The Definition of a Marketplace Platform

We are living in a challenging time right now. Who could predict the devastating global coronavirus pandemic in 2020? While doctors save lives and try to find a cure for the virus, quarantine measures have damaged businesses around the world. Employees have lost their jobs, while business owners continually suffer financial losses caused by the lockdown. Shutting down stores paralyzed a lot of retailers, and they are no quick fixes for the recovery process. How can you protect your business and minimize your losses in similar crisis situations? Marketplaces could be one of the answers to this question.

Marketplaces made some serious buzz after successful examples of them became famous. Yes, it is a huge and nascent industry to expand your business in, to attract new customers, build a brand image, and ultimately increase revenue. But in the current situation, it is more than an ambition to become the next Jeff Bezos. Moving your business online could be a saving grace in a time when people are not allowed to be in a physical store.

What is a marketplace?

A marketplace is an independent platform that operates online, and its purpose is to connect buyers and sellers directly. No actual warehouses are required to store items because the database contains descriptions and photos of goods. To survive among competitors, the marketplace must provide the most advanced security features for E-commerce Fraud Detection, guarantee the integrity of a deal for each side, and offer features such as detailed tracking of purchases in real-time.

What are the benefits of marketplaces?

The main advantages for businesses are the following:

  • You will get an additional channel on which to advertise and sell your goods or services;
  • Compared to other sales channels, marketplaces require lower marketing costs;
  • More opportunities for international sales;
  • Marketplaces are loved by customers and very convenient;
  • An established online marketplace improves your brand image and builds client loyalty;
  • Getting independent reviews and opinions on your products or services makes them more attractive and ultimately increases sales;
  • Marketplaces make it easier to find new business partners; and
  • They work 24/7 with no limits on operating time;

Amazon is the biggest marketplace in the United States. Initially, it was an online bookstore but has now expanded to include toys, electronics, pieces of art, and tons of other items. In 2020, it’s a multi-billion-dollar corporation with 11 marketplaces across the globe with a customer database from 180 countries. Amazon became a technological company and now offers cloud infrastructure services (AWS), analytics services (Alexa), other software products, and multimedia content. They leverage Artificial Intelligence for Predictive Analytics in Retail to know what a customer wants and even provide Customer Demand Forecasting with Machine Learning. As you can see here, the marketplace is not the sole business model for Amazon, as they are looking to grow in other directions to remain the leader in E-Commerce.

“We’ve had three big ideas at Amazon that we’ve stuck with for 18 years, and they’re the reason we’re successful: Put the customer first. Invent. And be patient.”
Jeff Bezos, founder, CEO and the president of Amazon

The size of Amazon

How to build a marketplace

You will get a complete answer to this question by reading the article. We will get clear about classification, compare ways of building a marketplace, explain the process for startups, and give you some tips on hiring a team and breaking down the budget. Let’s go!

How to Create a Marketplace 101: General Classification

To get the most revenue out of your effort, it is important to pick the right type of marketplace. Whether you want to build from scratch or add features to existing infrastructure, a clear understanding of this classification will help you get the best results.

First, we need to focus on your Target Audience. The options are:

Peer-to-Peer (P2P)

This model, which has another name — customer-to-customer (C2C), focuses on presenting the customers an opportunity to sell and manage products or services. Just imagine Etsy, which is a place to sell handcrafted goods made by very small groups of people. Big brands are not allowed there; this is a platform for people with artistic skills to share their work. Anyone can buy items; sellers pay fixed fees. Another great example is Uber — which offers and manages peer-to-peer ridesharing.

Business-to-Customer (B2C)

B2C is for businesses who want to sell their products or services directly to a customer without any third parties involved. Most of the representatives of this model offer a large variety of goods. AliExpress is probably the most notable example here.

Business-to-Business (B2B)

B2B marketplaces help businesses improve the distribution of their products by finding new partners. Alibaba is the biggest B2B portal in the world, covering also B2C and C2C. Founded by Jack Ma and Peng Lei in 1999, it’s actually a holding that consists of companies such as Guangzhou, Evergrande Taobao, F.C, UCWeb, 1688.com, and Ali Express. Alibaba generated nearly $72 billion of revenue in 2020.

Next, let’s discuss the differences between vertical and horizontal marketplaces.

Vertical Marketplace

These types are very narrow — aimed at a specific niche, industry, or demographic. The advantages are the ability to save money on marketing campaigns, provide more value, gain more revenue from a smaller number of customers, and it is easier to maintain high-quality products and services on the platform.

The disadvantages are quite obvious here because this narrow approach creates a lower number of transactions overall. Thus, you need to be proficient in the chosen niche to stand out among your competitors.

Horizontal Marketplace

With a horizontal marketplace, everything is the opposite; it covers all imaginable categories of items — in most cases, the ones in the highest demand to appeal to the largest target audience possible. The most notable advantage is low operational costs, as all sales are derived from the same model. The appeal to multiple types of target audiences results in more transactions and more profit.

