But why would a founder want to choose an online\u00a0marketplace over another\u00a0business model? Here are a few\u00a0key benefits:<\/h3>\n
Casting off the shackles of inventory is one of the defining upsides of an online\u00a0marketplace.<\/p>\n Inventory is the stuff on the shelves of your local supermarket, the boxes of faux-rustic knick knacks in the storeroom of Pier 1 Imports, and the Ford Focuses sitting on the lot of a car dealership. It\u2019s the stuff that a business owns but has yet to sell.<\/p>\n And inventory is one fickle mistress.<\/p>\n Too little, and your customers won\u2019t find the specific good that they need. They\u2019ll leave your business to satisfy their needs elsewhere.<\/p>\n Too much, and it will sit on the shelves or in the warehouse untouched. The supply will exceed the demand and you won\u2019t be able to sell all of your product.<\/p>\n If it\u2019s perishable\u00a0(like food), it will rot and you\u2019ll lose money. Even if your product is not perishable, it will still lose value over time as newer models become available or as trends change<\/a>.<\/p>\n Unless you\u2019re able to find and stay in that “Goldilocks\u00a0zone<\/a>” of perfect balance between supply and demand, inventory problems will cost you money or customers.<\/p>\n In most cases, an online\u00a0marketplace doesn’t require any\u00a0inventory because the company is not selling the actual good. Instead, it is\u00a0connecting people with goods or services to those who want to pay for those goods and services, and then taking a cut of the transaction.<\/p>\n Because there\u2019s no inventory to store or ship, a marketplace also saves on the cost of facilities to store inventory and an operations department to process it.<\/p>\n Consider the massive undertaking required to get a 60-pack of bicycle helmets from a factory to a specific\u00a0Costco store: drivers to move around the helmets, buildings to store them in for processing, and planners to decide how many bicycle helmet mega-packs ought to go to each store. Then there\u2019s insurance, property taxes, human resources staff to support your bulging work force, and so on.<\/p>\n Or, you can skip all that. Be RelayRides<\/a> rather than Hertz,\u00a0Airbnb<\/a> rather than Motel 8.<\/p>\n Things still might not be easy\u00a0(being a founder never will be, just ask Nicki Boyd<\/a>). But, at least you don\u2019t have to worry about all your capital sitting around in boxes.<\/p>\n Of course, the widgets are just the first component of your online marketplace; the other is the user base.<\/p>\n Unlike the widget vendor in the factory, your user base is comprised of sellers and<\/em> buyers, not just buyers. You\u2019ll need to shape your business to offer a quality service to both parties, which is a delicate balancing act. But if you pull it off, you\u2019ll reap the sweet benefits of having a double advocate base.<\/p>\n If inventory is one of the most expensive disadvantages of a traditional reseller model, another is the cost of marketing. Once a reseller has a bunch of items\u00a0up for sale on its\u00a0website or in its\u00a0store, the\u00a0company\u00a0needs to convince people to come and\u00a0buy them. This includes informing the customer and convincing them to come to your store rather than another.<\/p>\n The antiquated musket that used to be the main weapon of the marketing industry was advertising on print, radio, and\/or television. It was (and still is) a prohibitively expensive tool that dramatically favors the established players, like these 36 companies<\/a> that spent over a billion dollars on ads in 2011. That\u2019s why efficiency-minded startups focus instead\u00a0on virality and growth hacking tactics<\/a>.<\/p>\n In an online marketplace, every transaction involves two parties: a buyer and a seller. Assuming everyone involved has a positive experience, both parties will\u00a0have a reason to spread the word.<\/p>\n More importantly, at least one of these users \u2014 the seller \u2014 is a stakeholder in the online marketplace, meaning she\u2019ll do better if the marketplace does better. While good will and excitement will turn many users into advocates, nothing works better than a clear financial incentive.<\/p>\n Craigslist sellers will link people to their listings through their own social media, Uber drivers encourage people to use Uber, and TaskRabbit handymen will advise people to employ their services through TaskRabbit<\/i>.