From listing to transactional marketplaces
Ever since the first classified ad appeared in the Boston News-Letter in 1704, many companies have built large businesses charging sellers (advertisers) to add supply (listings) to their marketplaces. For the better part of the past 300 years, these “listings marketplaces” have played a critical role in local commerce and have proven to be valuable and durable companies.
Twenty years ago, modern listings marketplaces began to appear on the Internet. And while those newly emerging Internet marketplaces were hailed as disruptive, close observers noted that pioneering sites like eBay and Craigslist were following the same business model playbook as the age-old classifieds industry.
From listing to transactional marketplaces
Listings marketplaces have always focused mostly on the seller’s experience rather than the buyer’s—because it is sellers who contribute to the bottom line. For example, eBay charges sellers to “bold” or “highlight” their listings (just like the original newspaper classified pages did), and eBay offers tools to power sellers to manage listings. Seller services can be tied directly to incremental revenue, but they don’t necessarily contribute to a great buyer experience, which feels like an afterthought in some Internet marketplaces.
Today, however, a subtle but important shift is taking place. Transactional marketplaces are emerging. In a transactional marketplace like Airbnb, a buyer pays money to the marketplace for a purchase, and the marketplace passes the funds along to the seller minus a “rake” or “vig” (effectively a commission for facilitating the transaction).
A new transactional marketplace can pose a significant disruption to an incumbent listings marketplace for several reasons. Because there is no cost for a seller to list, a transactional marketplace has an easier time aggregating all available supply -- there’s very little reason not to list if it’s free to do so.
In a transactional model, the marketplace only makes money when an item sells, so transactional marketplaces tend to focus more holistically on the buyer and seller experience to drive maximum liquidity and sell-through.
Transactional marketplaces partially insulate buyers from having to trust sellers. Instead of evaluating whether a specific seller should be trusted with payment, a buyer can rely on the marketplace to withhold funds until and unless there is satisfaction with the purchase. This is particularly helpful for new sellers who get instant credibility from buyers because of marketplace guarantees and, therefore, have an easier time entering the market. The incremental supply from new sellers attracts more buyers, and the flywheel of marketplace activity spins faster.
The next wave: the end-to-end marketplace
Some innovative companies have even begun to improve on transactional marketplaces by creating an ‘end-to-end’ experience for buyers in which the individual seller is almost irrelevant. From the buyer’s perspective, an end-to-end marketplace feels indistinguishable from a typical retail experience. The end-to-end model adds branding and service on top of a transactional marketplace offering. Examples of end-to-end marketplaces are ThredUP in secondhand clothing and accessories (which accepts bags of clothes from sellers, then photographs and lists them on a site that feels like a typical retail e-commerce experience for the buyer), and x in short-term accommodation rentals (the company provides branded shampoos, standardized sheets and towels, and a consistent key delivery process for the traveler so she feels like she is staying in a hotel).
End-to-end marketplaces are harder to build than transactional marketplaces because the marketplace typically has to ‘touch’ the product or service in some meaningful way in order to facilitate the transaction, which creates a host of operational challenges. The high-touch aspect of end-to-end marketplaces often requires a higher rake to compensate the marketplace for meaningful involvement in every transaction. In turn, the higher rake means fewer categories can support end-to-end marketplaces, but there are still several advantages to this new and innovative model:
An end-to-end marketplace removes the need for any buyer or seller screening. This reduced friction allows buyers and sellers to focus exclusively on product or service selection. Stubhub, for example, doesn’t require you to pick a seller; it simply offers tickets for sale and guarantees their legitimacy.
While transactional marketplaces provide safety and assurance related to seller performance, end-to-end marketplaces go a step further and effectively become the seller. To the buyer, an end-to-end marketplace feels the same as a retail store.
An end-to-end marketplace commands such an important role in the delivery of the product or service being purchased by the buyer that it can set pricing or pricing rules, eliminating haggling or price shopping. In addition, playing such a key role limits the potential for “disintermediation”, a risk that transactional marketplaces face when the end customer works directly with the suppliers.
While the listings model of marketplaces has a rich history, we believe it will increasingly be relegated to a limited set of categories. In its place, we expect to see the continued emergence of transactional and end-to-end marketplaces, which will be disruptive forces on their predecessors. While it took almost 300 years for the original classifieds business model to get disrupted by the Internet, it’s taking less than 20 years for those relative newcomers to get disrupted themselves.