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Facebook’s entry into “Marketplaces” lacks critical elements

(Image credit: Image Credit: Katherine Welles / Shutterstock)

The internet is buzzing with news of Facebook’s new Marketplace initiative.  Kudos to Facebook for seeking out more ways to connect its 1.71 billion users and make It possible for them to buy and sell from each other.  That Facebook recognises the power of the Marketplace model is an excellent sign of progress, but what is worrying is that Facebook does not seem to know exactly what they are getting themselves into.

Marketplace background

Each day, e-commerce merchants strive to offer a new generation of empowered customers a broader array of product choice with high availability and competitive prices.  At the same time, they must protect margins and profitability. Meeting both of these goals is a challenge – adding more products traditionally means inventory and logistics overhead.  

Marketplaces are the logical solution to these e-commerce challenges.  A Marketplace brings together third-party sellers on a single platform, creating a central location for consumers to access a broad choice of buying options while the operator avoids overhead costs.  Marketplaces mirror the DNA of the internet – putting buyers and sellers in direct contact, creating value while reducing the number of intermediaries in the process.

Many e-commerce giants have already launched Marketplaces – Amazon, Walmart, Sears, and Fnac, amongst others.  For some of these large retailers, Marketplace activity already accounts for over 40 per cent of unit sales. For popular vertical pure-lay online Marketplaces such as Etsy (Arts & Crafts), Farfetch (Fashion), or Foodzie (Artisan Foods), 100 per cent of sales are via the Marketplace model.  The success of these Marketplaces shows that the Marketplace revolution is well underway.

What makes Marketplaces so attractive is the business model:  with a Marketplace, a merchant allows a third party partner to sell on its site and take a commission on the sale.  It is essentially a finder’s fee for matching a buyer with a seller.  Better yet, the Marketplace operator never pays for the inventory or overhead associated with the product, so the commission payment from the seller is virtually pure profit.  

The reason Marketplaces can be so disruptive is consumer acceptance.  According to a recent paper published by Forrester, “Retailers: Seize The Marketplace Opportunity,” consumers have become comfortable buying products on Marketplaces.

In fact, consumers are not just comfortable buying products on Marketplaces, they actually have a better shopping experience with Marketplaces due to the convenience, expanded product choice, and fair prices that the Marketplace model enables. 

Marketplaces require extensive assortment (and availability) and governance to ensure quality of transactions. Without such centralised governance, Marketplaces delve into anarchy and drive customers away quickly.  A Marketplace operator must ensure that Marketplace transactions conform to a certain set of rules and key performance indicators (KPIs).  Without this governance, buyers will not feel safe purchasing goods on the Marketplace and low-quality sellers will be allowed to conduct transactions, which will only hurt the overall customer experience.

The Facebook Marketplace

One thing Facebook will do extremely well is connect a huge amount of potential buyers with potential sellers. A large audience is key to being able to operate a successful Marketplace. The first tenet of a successful Marketplace is the ability to drive a large amount of quality site traffic, because a Marketplace will live and die by the traffic the site gets. The Marketplace must have enough visitors to make sellers visible to those consumers. The operator is responsible for generating this traffic through effective marketing.  This is the one area where Facebook is well-positioned: Facebook can truly deliver is in sheer number of users.  From a business perspective, Facebook would like to monetise those customers beyond just advertising received from sponsors.  The company wants a piece of the purchases that customers make as a result of something the saw or found on Facebook.  Strategically, a Marketplace makes great sense.

However, there are two main areas Facebooks Marketplace falls remarkably short:

1.     Extensive product mix and availability.  A Marketplace must present the right product mix to its buyers.  The Marketplace operator is responsible for the mix of products offered on the site. That decision will come back to the purpose of the Marketplace – broad Marketplaces like eBay may have very few restrictions on sellers while others will be much more selective.  Facebook does not seem to have a strategy on how to manage product mix.  At present, Facebook maintains absolutely zero control of what is offered on its marketplace, which could work given the Peer to Peer nature of the Marketplace for now. However, there isn’t curation of offers (the ability to choose which offers will appear and make them most relevant for the customer base) and the monetisation strategy is unclear at this time. Products may simply sit out there for sale forever, frustrating buyers who can’t find what they want, and sellers who can’t sell their items.  A lack of success right off the bat could hurt the Facebook brand and start the Marketplace out on the wrong foot.

2.     Robust governance. Perhaps most importantly, a Marketplace must provide an effective Legal and governance framework.  The operator must ensure that Marketplace transactions comply with any relevant regulations. The extent to which the operator imposes various levels of regulations will depend on the purpose of the Marketplace. For example, some B2B Marketplaces with an exchange of sensitive business information may be very highly regulated with specific rules that govern seller and buyer behavior.  At present, Facebook plans to offer no governance on its Marketplace, choosing to simply be a service that introduces someone with something to sell to a potential buyer.  When something goes wrong – as it is wont to do – neither the buyer nor the seller have the intermediary – Facebook – to help settle the dispute.  Over time, this will undoubtedly impact Facebook’s brand negatively.

Facebook is wise to think about how the Marketplace model could allow the company to further monetise its huge user base.  However, without the right business strategy and Marketplace technology platform, Facebooks risks creating a Marketplace that will underwhelm customers and tarnish the Facebook brand.  Amazon is successful because it governs the quality of its sellers aggressively.  The company is customer-obsessed, often to the chagrin of its sellers.  Customer experience is so important, however, that Amazon will often suspend sellers over a single complaint or issue.  Before Facebook launches its Marketplace, it will need to make sure that there is a strong framework in place to ensure a high quality of service.

Adrien Nussenbaum, Co-founder, Mirakl
Image Credit: Katherine Welles / Shutterstock