<\/p>\n As your group of sellers grows, so does your guerrilla marketing team \u2014 no Don Drapers required.<\/p>\n Thomas Malthus<\/a> preached in the 18th century about the dangers of population growth. Because population grows exponentially, but food production does not, the whole of humanity ran the risk of plunging into a famine-driven Dark Age rivaling the collapse of Rome.<\/p>\n Wouldn\u2019t it be a disappointment if armageddon were caused by insufficient grain stores rather than the sharkpocolypse or zombie virus that Hollywood keeps promising?<\/p>\n Similarly, exponential growth of demand creates major problems for vendors and resellers. If a worker can produce X widgets in an hour, the only way to respond to rapid growth is to either match it with an exponentially growing workforce or to continuously overhaul manufacturing processes to increase efficiency. Either way, operational costs will increase just as fast as revenues, perhaps faster.<\/p>\n And growth is critical to a successful startup. In ironic contrast to the locavore small-batch coffee roasters that their employees love, tech companies\u00a0are focused on scaling\u00a0as quickly as possible.<\/p>\n There are good reasons for this. Tech startups are often harnessing a recently-developed technology or tapping into an emergent market, and one of the biggest risks in the\u00a0early stages is being overrun\u00a0by a competitor. Simultaneously, fast growth creates momentum and attracts larger investments from venture partners who are looking for the next Facebook, not the next boutique distillery.<\/p>\n One of the reasons that online\u00a0marketplaces are seen as darlings at the moment\u00a0is their capacity for rapid growth. Because they facilitate\u00a0a transaction rather than actually taking part in it, their labor force does not need to grow on pace with the number of transactions.<\/p>\n They aren\u2019t making, packaging, or delivering the product in question; they only need the staff necessary to maintain the platform at increasing levels of use. To put it\u00a0another way, the number of people hired by Ebay is not directly connected with the number of goods bought at auction through their platform.<\/p>\n In practical terms, an online marketplace is theoretically capable of much faster growth than other types of businesses, which in turn attracts interest, investment, and top-tier talent.<\/strong><\/p>\n Party City<\/a>, a traditional manufacturer and reseller of discount party paraphernalia, and Etsy<\/a>, the online marketplace for homemade crafts, both went public in 2015 with very similar financials. Both were also valued similarly with Etsy at $1.8 billion and Party City at $2 billion<\/a>.<\/p>\n Both companies\u00a0oversaw a similar value of transactions. Party City brought in $2.27 billion<\/a>\u00a0in 2014,\u00a0while Etsy saw $2 billion<\/a> of merchandise exchange hands via its\u00a0platform during the same period.<\/p>\n But here’s the big difference: Etsy was launched in 2005 and employs 685 people<\/a>.\u00a0Party City was founded in 1986 and employs 6,296 full-time employees, plus\u00a0over 8,000\u00a0part-time employees, according to its\u00a0IPO filing<\/a>.<\/p>\n That\u2019s the growth power of a\u00a0successful online\u00a0marketplace.<\/p>\n We’ve presented some of the key benefits of structuring your startup\u00a0as an online marketplace. It’s important to remember, though, that there are also some downsides to this business model.<\/p>\n In particular, online marketplaces are notoriously\u00a0difficult to spark \u2014 what is often called “the chicken and egg problem” (which we will explore in a future post).<\/p>\n![\"Online](\"http:\/\/d1vqbpto5tbbz0.cloudfront.net\/blog\/wp-content\/uploads\/2015\/08\/10191123\/shelf-384558_1280.jpg\")
<\/a><\/p>\nNo\u00a0Inventory<\/h2>\n
![\"Online](\"http:\/\/d1vqbpto5tbbz0.cloudfront.net\/blog\/wp-content\/uploads\/2015\/08\/10191123\/megaphone-50092_640.jpg\")
<\/a><\/p>\nFree Advocacy<\/h2>\n
![\"Online](\"http:\/\/d1vqbpto5tbbz0.cloudfront.net\/blog\/wp-content\/uploads\/2015\/08\/10191123\/sapling-154734_1280.png\")
<\/a><\/p>\nExponential Growth<\/h2>\n
![\"Online](\"http:\/\/d1vqbpto5tbbz0.cloudfront.net\/blog\/wp-content\/uploads\/2015\/08\/10191123\/Screen-Shot-2015-08-10-at-4.31.40-PM.png\")
<\/a><\/p>\nParty City (Traditional Reseller) vs Etsy (Online Marketplace)<\/h3>\n
Downsides of an Online Marketplace<\/h2>\n