Are you a platform or a marketplace?

As your business grows and evolves, your decision will have broad implications for brand identity, growth strategy, international expansion, and payments.

Michelle Vautier is the VP of Payments & Risk at Patreon. She is passionate about enabling ecommerce and working toward creating a payments ecosystem that has no borders.

Platform or marketplace? It’s a deceptively simple question that many e-commerce companies nonetheless struggle to answer.

The choice of which path to take can have broad implications for brand identity and growth strategy, as well as practical ramifications, especially where payments are concerned. As a business grows and evolves, these will only be magnified, particularly when a company sets its sights on international markets.

For this reason, it’s important for companies to make the distinction between the two models early on, and plot a course that makes the most sense for their business goals. Doing so can help avoid costly detours and dead ends, and focus resources and energy where they are needed most. (article continues below)

diagram courtesy of Michelle Vautier

Shades of Gray.

There are no ironclad definitions of either model, and many companies use the terms marketplace and platform interchangeably.

Most industry experts, however, draw the line at the checkout: a marketplace plays a direct role in the transaction itself, from managing payments to ensuring that the product or service is delivered. A platform connects buyers and sellers, but typically steps aside when it’s time to finalize the sale.

In the physical world, it’s the equivalent of shopping in a grocery store (marketplace) versus a farmer’s market (platform).

Most experts draw the line at the checkout: a marketplace plays a direct role in the transaction itself. A platform connects buyers and sellers, but typically steps aside when it’s time to finalize the sale.

In a grocery (marketplace), customers may pick up a gruyere from the cheesemonger and a baguette from the baker, but they still pay for everything from the same register, and the grocer is the merchant of record.

Contrast that to a farmer’s market (platform), where customers walk from stand to stand. They may be confident that each vendor has been vetted by the market, but when it’s time to pay for the veggies, they work directly with the farmer.

To get a better idea, let’s look at some examples. (article continues below)

diagram

Etsy: What It Means to Be a Marketplace

Although Etsy works with millions of sellers, it is very much a marketplace; it’s a place for customers to browse and discover, and when it’s time to pay, Etsy handles the transaction.

There are benefits to being a marketplace—namely more control. A marketplace can influence the entire experience, and payments is a major component. While many merchants think of payments as an afterthought, checkout design and payment options play no small role in getting customers through the final steps of transaction.

Consider this. The average e-commerce store loses more than 75% of its sales to cart abandonment – with security concerns, account set up, and long or confusing checkouts among the top reasons customers don’t follow through with a purchase.

The average e-commerce store loses more than 75% of its sales to cart abandonment.

The payment experience also influences overall customer satisfaction and the likelihood that customers will come back. More than a third of customers surveyed by American Express said they’d consider switching to a competitor after a single bad service experience. The impact is even more profound on mobile, where customers are 62% less likely to return following a negative experience.

As a marketplace, Etsy is able to control for these variables by providing a consistent experience at the point of sale. That includes securely storing customer payment information, employing card updater services to minimize declined payments and creating targeted marketing based on purchase behavior.

The tradeoff, however, is that marketplaces take on a great deal more responsibility at every stage of the transaction. That includes processing payments – as well as returns and chargebacks – keeping customer data safe, and staying compliant with ever-changing regulations.

This accountability doesn’t end at the checkout. If there is an issue with goods or services, a marketplace is generally on the hook.

It is often more difficult to scale globally as a marketplace—where having a brand that resonates with local customers is key—than it is to launch internationally as a platform, which operates primarily behind the scenes. (article continues below)

diagram Bombas uses Shopify to build, maintain, and scale its online store.

Shopify: What It Means to Be a Platform

A platform provides other businesses with the services and marketing channels they need to connect with customers. But ultimately, the companies or other entities that operate on such a platform are responsible for seeing a deal through.

A classic example is Shopify, an e-commerce platform for online stores and retail point-of-sale systems. Its aim is to provides merchants with the tools they need to build, market and manage e-commerce, and it operates very much behind the scenes.

