Most Ecommerce Marketplaces Will Fail, Here’s Why

ecommerce marketplaces illustration cart and keyboard feature

Ecommerce marketplaces have become one of the major trends in retail, providing B2C and B2B firms alike with the opportunity to increase their inventory, offer a better experience, and improve the bottom line. Many retailers and manufacturers are setting up their own marketplaces, but most of these are doomed to failure.

Let’s be clear. When a marketplace is approached in the right way, it can be transformative. Amazon is the poster child for ecommerce marketplaces. By 2017, more than half of the units sold on Amazon worldwide were from third-party sellers, and in 2021, Amazon Marketplace sellers listed about 350 million products. Because of the clear business advantages of its marketplace model, many companies have tried to follow suit.

Walmart spent $3.3 billion on Jet.com in 2016 to help it compete against Amazon, but discontinued the website just four years later. Macy’s is planning to launch its marketplace late in 2022, but when a retailer tries to respond to competition from Amazon, they are usually already in a weak position.

Why Marketplaces Can Fail

The Amazon marketplace model is highly attractive, but many issues can arise when starting a new marketplace based on an existing retailing model. Retailers see marketplaces as a route to expand product range, adding new vendors without taking inventory risk.

Too often, they look at a marketplace as if it were a feature, such as adding new search capability on the website. As a result, the marketplace project is set up in such a way that it never can overtake the main business. It’s usually pitched as a 12-24-month project to add, say, five marketplace features or add 100 vendors. The perspective is inside out. It’s never outside in, from a customer perspective.

Another mistake is to view the marketplace as an IT cost center project rather than as a way to add new technical capabilities that will allow the business to offer something unique to new vendors.

The organizational structure of most traditional retailers also works against transformation. The purchasing department will commonly ask marketplace stakeholders to list the 10 products they would like to add to the ecommerce website. Then the temptation is for purchasing to say, if those products are so good, let’s buy them and put them in our inventory. So the purchasing department becomes a competitor to the marketplace project.

As with any new initiative, budgets can be a concern with marketplaces. Suppose there is a possible cost of $25 million. In that case, that will inevitably spark internal discussions around whether that budget could be better used to target a new territory or open more brick-and-mortar stores.

Should Businesses Emulate Amazon?

Given these challenges, it’s common for businesses to attempt to replicate the Amazon model with their own marketplaces. Yet, Amazon’s business model is not without its issues, such as fraudulent reviews and tax scams. It’s also tough to find products on Amazon because of the low level of search granularity, with only limited filters such as color, brand or price.

In the beginning, eBay was more successful than Amazon because the marketplace model was core to its business. Amazon ultimately outperformed eBay because of the product review, the Prime program and the many customer experience initiatives that strengthened the Amazon marketplace.

The number of reviews Amazon has built up is another major asset. Businesses have successfully competed with this by focusing on high end, more complex products that do not benefit from trusted Amazon reviews, for example, professional audio equipment. Thomann, a 60-year-old European professional audio equipment supplier, is much better equipped than Amazon ever could be to compete in this sector because it already has a very strong position in that industry.

Which Marketplaces Can Succeed? 

It’s fairly straightforward to judge if marketplace initiatives have a chance of success. Macy’s decided that a marketplace is a strong model and will help it grow the ecommerce side of the business. In fact, because the marketplace is not solving any problems, the platform is likely to underperform. It’s hard to get products the next day, and then trying to integrate everything in a multichannel experience is another challenge.

You can order from a third-party vendor and pick the item up in the department store, but this is not possible in all cases. In the store, there is often a lack of knowledge of how to handle those orders and manage returns. This inconsistency leads to a lot of frustration for the customer and can have an adverse impact on the brand.

Despite all this, ecommerce marketplaces will still become the dominant business model in retail. It requires a long-term willingness to change your core retail business into a marketplace business. If leadership teams commit to this, avoid feature play and focus on a strong business proposition, then marketplaces can be incredibly effective.

Alexander Graf is co-CEO of Spryker