From an online store to a marketplace — the 5 stages of e-commerce

Over the past 5 years, marketplaces have become a regular and impressive part of online commerce in Ukraine. However, the creation of a marketplace still raises questions. Andrey Pavlenko, CEO of Scallium, proposes to structure the e-commerce business processes in the following way — he delves into the stages of the retail evolution from a traditional online format to a dynamic and highly integrated ecosystem.

Andrey Pavlenko. All photos in the article are provided by the author

Scallium is an IT team that develops complex solutions for large online retailers and a PIM system for managing product content. In one of the previous cases, the platform was used as an IT foundation in the Epicentr Marketplace development, the biggest Ukrainian retailer.

Marketplace is a conditional concept. They are completely different, and often a company creates a business model with all the marketplace features but does not call its model with this word.

Let’s take this definition – a marketplace is a kind of retail platform where many participants work with each other. One platform usually has many options for interaction.

We at Scallium distinguish 5 stages in the evolution of marketplaces:

  1. Classic e-commerce (online store)
  2. Dropshipping Platform
  3. System Marketplace
  4. Scalable Marketplace
  5. Ecosystem

You can go in different ways. You can start with a traditional online store and develop an ecosystem step by step. Or you can remain a robust niche store if you don’t want to become a marketplace. Or you can launch a marketplace from scratch without previous stages of traditional retail.

The main thing is to understand the fundamental differences between these stages in terms of managing a business. Then any path will not be overshadowed by problems and losses in profits.

So let’s consider each level in detail.

Level No. 1 – traditional e-commerce

This is not a platform model yet. Value runs linearly from business to consumer. That’s not bad. Many excellent online stores are profitable and growing.

The advantage of the traditional model is a high level of control over all processes. The shortcoming is poor scalability. A business is limited by resources: goods, the number of warehouses, the number of personnel hired, etc.

The online store team provides all operational tasks:

  • Marketing
  • Product content creation
  • Updating price and availability
  • Assortment management
  • Payment / Issuance of receipts
  • Delivery of goods
  • Customer service
  • Refunds

If you are faced with the task of scaling, an online store has two options:

  1. Increase operating costs. But you should keep in mind that the number of control points also grows with the growth of the showcase. The more people in your team, the harder it is to manage them.
  2. Increase assortment through dropshipping.

Choosing this strategy, the online store moves to the next level of e-commerce development.

Level No. 2 — dropshipping platform

We call this stage the transition model between traditional e-commerce and marketplace.

At this level, the delivery of the goods is handed over to third-party suppliers. But this is not a marketplace yet, as the processes are not automated. Suppliers often send their product catalogs in excel; then, information is manually uploaded by the content managers of the online store. At the same time, the store owner partly shares the responsibility with the merchants. Still, everything else like assortment management, marketing, transaction support, search for suppliers – remains business responsibility on the side of the storefront owner.

All this managing operations does not allow you to quickly respond to market demands. In addition, such a model is challenging to scale because time is wasted on attracting vendors and expanding the range.

Nevertheless, it is easier to grow here than in the traditional e-commerce stage. The business receives a virtual shelf and at the same time spends fewer resources for assortment range: it does not purchase goods, does not store them in a warehouse. The main task is to accept orders from customers and transfer them to merchants.

Level No. 3 — system marketplace

When a company becomes a marketplace, it no longer sells directly; it organizes a space where others sell. Now business creates conditions for other sellers.

The functions differ from traditional e-commerce even more. Most of the business operations for fulfilling and processing orders are outsourced. Thus, the business focuses on a growth strategy:

It takes time to create conditions and rules for all participants in the marketplace. There can be experiments in the business model and the processes. In this model, fast hypothesis testing is still difficult (unlike the next level), but once the conditions and rules are created, the storefront can scale with hundreds of thousands of sellers. This is an early-stage platform model.

At this level, you will need an IT marketplace platform – we call it a marketplace back-office. But to become a full-fledged marketplace, it is not enough to integrate an IT platform with an online storefront. The changes in your business model must be reflected in the company strategy. After all, a business now has at least two client types: a buyer and a merchant. The need to reform and review the business is the only challenge of this model. Instead, you receive high advantages: scaling and dynamics ability.

Level No. 4 — scalable marketplace

A scalable marketplace differs from the previous stage in a high level of automation.

Most of the processes work independently if you have the necessary IT infrastructure: management of sellers, content, sales analytics, sales and marketing channels automation. IT solutions also implement the logic for calculating bonuses/penalties for suppliers based on automatic SLA (Service Level Agreement) control and marketing tools for sellers like recommended products, product bundles, crossed-out prices, and more.

Business becomes flexible and adaptive. At this level, a complex of IT solutions as one large system helps the business to scale when in the previous level 3, different solutions worked as separate products: a powerful CRM, PIM system, a system for working with orders, BI analytics, and more.

So at this level, the company quickly adjusts to external market challenges and can easily test new hypotheses. Therefore, this model quickly scales. I call it the Agile level of e-commerce development.

Level No. 5 — Retail Ecosystem

An ecosystem is a self-developing platform model – a format that constantly transforms and provides more value for the client.

Let’s look at the example of the Alibaba Group ecosystem.

They have everything from the wholesale platform Alibaba and retail platform Aliexpress to services aimed exclusively at the Chinese market. They launched a video service like Youtube called YouKu, their web browser, logistics, fulfillment, Big Data service, and much more.

In other words, Alibaba covers the entire cycle of different needs from different types of customers. These products make it possible to touch Alibaba Group’s products and services within a single ecosystem.

The thing is platform business model develops permanently and independently.

You have more sellers > you have more products > you have more traffic > you have more sales. Thus it is a sustainable growing circle.

Back in the old days, creating an online store required a lot of money, knowledge, and an expensive IT team. Then ready-made solutions and website constructors appeared in the market. The task has been simplified, and every second business created its online shop.

Today something similar is starting with marketplaces development. Turnkey back-office solutions are already in the market. They help to launch a marketplace relatively painlessly, using someone else’s experience. At the same time, the market is not yet oversaturated; there are many opportunities for consolidation and promotion. This is the perfect time for changes. The main thing to remember is that everything does not end at the marketplace stage, but it’s only just the beginning.

Author: Andrey Pavlenko, CEO of Scallium