Are we ready to adopt the marketplace model?
Marketplace model’s biggest challenge is that it’s difficult to execute as it requires adequate liquidity on the buyer’s and seller’s side
Buyers and sellers getting into direct contact for the hottest deal is no more a far cry. From China’s Tmall, Gmarket of South Korea to Amazon, Flipkart, OLX – all support the marketplace model, rather than the inventory-led model. Several e-commerce players are shifting to this model due to scarcity of capital. With the foreign direct investment (FDI) favouring the marketplace model, companies are trying to adopt it in an effort to maximise capital efficiency.
Most of the e-commerce companies were focussed on the consumer experience best served by an inventory model as capital was in abundance, but the draining balance sheets are making them familiar to the marketplace model. This model enables a large base of buyers and sellers to transact with one another in a transparent and efficient manner. It is proven to be more scalable, cost effective and operationally uncomplicated than the inventory-led model. The inventory-led models have many challenges such as inventory, carrying costs, packaging, pilferages, operational and logistics manpower hiring and training, handling returns, order management and tracking. Snapdeal has always been on the marketplace model because of the inherent advantages of not carrying the inventory, making the process faster and scalable.
Recently, Flipkart announced the launch of a marketplace platform, bringing buyers and sellers in direct contact. After building a certain critical mass of online shoppers in India, they opened the platform for other people to come and leverage it because they believe it exposes customers to various collections at the best price.
Sundeep Malhotra, Founder and CEO, HomeShop18 TV and HomeShop18.com said, “The Indian e-commerce industry is growing at a fast pace and is still figuring out the suitable model for itself. There is a strong need of capital to build and sustain an inventory model, whereas on the other hand, the marketplace platform takes away the need of warehousing. This could be one of the primary factors for adoption of the marketplace model.”
“Moving from an inventory-led model to marketplace is not an easy transition. It is as good as building from scratch. The biggest challenge faced in adopting this model is customer experience. Companies would need a lot of support from merchants to provide the same customer experience in terms of delivery time, packaging, delivery boy behaviour, etc. These will be the main challenges that e-retailers will face whilst shifting to a marketplace model,” he said.
The market place model avoids buying own warehouses and eliminates the huge operational costs, making it scalable with lesser initial cash burn.
“Only companies that have a long-term vision, who invest in setting up the right infrastructure and who have deep pockets are able to sustain the inventory model in the initial phase, where the cash burn is disproportionately higher. In addition to this, the huge operational costs, especially in procuring and managing inventory, restricts the company to offer the widest range and typically allows the company to offer limited categories. In India, finding, training and retaining quality people at all levels of managing a large inventory-led e-commerce venture is probably one of the biggest challenges,” said, Amarjit Singh Batra, CEO, OLX India.
He shared that marketplace companies also benefit from the options they provide to their customers for the same product, as multiple sellers can sell the same SKU and helps create a competitive pricing environment. They also benefit from network effects because buyers can become sellers and vice versa, but that happens on a true marketplace model such as OLX.
The Indian market is fragmented with a large number of cities, the logistics infrastructure for retail shipments being inadequate, and the low penetration of credit cards and internet banking, means that e-commerce companies need to invest heavily in setting up their own last mile delivery systems and in managing Cash-on-Delivery payment option.
Ankur Warikoo, CEO, Groupon India said, “Even though e-commerce is growing at a breakneck speed, the profit margins are relatively low as compared to the developed markets. Several e-commerce players are shifting to the marketplace model from the inventory-led model because it gives them hope of scaling sales by becoming a platform where a large number of buyers and sellers transact. Marketplace models also completely eliminate the holding cost of inventory (and the risk of dead inventory, in case the products become obsolete or expire). For a large e-commerce player across categories, this holding cost can be quite significant, putting stress on the case of the business.”
The biggest challenge is that it’s difficult to execute as it requires adequate liquidity on the buyers’ and sellers’ side. Managing a consistent and positive customer experience by finding quality sellers, managing the order tracking, and customer satisfaction on delivery and quality of the product from a diverse bunch of sellers becomes difficult as the market expands.
Malhotra stated, “Some of the difficulties faced in marketplace model are processes and IT- enablement of vendors and retailers, which are not fully geared up to handle the business efficiently. Then, there could be issues with delivery and customer experience in Indian context. There could be instances of inventory blocking in market place model, with the same product being listed on two or three sites and the product getting sold out. Hence, customer satisfaction can be a cause of concern in the market place model.”
Another challenge in a country like India, pointed by Batra, is that most sellers would be selling on multiple marketplaces, leading to lack of differentiation among these marketplaces in choice and pricing and to build a consistent experience, even marketplace companies get involved in the last mile delivery, branded packaging, offering money back guarantee, etc, that add to the cost and managerial bandwidth in operations.
The quality control in a marketplace environment is lesser, since the seller is directly interacting with the buyer and in many cases the real reason for customer dissatisfaction cannot be ascertained. However, this can be eliminated through stringent checks at the website level.
Warikoo pointed out that the major disadvantage of this model is that the shipping cost is higher because multi-product orders are fragmented across vendors and shipped separately. And this in turn may lead to customer dissonance because a customer won’t receive their entire order at one time. This may also lead to non-compliance of delivery timelines promised; reasons being cross state barriers and non availability of stock with the vendor, order cancellation, and loss of consumer trust.
“One of the key challenges in an e-commerce marketplace is that the customer doesn't perceive the company as a marketplace. For them, they are buying from an e-commerce site the products that they are promoting on their sites through mailers and advertisements and for which the company is accepting money from them. So if the customer is defrauded or has a bad experience, then it's not the actual seller but the e-commerce marketplace company that has a loss of trust,” Batra added.
E-commerce is still at a nascent stage in India, most consumers are not able to differentiate between the inventory-led models, or controlled marketplaces or the full blown marketplaces. Hence, it will take time to overcome the disadvantages associated with the marketplace model and become a win-win situation for marketers, buyers and sellers.
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