7 Deadly Marketplace Sins
Black Lives Matter:
I wrote a post last week that asked you to stop and think about what is happening in this country and how it affects the employees in your company. You don't build values for the good times. You build them so you, your leadership team and employees have no question about the motivations behind your decisions, how you prioritize and how you treat people.
There is a shift happening and if you think this doesn't apply to you, take a step back, listen and learn. We all win when companies don't just comment, but act based on their values. Last week, I signed up to mentor aspiring young, black entrepreneurs at no cost to anyone - if your'e also interested in paying it forward, check it out.
5 minute read
What has you talking...
The conversation about EDI versus API when it comes to marketplace onboarding definitely sparked a healthy discussion last month. I called EDI the cockroach of retail - you just can't kill it.
For all the "innovation" conversations that are spouted at the retail conferences, the fact we're still using this archaic functionality to pass inventory and order information makes me cringe. Thanks to Krish Iyer, Gwen McShea and Chuck Gorman for chiming in on the EDI love/hate debate. It's old, but it works!
Introducing the 7 Deadly Marketplace Sins
We’ve all heard about the 7 deadly sins, even before Brad Pitt wondered “What’s in the Box?”.
The deadly sins were created by a fourth-century monk Evagrius Ponticus he wrote in Greek the 8 evil thoughts, which were translated by Pope Gregory into Latin and reduced by one in the year 590.
They were: lust, gluttony, greed, sloth, wrath, envy, and pride.
In the eCommerce world, I've come up with my own list of 7 deadly sins which apply to building marketplaces as well.
They are:
Mistaken Identity
Seller Field of Dreams
Your CAC is Too Damn High
Lack of Innovation
More of the Same
Product Deception
Fulfillment Variance
Throughout my 20+ year career in eCommerce, I’ve spent most of it studying and immersed in marketplaces. I see the same bad habits over and over again. They are traps that companies fall into when they try to build a marketplace for the sake of checking the box on an initiative.
If you suffer from some of these sins, the consequences are many:
you will find it hard to attract buyers and sellers, and, worse, you may have trouble attracting investment for your new venture.
I'm sharing 3 of the 7 in the newsletter and you can download the entire list from my website here. There is also a BONUS item I didn't mention yet ;-)
#1 Mistaken Identity.
Of all the marketplace sins, this is the most expensive. In Biblical terms, it’s the sin of Pride and Envy. In other words, you feel you can be all things to all people, and you envy the market position of another player.
Let me tell you a little story about eBay.
When eBay built its marketplace, its early success was that there is a lot of inventory out there looking for a price. Who remembers the Beanie Babies craze?
For instance, many auto parts are not available quickly online. When eBay Motors was introduced, it became a place for backyard mechanics to get hard-to-find parts that simply weren’t stocked in retail stores because there is so much variety.
When inventory is hard to find, it is a good fit for an online marketplace. eBay took advantage of the eCommerce revolution. Their business model was once called “indestructible” by a leading financial analyst.
The reality is eBay was built to solve the problem of unlimited, unique, hard-to-find, or hard-to-price selection. The problem? Someone forgot to tell eBay.
With the rise of Amazon, cracks started to appear. It got easier to buy more things on Amazon. They became famous for being convenient to buy any product you might want to buy. You couldn’t find anything on the planet on Amazon, but when Amazon had something it was just easier.
Earlier, Amazon tried to compete with eBay Auctions, in the chance that eBay had hit on a formula that Amazon didn’t have. But it didn’t work for them. They shut it down.
As Amazon finally launched its third-party marketplace (which still continues today), they hit on a unique formula, based on their catalog, in a way that made it difficult for any company to follow. At the same time, Amazon had also become known for reinvention and innovation.
eBay was caught flat-footed. It had to respond because now it had a marketplace competitor that was more convenient for buyers. But, how to respond?
eBay management had 3 options, which ultimately boil down to the classic line extension challenge posed by Jack Trout and Alan Ries.
Ignore Amazon. In other words, stick to your knitting. We know what we are, and Amazon is different. Not better, but different. We can innovate in our own way.
Build a new brand. This seemed daunting and unlikely to a Wall Street darling like eBay. eBay’s brand was one of it’s most prized assets.
Extend the Brand. We can do both. We can keep the fun of eBay, but also bring new convenience features we’re lacking now. This is what they picked, and in response eBay launched eBay Express.