The first disadvantage is that it is difficult to build a precise marketing strategy — the customers in horizontal marketplaces are very different. The second disadvantage comes from pressure from competitors. There are tons of horizontal marketplaces, making it hard to stand out among competitors, attract new customers and sellers, and create a unique selling proposition. If that’s not enough, it’s way more difficult to provide effective customer support and build trust among participants.

Financial models

The three most popular financial models for marketplaces are Commission Model, Subscription Model, and Listing Fee Model. In a Commission Model, the marketplace owner receives a previously agreed on a fee for each transaction. Subscription Model means that each registered user pays a certain amount of money regularly. In a Listing Fee Model, each user pays the same price for listing a product or service.

Management types

You can choose between unmanaged platforms, managed to a certain degree, or fully managed.

Products

The most popular type here is goods marketplaces, with eBay being a quick example. Another common type is service marketplaces, like Airbnb or Upwork. Hybrid marketplaces are a mix of both previous types and offer goods and services at the same time — think of Craigslist. Crowdfunding platforms for startups like Kickstarter could be classified as project marketplaces.

By interaction

And finally, online commerce platforms aim to give a customer a link to buy the desired product, while online-to-offline try to connect a customer with an actual brick and mortar store.

To wrap it up, and give you an overview of all of these types:

Target audiencePeer-to-Peer (P2P)
Business-to-Customer (B2C)
Business-to-Business (B2B)
FocusVertical
Horizontal
Financial modelCommission model
Subscription model
Listing fee model
Management typeUnmanaged
Partially managed
Fully managed
ProductsGoods
Services
Mixed
Projects
InteractionOnline
Online-to-offline

Comparing ways to build a marketplace platform

Now let’s compare the different options to build a marketplace. Of course, every use case is unique and it’s next to impossible to figure out the best way for every business. However, we will look closely at each option in terms of time to market, the technical expertise required, costs to build, scalability, and customization. Hopefully, you will see which option is better for your business.

Writing code from scratch

If you want to do everything just like you have imagined — especially if you have the necessary expertise or access to a team of specialists — this might be for you. Having access to the code, no third-party software, and licensing are the main benefits here.

On the other hand, this approach takes a lot of time — at least three months, because building an optimized platform that handles all transactions smoothly is no easy task. This is a major drawback because it is often very important to create a marketplace as soon as possible. Experimenting on developing custom features (which might not be useful or popular in the end) and supporting a platform by yourself can drain your budget. Speaking of budget, this approach can cost you significant money — starting around $50,000.

Building a Marketplace Platform

Building a marketplace using open-source software

Using existing software will give you a time advantage compared to creating from scratch — marketplace software already has all basic functionality features, and you can quickly add features to the set. It will also be a lot cheaper to build than the previous option.

Time is an issue here, too; it will take at least a month before you can launch. Also, it’s hard to find top open-source software that is easy to customize — some adjustments can require effort from developers. Maintenance and updates can also be an issue. If a software creator doesn’t offer updates on legal requirements for payments, for example, your team must handle it.

Choosing a website builder

Basic e-commerce or website builders are indeed very affordable, and there are plenty to choose from. Just look at the Magento and Shopify as e-commerce tools or Wix and WordPress as website builders. Some of them even have heavy customization options with the help of various extensions. So, choosing a website builder could be the cheapest way if you know how to handle plugins and tools.

However, it can take weeks to optimize everything both for buyers and sellers. This includes understanding the user’s journey and adjusting every plugin and extension to meet users’ high expectations for a good experience. Also, keep in mind that you are limited to the functionality that particular builder offers — which limits scalability There is also a big chance that you won’t find a plugin for the desired function. But even if you do, it is very risky to gamble your marketplace’s success on the right interplay between a set of plugins and extensions — if something goes wrong, it could paralyze your operations. Managing plugins can easily become a full-time job.

Using a no-code marketplace builder

Using a software-as-a-service (SaaS) or a marketplace-as-a-service tool is the fastest possible way to launch a platform. Sometimes, you could be online within a day. SaaS software is tested by other businesses, and such a quick launch allows you get validation of your idea and determine the features that are important to your clients. This approach gets you the best UX with minimal investments. The final benefit is that you don’t need to know how to write code to manage your online business and all of its aspects.

However, similar to the previous approach, there might be some limitations in the number of features because software providers tend to work with as many customers as possible. This is a problem in terms of scalability too — if you have a desire to grow your business, the available features might not be enough.

