BusinessDesign

How Does A Marketplace Work?

In today’s mobile era of the internet, we tend to shop online more often than ever before. We can attribute it to the fact that it’s infinitely easier to compare products from different sellers online, often from the comfort of our sofa.

As a result, we tend to shop at online marketplaces that connect various providers of goods and services with potential clients.

eCommerce businesses have a much easier time acquiring customers, and clients can find online retail shops or service providers with the best reviews, without much risk of getting tricked into a bad deal.

Marketplace Types

In this new world of centralised sales, we can distinguish between two main approaches to conducting business.

Marketplaces act either as brokers, charging providers a commission for their services, or as distributors, adding their own markup to suppliers pricing.

Broker

In a broker system, the marketplace operates as a marketing company. It charges vendors a commission for each generated sale. Payments are processed either directly between sellers and buyers or through a third-party payment provider.

In most countries, in this system, the marketplace can’t really process payments directly, as an intermediary, unless it obtains a finance business license required to do so. Therefore, in order to process payments through the platform, a third-party payment processor is required.

In this scenario, responsibility for defective products can be shifted to the actual sellers, since the marketplace acts merely as a sales platform.

Distributor

When the marketplace acts as a distributor, it effectively buys goods or services from its suppliers and sells them to the clients for a profit. It’s the most traditional business model.

Payment processing in this scenario is easy and can be simply done by the platform itself. You can find out more about payment gateways and providers here.

All purchases from sellers can be deducted from the marketplace income, all sales can be considered revenue.

In theory, businesses operating according to this model can generate much greater revenues, since all operations are going through their books.

It’s also worth noting that an online marketplace takes all responsibility for defective products since it acts as a distributor.

Marketplace Business Model

The marketplace supports admin users that are able to issue invoices and payouts. They also have access to a dashboard, where they are able to see the list of transactions and search through them. At the top of the dashboard, you can typically find a financial summary of all transactions.

Guest users have access to the landing page and are able to view and pay invoices as well as view payouts. At this point, we can start issuing transactions!

The administrator can easily create invoices and payouts from the dashboard. Information about them will be sent to a specified email address. Alternatively, an invoice or payout URL can also be shared manually with the recipient.

Customers can easily pay invoices using a debit or credit card. It supports 3D secure payments, which shields sellers from chargeback in the event that a stolen card is used.

This simple marketplace model can be used anywhere where a distributor business model makes sense.

Here are some examples of such businesses:

  • Accounting services
  • Marketing services
  • Construction services
  • Cleaning services
  • Various B2B businesses
  • Car rentals
  • House rentals
  • Wholesalers

Despite the simple design, it can greatly improve the lives of small business owners.

Summary

The traditional online marketplace business structure is very popular because it provides a fast and safe shopping experience for customers. We can choose our approach from the two most popular models: broker or distributor system.

Depending on the country that you want to operate in, you can go with a payment processor that best suits your needs. In some cases, a bank account alone will be enough, but if you are catering to an international or global audience, you will need more payment options. You can find out more about payment gateways and providers here.

To kick off your journey with online marketplaces, you can use the basic implementations described in this article.

We hope you will find it useful and it helps you grow your business.

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