Marketplace fundamentals for digital optimisation: identifying common causes of inefficiency

Graphic scaling marketplaces

From farmer’s markets to stock exchanges, marketplaces act as intermediaries between buyers and sellers, bringing them together more efficiently than if no marketplace existed. Ideally, this efficiency creates value for buyers, sellers, and the marketplace to be located in a specific physical space — remained constant even as marketplaces developed in complexity over centuries. However, that limitation is gone. Technology and the internet have freed marketplaces from their geographic restrictions, and marketplaces are increasingly switching to digital. Companies realise the opportunity to reduce costs and increase volume by digitisation.  They understand that in addition to overcoming the inefficiencies of geographical separation, digital marketplaces have the potential to resolve numerous other inefficiencies that prevent optimal marketplace performance. McKinsey reports that companies are three times likelier now than before the pandemic crisis to say that at least 80% of their customer interactions are digital in nature.

McKingsey report how crisis has accelerated the digitalisation of customer interactions

However, optimisation of digital marketplaces is far from easy. In addition to the right provider, you must have an effective strategy, robust infrastructure and patience. A marketplace typically takes more time to seed than most owners initially allow.

Common characteristics of an optimised digital marketplace

The efficiencies to be gained with a digital marketplace will vary based on industry, business strategy, marketplace size, and other factors that differentiate marketplaces. However, certain characteristics are common among successful marketplaces, and understanding these attributes is essential in envisioning optimisation for any digital marketplace.

1. Thick

There are enough transactions available at one time — the sell-side of the marketplace has been properly “seeded” with attractive inventory, and the marketplace attracts buyers. Efficient matching of buyers to list allows sellers to sell more quickly, thereby increasing the transaction volume of the marketplace, which in turn increases the fees recovered by the marketplace.

2. Ease of Use

The marketplace has low fees and price transparency that makes it easy to participate. It also has customer-friendly features such as:

  • Intuitive workflows
  • Search and filtering tools
  • Recommendations
  • Multi-device syncing
  • 24/7 availability

The aim is to build a digital marketplace with all of these characteristics, as well as characteristics necessary for efficiency given a marketplace’s particular situation. The sad truth is that the vast majority of digital marketplaces are falling short of that goal. At this stage in the evolution of digital marketplaces, almost all of them have some inefficiencies to remedy.

3. Secure

Secure Participants feel it is safe to participate and reveal their preferences. Information is secure and features such as seller ratings, transparent pricing, trade clearing, and settlement services allow participants to feel comfortable transacting on the platform

4. Uncongested

There is enough time for offers to be made, accepted and rejected. The marketplace matches buyers, sellers and inventory to optimise transaction prices and volumes. It also has a choice of trading mechanisms, automated trade matching and offer comparison tools.

5. Scalability

The marketplace has the strategy and the resources to continue growing and maintain momentum. The “network effect” spans across the platform - more sellers attracting more buyers, who attract more sellers, who attract more buyers, and so on. Each new participant grows the marketplace and makes it more valuable.

6. Adaptable

Marketplaces change over time as they mature and the marketplace design needs to keep pace with this. The marketplace should track the behaviour of buyers and sellers to optimise pricing for everyone, identify opportunities for sellers, guide buyers to inventory, and adapt to future market conditions which can be expected.

7. Auditable

This is a key consideration, in particular in regulated markets where transaction records may be required. Return on investment (ROI) can also be quantified and improved by tracking key performance indicators (KPIs), including:

  • Gross merchandisable value
  • Number and growth in sellers
  • Number and growth in buyers
  • Number and growth in listings
  • Average listing price
  • Forecast vs achieved price
  • Fulfilment rate
  • Sell-through rate
  • Average amount purchased per buyer
  • Average number of orders per buyer
  • Average order growth per buyer
  • Customer acquisition cost (CAC) for both buyers and sellers

5 Steps to successfully scale your digital marketplace

Growing a marketplace is an iterative process and a large part entails regular reviews of tools, processes and user behaviour to assess what is and isn’t working. There is no silver bullet that can magically entice people to move forward into a totally new buying and selling environment, but there are some useful ideas:

Generate awareness  

While that might seem obvious, users need to be aware of the marketplace and the benefits for both buyers and sellers.

Seed the supply side  

Make sure you have attractive inventory available when you go live. Partner with a supplier, buy the product, underpin the pricing – whatever it takes to ensure you have a fully stocked platform for launch. Without inventory there is no marketplace.  

Allow for some degree of anonymity  

There is a long history of buyer and seller communities wishing to remain anonymous. You can enable this with private seller and buyer owned markets, feeding anonymous transaction data into an aggregate market price, which benefits all market participants.

Overcome vested interests  

Brokers and speculators who have an interest in manipulating the bid/offer spreads will initially oppose transparency, but their attitudes change quickly when they are better informed about underlying physical product price movements.