Building with a set of no-code tools

If you are proficient in the variety of no-code tools, you can build a marketplace website yourself, choose the right components for functionality, and foresee future updates. But even in this scenario, it could take weeks to find the exact tools you need and get an understanding of how to build with them. If you don’t know what Webflow, Airtable, Parabola, and Jetboost mean, this approach is probably not for you. Even for the experienced no-coder, time is also a factor here — no-code tools require at least two weeks. In any case, the resulting platform can be unstable and require a lot of additional work in the future.

Creating on top of an API-based marketplace SaaS tool

This approach allows you to focus on features, rather than wasting time on basics. Compared to creating from scratch, it could be dramatically cheaper. It is more customizable than any no-code tool, and you can experiment with your ideas and integrate third-party software. Finally, it is reliable in terms of support, updates, and compliance if a software provider controls these aspects.

However, it could be considered a drawback that in this case, you need to have development skills or a team of experts. Building on top of APIs is more costly and time-consuming than a no-code tool approach — it could take up to a month.

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Things you should consider while creating a product

If you don’t have an existing company that needs to be properly represented online, but have a groundbreaking idea for a business, here are the essential steps for building a marketplace for startups!

Research and SWOT analysis

Figure out what actual problem your marketplace idea solves. Like how Uber focuses on making ride-sharing simple, your idea must have a clear value for the client. When you have this vision, analyze the competition in your niche to understand your chances.

Idea validation

Once the main focus is determined, it makes sense to try to understand the size of the market, who would use your marketplace and how often, and what external sources you need to succeed.

Planning stage

At the planning stage, it’s crucial to gather requirements, complete market research, create specification documents, design wireframes, and estimate the delivery time.

Forming a team

Depending on the budget and scale of the project, it may require a wide variety of specialists such as Back-end and Front-end Engineers, Quality Assurance/Automation Engineers, and UI/UX Designers. Depending upon how the development process will be managed, you may need Project Managers, Product Managers, and Business Analysis Specialists.

MVP/Development stage

This is the most important phase of a project and worth a detailed article of its own, as a lot of ground must be covered. So, we won’t go into too much detail. But this is the time in your project life cycle when you need an expert team to rely on. The team must have enough experience and knowledge to build the right continuous delivery process, develop the MVP, and then stick by you until the project is finished.

Forming a marketing strategy

It’s important to have a marketing strategy that will turn to a winning strategy after the release of your marketplace. Thus, it makes sense to get in touch with sellers in your niche on competitive marketplaces and business directories. As for customer acquiring strategies, there are a lot of them — including setting up a landing page to collect emails before the launch of your marketplace, advertising your startup in online communities, contacting the influencers of your target audience, or starting your blog.

How do you scale a marketplace?

Here is some advice to help you grow your marketplace quickly:

  • Focus on the side that is harder for your business — supply or demand. If you can improve the weak point, the strong one will be even more powerful.
  • If you want to expand, it’s super important to find and work on a certain niche, even if your marketplace is horizontal. You need something to distinguish you from your competitors.
  • Offer as many items as possible.
  • Work on improving transparency, review, and rating systems as well as insurance to build a client’s trust.
  • When introducing new features, focus on one at a time.
  • Don’t change your strategy too fast, because the results might be just around the corner.
  • Define and target the most valuable users first, as they can influence others.
  • Build a community around your marketplace — make events and host Meetups.
  • Protect the uniqueness of your offering or find it, if you don’t have it.

Budget Breakdown

So, how much does it cost to build a marketplace? We have finally arrived at the main point of this article. Now that you know the classification, approaches, and even the process for startups, we can talk about money. It’s all about your budget. These options, according to average costs, are available.

$1,000-$5,000 budget

Building a platform from scratch with a hired team of experts is not an option at all because of the costs involved. However, you can consider leveraging a SaaS solution or maybe an open-source software marketplace. Using a generic e-commerce and website builder is also a great possibility for this amount of money — if you can code and you don’t need the help of a software development team, you can try to build it yourself.

$5,000-$50,000 budget

This is a great budget to work with. You can use API-based software, build a marketplace website, and still have some money left to implement new features. Hiring a developer and using generic website builders or open-source software is also a possibility here, but you must be aware that you might not have much money left for updates. This budget is still not sufficient to build a platform from scratch with hired software developers.

$50,000-$150,000 budget

This budget is perfect for hiring top software developers and building your custom marketplace from scratch with all the necessary features. You are limited to only what you need to achieve; all options are available with this budget.

Finding the Right Software Development Team

The real choice in developing a marketplace is between outsourcing and in-house teams. Both have their pros and cons; you need to choose what is most suitable for you.

In-house

With an in-house team, you will have full control over the process and will be able to estimate any aspect of software development. However, the cost of an in-house team is a major disadvantage. Also, you need technical knowledge or to hire a CTO to recruit the right experts for your project. The time spent on forming a team of experts can be a factor in the overall success of your marketplace.

