If you’re running a successful online store, turning it into a marketplace platform with vendors might sound like a great next step to expand your business.
Inviting outside vendors to sell on your platform may not only help you grow your product catalog without increasing your own inventory levels, but it can also create an additional revenue stream from vendor fees for your business.
However, there are a few crucial differences when it comes to running an online marketplace compared to a regular online store.
Here’s what you’ll need to know if you decide to turn your store into a marketplace with vendors.
1) Marketplace Software is More Complex
If you want to get a little more technical, you can go with free or commercial self-hosted ecommerce software – such as Magento, OpenCart, PrestaShop or a few dozen others. You'll need your own hosting and some technical skills to set it up, but you don't have to be a developer to run a basic self-hosted online store.
Now, online marketplaces are a little different. Since the platform has to handle third party vendors, two-sided marketplace software gets quite a bit more complex than your regular shopping carts.
First, you can go with a cloud/SaaS marketplace platform like Sharetribe, Arcadier or Marketplacer. It won't be as affordable as an online store platform (for example, Sharetribe starts at $79/mo vs 3dcart's $9.99/mo), but it will let you get a basic marketplace up and running without too much hassle.
Alternatively, you can go the self-hosted way by using a dedicated marketplace solution (MultiMerch or CS-Cart) or getting yourself a multi-vendor CMS extension (e.g. WordPress + WooCommerce + Dokan). In this case, we recommend having at least a freelance developer on your team - you may find the learning curve for self-hosted marketplace software pretty steep compared to regular online store solutions.
2) Product Management Works in A Different Way
So, you’ve got your marketplace website up and running. The next thing you'll find out about marketplaces is that the product catalog and inventory management works differently on a marketplace platform compared to a regular online store.
First, you'll need to get vendors (or sellers) on board to list items for sale on your platform - it's not really a two-sided marketplace if you don't have any vendors. (Tip: Create a vendor account for yourself and upload a few of your own products so you don't start with zero vendors.)
Now, you want to give your vendors a way to publish their products for sale. There are two distinct ways you can organize the product catalog in your marketplace system:
- Etsy-style, where every product is unique and belongs to exactly one vendor
- Amazon-style, where a single product can be sold by multiple vendors
Most existing marketplace solutions offer Etsy-style product listings by default, since it’s a somewhat easier system from a technical perspective. This works great for marketplaces offering unique, handmade and one-of-a-kind products, but not so much for retail and electronics marketplaces where a single, centralized product catalog makes more sense.
Whichever way you choose, you'll want to make sure it's easy for your vendors to list a product for sale. As a regular store owner, you may have time to fill out complex product listing forms yourself – but most of your vendors won't. Keep the user experience and the design of product listing forms in mind when picking a marketplace solution.
Unless you’re starting a completely unique marketplace platform, most of your vendors will already be selling their products on other platforms. So, you definitely want to make it possible for sellers to import their existing product catalog instead of uploading items one by one. A bulk import system or an inventory synchronization feature will let your vendors import their feeds from third party platforms.
Finally, don't forget about product moderation. No matter what product publishing rules you set and how carefully you pick your sellers, you will still get users publishing things you may not want to see on your platform. You can review new products by hand in the early stages of your marketplace, but as you grow you'll want to consider a dedicated content moderation solution.
3) You May Need a Specific Marketplace Payment Solution
As an online store owner, you don’t need much more than a PayPal account (or one of the hundred other payment processors) to accept payments from your customers.
In contrast to this, marketplace payment processing is a whole new ball game.
There are three different payment flows a marketplace can use to distribute customer payments between vendors:
- Aggregated, where you collect buyers' payments, then distribute them between vendors as payouts
- Parallel or Split, where your payment processor splits the buyer’s payment at checkout and routes it to multiple vendors
- Direct, where the customer pays the vendor directly
Direct may sound like the easiest way to process customer payments, but it has a few major drawbacks. For one, your customers won't be able to purchase products from multiple vendors at once - and making the buyer go through checkout multiple times doesn’t exactly sound like a great user experience. With direct payments, you don’t own the transaction either, which means collecting selling fees from your vendors at the time of payment won’t work.
Aggregating gives you a little more control over the payment process. Now, you're in charge of redistributing the funds and can withhold selling fees at the time of the payout. There are other challenges with aggregated payments, though. First, it makes your operations quite a bit more difficult since you're in charge of keeping track of vendor balances and making payouts. And, the financial regulators aren't huge fans of you taking money from your buyers for something they haven't received yet. For example, Europe's PSD2 directive places a whole new set of restrictions on platforms aggregating user payments. Not good.
Ultimately, parallel payment processing is the easiest in terms of compliance and operations. In this case, the buyer's payment is instantly split at checkout and distributed between the sellers and your platform – and you get to withhold your marketplace fees, so everyone's happy. The main challenge with split payments is the somewhat limited availability of marketplace payment solutions and the implementation difficulty. It's getting better, though - in 2019, there are more than a few dozen different payment processors available that offer split payments, and the number is growing.
4) Shipping Rules, Order Management and Logistics Differ
In a regular online store, you're the one managing shipping rules and delivering orders to your customers.
When you’re running a marketplace platform, it's up to your vendors to receive, process and dispatch the orders. As the marketplace owners, you want to make the process as easy for them as possible to keep your customers happy.
The way you organize shipping will depend on your region, industry and business model. However, there are two common ways you can do it:
- Allowing your vendors to specify their own shipping rules and rates
- Using a direct integration with a shipping provider to calculate costs automatically
In the first case, you let your vendors decide where they ship to, what methods they use and how much it costs the customer. The drawback is that it's a somewhat manual process. However, it is also a pretty versatile one as it doesn't limit you and your vendors to specific shipping flows and services.
Alternatively, your marketplace software may provide a direct integration with an existing shipping provider, such as FedEx or UPS, or a shipping solution like ShippingEasy. In this case, your sellers will only need to specify the dimensions of their products – and the shipping provider will calculate the delivery costs automatically. This option will not be a perfect fit for all marketplace types, though – especially if your vendors want to use a different shipping method than the one you’re offering.
In addition to shipping rules, there's also order management and shipping tracking. Customers love when their orders are fulfilled quickly, so your platform has to be up to standard. Not only do you want to make sure your vendors are notified when they receive a new order, but they'll also need a way to process and dispatch the order swiftly and keep the customer in the loop. To avoid disputes, you may need a system in place to monitor the order fulfillment rate and speed of your vendors.
5) The Nuances of Customer and Vendor Relationship Management
As a store owner, you have to keep your customers happy. As a marketplace owner, you also have to keep your vendors happy.
To reduce the amount of communication and support work you'll have to do yourself, you want to provide a clear communication channel between the customer and the vendor.
Here are some of the things your platform can offer that will keep you from becoming a full time customer support agent:
- Allow customers to ask vendors product questions and leave reviews
- Offer a private messaging system so buyers can reach out to vendors directly
- Provide a way to resolve disputes before they get escalated to you
This way, you’ll save yourself from dealing with the issues that can be resolved without your intervention.
Now, you will still need to support your vendors when it comes to product publishing, payments processing, order management and generally running their stores.
Streamlined user interfaces and a good knowledge base of articles for vendors that you can point them to will be a great starting point in reducing the amount of support questions you're getting.
These are just some of the key differences between a regular online store and a two-sided marketplace platform. If you’re looking for a more in-depth guide on starting a marketplace platform, check out my Guide to Starting an Online Marketplace Business.