTV starts to grow. Recent successful marketplaces have focused on becoming more vertical, creating an instant connection between buyers and sellers, and thereby increasing the speed of liquidity.

A frictionless experience

Another fundamental factor in the incredibly fast growth, disruptive marketplaces that have emerged is that they have sought to remove the hard work for its buyers and sellers. Making the platform as seamless and easy to use as possible will drive both sides of engagement.

As an example an online marketplace where a consumer can find what they need quickly, with a high consumer rating, on a mobile device and that enables them to pay without having to physically take out their card from their wallet, is one that has succeeded in accommodating its users and thereby creates this frictionless experience.

Tech is critical but so is human service

Heavy technology investment is of course necessary to drive these marketplaces but the importance of having the right team shouldn’t be overlooked. Investment in these two areas will be a constant requirement during the growth phase of the marketplace and is the reason why many seek external investment.

With two of the top five 2015 venture capital deals being in online marketplaces (£102m raised by Funding Circle in April 2015 which then listed on LSE on November 2015 raising £150m and £59m raised by FarFetch), there is clearly appetite to fund the right offering.

A key role for the team will be ensuring that a buyer does not have to scroll through lots of bad ratings to get to the better sellers/service providers and that users receive a response to a bad rating, with a promise of how service will be improved to encourage future use.

Additionally, many sellers may be new to an online marketplace and will require support in coping with quick delivery times, ensuring quality isn’t jeopardised or understanding how to make their home a rental space.

The technology, similarly, will be evolving constantly, with new features being added to enhance the buyer’s and seller’s experience, adapting to international markets and being able to cope with different VAT treatments and currencies.

Whilst there may be concern over whether the valuations achieved by some of these marketplaces are sustainable, the ever increasing dominance of the internet, coupled with consumer expectations continually becoming more sophisticated, means a compelling opportunity for savvy online marketplaces continues to exist.

The right offering will provide reassurance to and build trust in a consumer and disrupt a market so quickly that the suppliers will not have the opportunity to react and will be swept up with the change. An online marketplace can provide the perfect forum to unlock value in fragmented, illiquid markets.

Natasha Frangos is partner and head of creative, media and technology at Chartered Accountants haysmacintyre.

Comments

(will not be published)