Outsourcing

Why should this option be considered? First and foremost, it’s the price — development services are significantly cheaper in countries other than the United States. The second advantage is expertise — you can find an already created and experienced team of marketplace developers rather than trying to hire one expert at a time. The drawbacks here are possible security issues, time zone differences, lack of visibility, and failure to meet deadlines. But with a trusted partner with a proven track record, outsourcing could be very beneficial.

Our Expertise in Marketplace Development

It’s time to share SPD Group’s experience in marketplace development — we have been doing it for over 10 years. Hopefully, our story will help you to see the advantages of the model and approach we went with and decide whether it is suited for your case.

From the very start, our partners chose SPD Group as an outsourcing development team for creating a marketplace startup. The project was set to be developed from scratch; while this approach has its flaws, it proved successful here. The main benefit of development from scratch is a huge diversity in possible features. That’s exactly what helped the project to become one of the most powerful white-label B2B and B2C E-Commerce platforms in the world, gaining recognition in the United States, Canada, and Europe.

We did not create just another online store for selling all kinds of goods and services; thanks to white-labeling, the websites on this platform can be customized and branded according to a client’s needs. White labeling for sellers includes various unique types of back-end functionality. Such functionality is unattainable in any other approach (e.g. Magento or no-code builders) for building a marketplace. In short, a seller can leverage all the functions and options of a platform, while making their marketplace website look like it was custom made for a particular brand.

The startup was later acquired by a leading coupon and gift card seller in North America and integrated into its existing system. After the acquisition, the components of the marketplace platform expanded and now include:

  • An advanced white-label customization engine.
  • A complex payment framework that supports over 20 payment systems.
  • Virtual money support.
  • Reporting and sales analytics.
  • Single sign-on integration with a client website.
  • Fraud prevention and detection functionality.
  • Integration of subscription and email services.
  • A wide range of loyalty functionality, promotional campaigns, refer-a-friend program, etc.
  • Automated discount and sales programs.
  • A custom framework for cross-client product sales.

When the acquisition occurred, using an outsourced team turned out to be a significant advantage. It’s much faster and easier to increase the size of an outsourced team; in this case, the development team successfully scaled up to 100 experts when it was necessary for the new owner. Now, SPD Group not only helps support and improve the marketplace platform but also offers its expertise for unification and platform consolidation services that were not initially needed for the startup.

Summary

Why do I need to build a marketplace?
You may want to consider building a marketplace to increase your revenue, attract more customers, find new business partners, and get a scalable and automated 24/7 business model.

What are the types of marketplaces?
By target audience, they are divided into three categories — Peer-to-Peer (P2P), Business-to-Customer (B2C), and Business-to-Business (B2B). By focus, there are only two ways to go — Vertical and Horizontal.

How can the marketplace platform provide secure transactions for both buyers and sellers?
The whole point of the marketplace, a platform that connects sellers and buyers, is to offer the most convenient and secure experience possible. A marketplace platform provides secure transactions by doing everything to protect regular payments, enable automatic refunds, and offer quick payment cancellations. Some businesses use Advanced Fraud Prevention and Detection systems powered by Artificial Intelligence.

What is the best way to build a marketplace?
It depends on your particular case. If you have a big budget and time, then writing code from scratch is probably the best way to go. In other situations, options such as building a marketplace using the best open-source software, choosing a website builder, using a no-code marketplace builder, building with a set of no-code tools, or creating on top of an API-based marketplace SaaS tool might be better.

How much does it cost and how much time it will take?
Once again, it depends on your goals and requirements. According to average market prices, creating a marketplace could cost anywhere from $1,000 to $150,000 depending on the chosen approach. SaaS or MaaS is the fastest approach to launch a marketplace; the job can be finished in a day. However, other approaches may require a couple of weeks or even months.

Conclusion

Online marketplaces are probably the future of the retail industry. According to Statista, 75% of marketing executives believe that the most important benefit of marketplaces for businesses is the opportunity to reach customers in the places where they prefer to buy. While that’s a good point, we believe that marketplaces have an additional valuable function. When online becomes the only way to reach customers, like during the 2020 coronavirus pandemic, a marketplace could be an essential solution to protect your retail business. With the right development partner, it is possible to create a custom marketplace platform that will secure your business in any crisis situation.

Further Reading

  1. The Beginners Guide to Starting an Online Marketplace – https://jungleworks.com/download/eBook_Online_Marketplace.pdf
  2. 4 Things to Consider When Building a Viable Marketplace Startup from Scratch – https://rubygarage.org/blog/how-to-build-a-marketplace-startup
  3. How to Create a Marketplace Website: Cost and Resources – https://www.cleveroad.com/blog/build-a-marketplace-website
  4. How to Build an Online Marketplace – https://steelkiwi.com/blog/how-to-build-an-online-marketplace/
  5. How To Build A Successful Online Marketplace Business – https://www.referralcandy.com/blog/online-marketplace-business/

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