In the year following its migration to Shopify, Bombas achieved a 300% increase in revenue. Its customers were (presumably) thrilled—and most never knew that Shopify existed.

When customers browse bags on LeSportsac’s e-commerce site or order a Leesa mattress, they interact directly with those brands. What they don’t see are back-end and front-end systems created and managed by Shopify.

For a platform like Shopify, success hinges on providing a customer (merchant) with a beautiful online store, a seamless shopping experience, and a robust digital infrastructure that will allow them to scale their business. Success is defined in terms of increased conversion and retention rates, as well as rapid, sustainable growth.

Take the example of Shopify and Bombas, an online sock company. In the year following its migration to Shopify, Bombas achieved a 300% revenue increase. Its customers were (presumably) thrilled—and most never even knew that Shopify existed.

Shopify still needs to keep its customers happy—and process payments for its business-to-business services—but its focus is on helping merchants, not catering to the end consumer.

In general, platforms are beholden to fewer rules and regulations, especially with regard to payments. They typically have less control over the end-user experience—but many businesses are happy to make the trade. (article continues below)

diagram

Airbnb: Blurred Lines

Several large companies have managed to achieve scale by functioning as both a marketplace and a platform.

Airbnb is one example. On one hand, it is very much a marketplace. It makes it easy for customers to shop for vacation properties and other experiences while providing a consistent experience at checkout.

Once users book a rental, however, the property owner steps in and plays the lead role in shaping the experience. In that sense, Airbnb is a platform. Patreon, Uber and Lyft are similar: they act as marketplaces at the front end of a transaction, platforms on the back end.

eBay started as a platform, with buyers and sellers transacting directly, but evolved into a marketplace. By contrast, PayPal emerged as a marketplace but now functions as a platform.

It’s possible to operate successfully in the middle—as long as the decision is intentional and aligns with a company’s long-term objectives. Likewise, companies can shift direction as they come to different milestones in their development, but the transition tends to be easier after a company has made its mark.

For example, eBay started as a platform, with buyers and sellers transacting directly, but eventually evolved into a marketplace. By contrast, PayPal initially emerged as a marketplace but now functions as a platform.

Payments remain the best way to spot the difference. A marketplace has both the benefit and responsibility of controlling the payment process, whether it does so directly or via a third-party service. A platform brings together buyers and sellers—and provides tools that enrich the experience—but it generally does not play a direct role in the final steps of a transaction.

A Compass for Growth.

Rather than making the question an afterthought, e-commerce companies need to understand the benefits and drawbacks of each model as it relates to their position in the market and their longer-term strategic goals.

The decision can have a profound impact on everything from user experience and marketing to payments and partnerships. For example, a consumer-facing marketplace like Etsy will plot a very different path to growth than a pure platform, such as Shopify.

A company that begins as a marketplace will invest in the payment infrastructure and training needed to be a merchant of record; it creates expectations in the marketplace—both for consumers and vendors—about its role in the transaction.

Rather than making the question an afterthought, e-commerce companies need to understand the benefits and drawbacks of each model as it relates to their position in the market and their longer-term strategic goals.

If Etsy decided to relinquish its role as a marketplace and instead function as a platform, it would likely entail a 180-degree shift in strategy. At a minimum, it would need to provide merchants with the tools and training needed to be the merchant of record.

Likewise, Shopify has built its infrastructure, relationships and user experience around its role as a platform; transitioning to a marketplace at this stage of the game would be no small feat.

In addition to the direct costs of making the wrong choice – or worse, failing to make a choice – companies that decide to change course will need to deal with the potentially larger consequence of brand confusion, not just with customers but also partners, investors, and employees.

There is no right or wrong answer. Companies should periodically revisit the question of whether they are a platform or a marketplace, whether it makes sense for their current strategy, and which direction they want to go as they look ahead to the next stage of growth.

Michelle Vautier is the VP of Payments & Risk at Patreon. She is passionate about enabling ecommerce and working toward creating a payments ecosystem that has no borders.

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