The founder of the online store AboutYou stated in an interview that their priority is not with transactions, but with providing inspiration to the consumer. This was unimaginable in retail 20 years ago. The priorities of AboutYou are a good example of what makes a marketplace business model different from the traditional wholesale model. The data obtained through interaction with the consumer is the most valuable, not the transaction itself. Below we explain four important differences between marketplaces and wholesale and what the implications are for brands.
1. Online vs. Offline
Platforms have always existed. Department stores are the main platform for retailers and consumers like newspapers are for advertisers and subscribers. However, technological developments have made it no longer necessary for them to have a physical form. Online platforms are working similarly, but don't have the physical limitations. They facilitate the link between supply and demand but do not produce or own the products themselves. This means that they can grow in a relatively cheap and quick way. AirBnB, for example, offers houses but does not own houses. Apple creates a platform where developers offer products (apps) that consumers can buy, and Uber arranges taxis everywhere without them owning cars.
2. Interaction vs. Transaction
The priority of traditional companies is to sell as much as possible. The amount of purchased products is the most important factor in business analysis. Platforms focus on the best match and interaction between consumers and producers. The more consumers that are active on the platform, the more attractive it becomes for producers and vice versa. This is also known as the network effect. The number of interactions is the competitive advantage of a platform. Data can be obtained from these interactions that improve the platform. An example of this are reviews: for example, how high the product ends up in the search results of Amazon or, the apartment in the search results of Airbnb depends on the experiences of other consumers. In addition, the search engine optimization of marketplaces creates a completely new business model, because companies are willing to pay for a higher ranking on the product page.
3. Product first vs. Consumer first
For Amazon, it doesn't really matter which specific product they sell. They want the consumer to be able to easily find the most relevant product and develop tools for usability. Because a brand or retailer can sell their products on Amazon relatively easily, they have a wider range of products. Additionally, the most relevant product is more likely to be offered. Traditional retailers, on the other hand, are product first: they promote a product because they have a lot of it in stock, or it has a higher margin, not because it is better suited to the needs of the customer. Nor can the consumer always find out what other people's experiences with the product are. Through reviews and algorithms that filter out poor performing products from the platform (these ones will be very low in the search results) only the most relevant remain. Providers are encouraged to optimize their products and services, as this has a direct impact on search results. That is why AirBnB hosts do their best to get good reviews.
4. Stock vs. DTC
Every brand or retailer with products in stock has an inventory risk. Online marketplaces offer products that the retailer or the brand ships itself. A commission is paid to the marketplace to facilitate the sale, but the marketplace itself does not have to keep stock and therefore has no stock risk. This allows a marketplace to scale up relatively easily and offer a wider range without having to open an additional distribution center. The retailer as an intermediary becomes superfluous. A brand can arrange its price, content, and shipping with a possibly higher margin and obtain more consumer data. However, this means the brand itself has to do more of the work.
A recent example
Görtz is a shoe retailer with more than 200 stores in Germany. In a 2018 interview, the CEO indicated that the platform that Zalando has is one of the biggest competitors. And now in mid-2020, Görtz is a partner of Zalando, and the range of Görtz is offered on the platform (example). This way, Zalando expands its range without having to keep stock or arrange shipment. Zalando is only the platform that facilitates it and can scale quickly by connecting retailers and brands. Question is, is Porter's 5 forces model still relevant if new entrants can be a competitor but also a partner?