Besides eBay and Amazon, there are countless examples of highly successful marketplaces out there, spanning a wide range of niches.
The core reason for their popularity from a consumer and seller perspective is fairly clear: they allow sellers to tap into several pools of consumers, who in exchange benefit from more choice.
However, in this article, we will focus on how they are taking the startup scene by storm specifically, and why they’re an attractive and high-potential business model for entrepreneurs looking for their next big idea.
One of the largest challenges a fledgeling startup faces is securing investment. Without significant funding from an angel investor, the vast majority of business ideas will fail to come to fruition.
In order to get this funding, entrepreneurs depend on the confidence investors have in their business model. Fortunately, technology investors are taking a strong interest in online marketplaces, indicating the perceived high potential of this type of business.
They are not only easily scalable, but they pose a lower risk than some other models of e-commerce because they tend to be asset-light.
According to The Conversation, there are 5,723 early stage private online marketplaces currently listed on AngelList (leading platform for investing in tech startups), with an average valuation of US$4.5 million – roughly US$25 billion in total.
This considerable value demonstrates how highly investors are coveting online marketplaces, so they’re an enticing prospect for entrepreneurs. As long as the concept and business plan are solid, the opportunities to secure funding are there for the taking.
The beauty of the marketplace format, from an entrepreneur’s perspective, is that by hosting a multitude of different sellers in one place, the pricing competition is direct and immediate. The consumer can more easily compare prices, thus incentivizing the merchants to reduce their prices.
In theory, this should allow startup marketplaces to attract more customers, who are looking for lower-priced quality goods and increase their revenue through commissions on sales.
Naturally, there are always concerns about the authenticity of products, particularly in the luxury sector, but as an online marketplace, you can play the part of an independent adjudicator. This makes the online marketplace model mutually beneficial for entrepreneurs, sellers, and consumers alike.
Unlike starting a conventional e-commerce store, online marketplaces do not necessarily require stocking your own products. Some larger sites, such as Amazon, combine selling their own wares and products from external merchants, but it’s advantageous for startups to simply act as the middleman.
One crucial reason for this is that it keeps overhead costs to a minimum – like warehouse space, stock acquisition, and inventory management – or even eliminates them completely, depending on the business plan.
Although the investment potential of online marketplaces is strong, finding effective ways to cut costs is still a major plus. As a conventional inventory-based e-commerce site, hitting the sweet spot in terms of accurately judging the supply and demand of your products is a constant battle.
This is especially true of perishable goods. Without the need for inventory, online marketplaces are often less expensive to establish and avoid the stock balancing act in the long term.
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