Understand user behaviour

Using heat maps to understand how users interact with the system is one way you can optimise the experience for them. For example, if you find your users are spending a lot of time on a listing page examining attributes of listings, you might consider expanding this area of your offering.

13 Reasons that can cause inefficiency in a marketplace

Many marketplaces suspect they have inefficiencies in their marketplace, but they aren’t sure what exactly these are. While each marketplace may have unique inefficiencies, there are common ones that can plague any trading venue, and all marketplace owners should be aware of them. They are the flip side of the characteristics of an optimised marketplace. See these typical inefficiencies outlined below.

1. Overly complex user interface

An overly complicated user interface will deter participation, making it difficult to find products or execute a trade. Stick to the ‘KISS’ model (Keep it simple, stupid). A simple intuitive interface will help ensure “discoverability” so buyers can easily navigate and locate items of interest.

2. Opaque pricing

The take rate is the percentage of a market’s Gross Merchandise Value (GMV) that the marketplace recovers in fees. When market participants aren’t sure how much the take rate is, they are less likely to participate and become loyal.

3. Undetermined price points

When the marketplace is trading items with unclear values, many opportunities exist for buyers, sellers, and the marketplace to lose out. Everyone is ‘shooting in the dark’. Fine art is a prime example of this as interest does not necessarily translate to a consensus price point. Christie’s adds value to their clients by providing their provenance service as part of their auction fee.

4. Non-current pricing

When pricing mechanisms don’t stay current with market conditions, a fair exchange of value isn’t taking place, a situation almost certain to eventually displease both buyers and sellers. With this in mind, a benchmark price provider is very important in ensuring buyers stay faithful to a marketplace. The marketplace is also exposed to the risk of lost revenue depending on its transaction model.

5. Low liquidity

When buyers and sellers can’t quickly sell or buy, a marketplace won’t reach its potential transaction volume, thereby lowering the marketplace’s revenue. However, there are markets that work very well despite the perceived lack of liquidity – “Request for Quote” (RFQ) is a platform for interaction amongst the market participants who wish to negotiate transactions amongst themselves.

6. Not optimised soft factors

Examples of these factors are:

  • Payment terms (e.g., no involvement in the payment flow — money is being exchanged offline rather than in the marketplace, lowering the take rate)
  • Delivery modes
  • Volume preferences
  • Freight components
  • Loyalty
  • Trade terms

7. Highly concentrated seller base

When there are only a handful of sellers in a marketplace, they have leverage to lower the take rate.

8. Buyers who are loyal to sellers

When buyers will seek out a seller outside of the marketplace, the seller will seek a lower take rate than if that loyalty didn’t exist.

9. Infrequent purchasing cycles

Without enough transactions being conducted in a marketplace, take rates won’t sustain it. When buyers don’t buy often, transaction volumes obviously suffer, which hurts the marketplace and makes it difficult to attract and retain sellers.

10. Limited geographic reach

Even digital marketplaces can be limited geographically due to a lack of market penetration in certain areas.

11. No real-time trading insight

Marketplaces are fluid and to be efficient they must be capable of adjusting pricing and volumes as quickly as the market moves.

12. Inability to predict buyer behaviour

Analysing the behavior of participants we can understand the pattern of how they will act in the future, but many marketplaces don’t have the technology to read these signals and proactively meet the needs of both buyers and sellers.

13. Insufficient scalability

Marketplaces need help in growing, but plans for scalability (e.g., support for power sellers) are often not formalised and acted upon. The reality is that many marketplaces suffer from a combination of these inefficiencies, however before they can be fixed, they must be recognised.

With all those factors in mind, how do you correct inefficiencies once you’ve identified them? What’s involved in turning those inefficiencies into an optimised marketplace?

Taking action to scale successfully

To remain competitive, organisations should meet users where and how they interact and develop sustainable marketplace strategies as part of a broader strategy to scale successfully.

In order to be successful, every marketplace has to establish itself as an effective intermediary between sellers (supply) and buyers (demand). But first, you have to increase awareness of your brand to stand out from your competitors to help drive adoption. The challenge is to find the right combination of internal and external resources to address each aspect. You need a particular, hard-to-find combination of auction, business, and technological expertise.

At NovaFori, we have a proven track record of designing digital marketplaces in various industries. To find out how we can help you reach new customers, optimise pricing and gain real-time trading insight.

We adopt a collaborative and hands-on approach, combining our B2B marketplace expertise with your industry knowledge and business requirements to design the platform that's right for you. We provide businesses with a flexible, scalable and modular platform solution, designed with a B2C user experience and complex product attributes of the B2B world in mind, to ensure your marketplace is a seamless extension of your business and your ambitions.

Interested to learn more about marketplace digitalisation? Click here to download the white paper.

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