While we don’t know what might have happened to eBay had they chosen another path, we do know that eBay Express was an abysmal failure. Why?
They got big things wrong:
How do we get traffic to these items?
How do we merchandise and price the items on the site?
How do we retain customers and create brand loyalty?
Amazon was innovating faster, and completely changed the trajectory of the company with the launch of Amazon Prime in 2005, which will prove to be one of the greatest retail loyalty programs of all time. Shortly thereafter, eBay launched eBay Express. Quite a contrast.
Here’s what most people don’t understand about a marketplace. A marketplace is a tool to achieve a certain goal. If your goal is flawed, it doesn’t matter that you’ve built a marketplace. Buyers won’t find it useful.
Of all the things to kill eBay, this sin of Mistaken Identity - not recognizing who they were - was always the biggest one. And it plagued them constantly over their existence.
#3 Your CAC is Too Damn High
Many marketplaces have failed because it’s too expensive for them to attract buyers. If you are new to the marketplace scene and don’t have traffic, you have to acquire customers. That traffic comes with a cost, but your paid advertising isn’t the real issue.
The problem is a retention problem. As a general guideline, your LTV (Lifetime Value) should always be at least 3x your CAC.
If sellers are the key to selection and selection is your strategy for customer acquisition, you’ve already lost. Selection is one part of a marketplace strategy. There are bigger, more important elements you have to consider first -- why does a buyer care?
There is a philosophy that if you want better customers, you have to make them better. Investing in things that solve problems for your customers will go far beyond having the products that they want or need.
This is what will keep your customers coming back - you’re serving a purpose and relevant in their daily lives. Of course, everyone talks about Amazon and Prime.
There are other marketplace success stories worth noting, however. Etsy is another. I respect them a lot, even if they aren't perfect. It’s a marketplace following the success formula: differentiation, staying true to DNA, and driving strong lifetime customer value.
Etsy was born out of solving a problem for crafters. The founders read through eBay seller forums where consensus was “I wish there was a place I could sell my crafts! eBay sucks - it's hard to use, doesn't care about us, and charges high fees!!!”
Etsy delivered early on for these crafty entrepreneurs and gave them a place to bring the offline community online. People were proud to promote their Etsy shops and this kicked off their flywheel of organic traffic.
In the early years of Etsy, 80% of their traffic was organic and while it’s shifted some, organic traffic maintains at 70%. With their new ad program, paid will soon be heavily subsidized by sellers.
What’s more impressive is Etsy’s sales from repeat buyers in the early days was hovering at 81% and more recently has shifted to 60%. My point here is the value proposition for Etsy sellers and buyers is strong. Sellers are committed to the platform and buyers trust the platform as their go-to for unique, hand-crafted products.
#6 Product Deception
For a few months there, it felt like the Wall Street Journal was in the “Amazon marketplace tabloid” business. Between the headlines of unsafe, mislabeled products, counterfeits flooding the marketplace and Amazon selling clothes from a factory most other retailers have banned, I started to wonder if buyer trust would start to waver.
Amazon can weather those types of storms. Other marketplaces haven’t been as lucky.
Product integrity is crucial because it can make or break buyer trust and significantly impacts your ability to recruit and retain brands to your marketplace.
For decades, eBay has struggled with keeping brands active on its platform. In your search results, if a Nike shoe from Jimmy’s bedroom floor is placed next to Nike’s own beautifully photographed product images - it’s an issue. Even worse is the counterfeit inventory that leaks onto the site and creates bad buyer experiences.
Product vetting at scale is nearly impossible to master, but there are basics you have to ensure are met before you can ask your buyers to trust you have sourced the most reputable inventory on your marketplace, including:
The seller is who they say they are.
The product is authentic and non-expired.
The product is in the seller’s possession legally, and not stolen.
The product is priced appropriately and doesn’t violate any state or federal rules.
Most marketplaces skip the step of vetting products before they are listed on the website. Why? Because to get any scale, you can’t have manual processes so it’s easier to hope the sellers you’re working with are doing the right thing.
It’s not enough.
What's Next
Clearly I'm passionate about this topic. I see so many of the same mistakes being made again and again as companies kick off their marketplace initiatives. This isn't like any other "innovation" or new venture project your company has launched before. It takes real, strategic work, a commitment to structure your entire organization around the success and realizing this is not your rotisserie set it and forget it type of program.