Marketplace model.

By Filippo Conforti on September 19, 2023

Businesses without an online presence had a difficult time dealing with the pandemic. It was during that time that many people were "inspired" by such an unfortunate situation and numerous marketplace ideas were born. Many developers approached Commerce Layer asking for help building a new marketplace. In truth, many of those initiatives never materialized. Instead, others succeeded and created to some outstanding marketplace platforms.

Regardless, this spike in marketplace demand gave me and my team the opportunity to better understand this model, all its variations, and extend our API to handle all possible scenarios. Depending on who you talk to, marketplaces can mean different things to different people. The goal of this article is to clear some fog, describe the marketplace model and all its possible variations, so that you can learn how to build one.

What is a marketplace?

In ecommerce, a marketplace refers to a business where there are many merchants (or vendors) instead of one. Marketplaces come in many forms. Some of them are more general-purpose or “horizontal”. Marketplaces like Amazon and Ebay, for example, are marketplaces where you can find anything. Others are more "vertical" and specialize in a niche product type such as wine, sneakers, or Pokemon cards.

As compared with a traditional, single-merchant business, a multi-vendor model allows for an additional level of freedom that affects various aspects of the business model and the customer experience. Who makes the sale? Is the cart shared across multiple vendors or does the website allow only single-vendors carts? How do payments, commissions, order fulfillment, and returns work? Those are just a few of the main questions we need to answer. Let's begin with the first one.

Merchant of Record

Merchant of Record (MOR) is the legal entity responsible for selling the goods. Basically, it's who gets paid, collects tax, honors refunds, handles chargebacks, customer service, and more. The MOR is usually the company behind the marketplace. By doing so, vendors have an easier time selling online without all the legal hassles. Other times, each vendor is their own MOR and the marketplace company acts as technology enabler, selling "on behalf of" vendors. Hybrid cases also occur, where the marketplace can offer both models. Amazon is a clear example, as you can find products that are “sold by” Amazon or the vendor.

Who the MOR is dramatically changes the rules of the game from a business perspective. There are also some features that are only possible when the marketplace is the MOR, and others when it isn't. As a result, selecting the MOR is the first step in designing your marketplace model.

Multi-vendor catalog

Regardless of the MOR, a marketplace website usually presents a shared catalog for vendors to sell their products. Vendors can either sell unique products or be one of many possible sellers of the same SKUs. Amazon offers both options.

The navigation is always one, so there must be a unique taxonomy tree. Vendors are responsible for categorizing their products by selecting one of the available taxons. For unique products, vendors must also provide product descriptions, images, etc. Alternatively, they just provide the offering for a product that is already on the marketplace and shared with other vendors.

Product offering

In a marketplace, a product's availability and price are part of the product offering. In the case of products that are unique to each vendor, prices and stock information are uploaded along with all other product details. When products are shared among multiple vendors, instead, each vendor provides only their price and stock information.

Price and availability are determined based on the vendor selected when a customer visits a product page. In order for the vendor selection algorithm to work, it must be real-time. In some cases, the process can be as simple as a round robin, while in others, it could depend on a combination of price, stock, and vendor membership status.

It's interesting to note how the information on product pages is separate from the product offering. I wrote about this topic here if you're interested. As part of my article's closing notes, I proposed that separating content and commerce might work better for experience-led ecommerce than a store like Amazon. While this might be true from a customer engagement perspective, Amazon is actually one of the best examples of how creating a separate product page from its offering can help you unlock sophisticated business models.

Shared carts

Marketplaces usually allow you to buy from multiple vendors at once. In other words, they allow you to share a shopping cart across multiple vendors. In order to offer this capability, the MOR must be the marketplace, not a vendor. Alternatively, each vendor can have its own cart. In this case, the marketplace operates more like a multi-tenant ecommerce platform than a real marketplace. However, there are some situations where this model is appropriate, or maybe it is the only one supported by the platform for technical reasons.

Splitting payments

Vendors are generally charged commissions for every transaction they conduct on a marketplace. Customer payments are sent to vendors after the marketplace platform fees are deducted. When there are multiple vendors in the cart, the payment must also be split. Payment is taken on the marketplace and asyncrhonous payouts are sent to vendors.

The Stripe Connect documentation provides a clear explanation of how each payment flow works. Adyen and Mollie have different APIs but similar behavior. Developer experience, fees, and capabilities are all factors to consider when selecting a payment gateway for a marketplace. It is also important to keep in mind that each gateway requires vendors to undergo an onboarding process, essentially verifying their identity and ensuring they are legitimate businesses. As this process may vary from country to country and over time, it can be very complex to implement. If the payment gateway offers a hosted onboarding application, it can be an important consideration.

Order fulfilment

Vendors normally fulfill orders, following the dropshipping model. Vendors should be able to manage prices, stock information, and shipments through a dedicated marketplace application. It would be ideal if the application also offered insights into their business, payouts, and performance.

Since vendors are responsible for picking, packing, and shipping orders, they must equip themselves as a small warehouse, with packages, tape, shipping labels, etc. Sometimes, the marketplace provides packages for vendors, making it easier for them to fill orders, and maybe even adding a nice touch of branding by printing the marketplace's logo on the packaging.

Amazon has taken a big step forward by providing vendors with an (optional) fulfilment service that allows them to outsource the entire process. It is for this reason that their service is unparalleled. Naturally, providing such a no-brainer service would be prohibitive for the rest of us, so dropshipping is likely a more feasible alternative.

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