Marketplaces, operational excellence and the “Amazon effect”

I love marketplaces as an investment theme: technology is fantastic at bringing transparency and liquidity to previously opaque and sticky markets, making life better for both buyers and sellers.

But as e-commerce becomes the default for an ever-greater share of consumer purchases, our expectations for what a “satisfying” purchase experience looks like have fundamentally changed. This change is forcing marketplace operators to think harder about the often-messy operations work that comes after a transaction, a significant expansion of their role as simple matchmakers for supply and demand.

What’s causing this shift in consumer expectations? And how can marketplace owners stay in front of it? 

The first question has a one-word answer:

Amazon has been boiling the frog of traditional retail for over a decade now, so we shouldn’t be surprised to find them chipping away at the defenses of their e-commerce peers as well.

Amazon’s first trick wasn’t so different from any other online marketplace — making it easy to find and buy almost anything online, saving both time (i.e., physically getting yourself to stores, hunting for merchandise + checking out) and frustration (too often, the item you needed either was either not carried at all or temporarily out of stock).

But the company’s latest PR stunts — announcing delivery by drone and predictive delivery — show just how far they’ve pushed their advantage on the operational side of their business. Online shoppers now expect their merchandise to arrive at their doorstep within a day or two of ordering, with free two-way shipping and effortless returns (Amazon will even credit a customer for a return and let them keep the merchandise if their shipping and restocking costs calculation tells them they’re better off that way).

Any e-commerce buying experience that falls below the Amazon standard becomes a reason to switch, finding another online seller that promises more, or just shifting yet another category of shopping activity to the one company that gets it right every time.

Contrast this with the canonical marketplace operator, who matches individual buyers with goods offered by a large and distributed array of independent sellers, each responsible for their own operations (i.e., pick / pack / ship / returns / exchanges / post-purchase support). Even simple tasks — like ensuring that the goods offered for sale are actually in stock — become much harder when those goods are distributed across thousands of garages and living rooms around the world, with no barcodes or RFID tags assigned to track their movement through the supply chain.

Now extend that problem to every other step in the post-purchase experience and you begin to see why any marketplace operator who aspires to brand loyalty and repeat purchases in their customer base needs to define their value proposition more broadly than just matching buyers and sellers.

So what’s a smart marketplace operator to do — without killing the economic magic of a business that largely relies on outsourced operations to make up for the lower margins that come with being a matchmaker rather than a merchandiser?

There are many strategies a savvy marketplace operator can use to meet (or exceed) customer expectations without killing margins. Here are just a few:

1. Invest early in seller tools + “virtual automation”

This is the first and most obvious step, and without it most marketplaces wouldn’t scale past the first year of operations. Marketplace owners must establish standard post-sale procedures for all sellers and provide automated digital tools (e.g., email and SMS notifications, secure web-based tracking forms and process-linked compliance checks for each step in the fulfillment and post-sales support process).

This approach works best when combined with a well-communicated seller Service Level Agreement (or SLA) that sets clear standards for response times, error rates and customer ratings — with performance incentives (e.g., higher rankings in search results) and disincentives (e.g,. removal from the site) for outperformance or underperformance relative to the SLA.

2. Centralize operations for top items + sellers

The next escalation of operational investment for a growing marketplace — particularly once the gains from automated seller tools and incentives have begun to plateau — is to make the leap to centralized fulfillment for the subset of sellers and items that show the steadiest and highest-volume demand.

This doesn’t have to be a margin-killer — fulfillment costs money and this is a value-added service that smart sellers are willing to pay for — and it can also be a growth enabler for both the marketplace and its best sellers. Many small vendors struggle to scale their operations as demand grows, and helping them construct a more scalable supply chain — while pooling the costs of doing so across multiple sellers — can add meaningful economies for seller and marketplace alike (with the added benefit of deepening the relationship with your most valuable sellers).

3. Completely redefine the value proposition

This is the most interesting vector of innovation for marketplace operators, and also the most effective line of competitive defense as Amazon and other online superstores gobble up the market for commodity general merchandise.

To survive in the face of Jeff Bezos’ implacable assault on e-commerce, your online marketplace needs to own a value proposition that is strategically divergent from Amazon’s: offering not only merchandise, but also experiences, values and emotions that that company’s laser focus on price and speed won’t allow it to replicate.

The solutions to this puzzle are as diverse as the modern range of successful e-commerce players:

  • Etsy’s focus on the quirks, craftsmanship and personal stories of individual sellers
  • Threadless’s community-sourced design process and celebration of the humans behind the design
  • Stella and Dot making in-person / social selling the emotional center of the brand experience
  • Uber’s embrace of the smartphone to bring immediate gratification, predictablility and transparency to the taxi-hailing experience
  • AirBnB’s leverage of social media as a trust-enhancer, making individual homes viable as a globally-scaled form of lodging
  • StichFix’s flipping the fashion retail model from “pull” (customer search and browse) to “push” (stylists select and proactively send), with a focus on indie designers not found in big box stores.
Some of these innovations are operational, but most include a healthy dose of the one thing Amazon fails at — human warmth. When you care about the seller and not just the merch, you’re more likely to take a risk on a new item or experience. And if the purchase delivers an experience along with a thing, your feeling about will stay with you much longer than the item itself. 
There’s risk in this strategy — bad experiences are even more potent than good ones — but by coupling technical + operational excellence with human warmth and experience-based differentiation, smart marketplace owners can build and defend franchises that even Amazon will be hard-pressed to attack.