🏪 Pitfalls of Online Marketplaces

Looking at the two big headaches all e-commerce marketplaces have dealt with for the past couple of years

🛒 WTF is a Marketplace?

Now that I have done a 6-month internship in an e-commerce marketplace which sells refurbished electronic goods, I am taking the liberty of talking about this industry and I just wanted to debate on 2 major problems that I see in a marketplace industry.

Before that, what is actually a marketplace?

I see marketplaces like Dating Apps where you have sellers on one end who want to sell products but don't know where to find customers and there are customers on the other end of the spectrum who want to buy a particular product but don't know where to purchase it. So Marketplaces make both parties meet. It could be in the online world or even in the offline world. If it is done via a website, then the site is called an e-commerce marketplace.

One more thing I wanted to deep dive into was the monetization factor. So when a sale happens for 100$ on a marketplace, that is called GMV (Gross Merchandise/Merchant Value) which includes the value of goods sold by all the merchants and sellers on the platform. So GMV is NOT the actual revenue earned by a marketplace company. The company will charge commissions on that GMV (say 10%) and these commissions vary from product to product, SKU to SKU and sometimes even colour depending upon the demand.

Now that we have made clear what marketplace is, let's double click on the dark areas of the marketplace which I understood after interning there for 6 months and tricky for an outsider to comprehend.

🐣 Problem #1 - The Chick and Egg situation

We always had the question "Which came first: the chicken or the egg?"

Well, in a marketplace the hardest part is attracting both the customers and sellers to the platform. The customers won't use the platform if there aren't many products on the site and the sellers won't sell on the platform if there aren't many customers.

So it is basically a supply-demand situation, where sometimes you have customers DEMANDing a product, but there are no sellers to sell that and sometimes you have the sellers SUPPLYing the product but no customers to buy them.

I guess only a few marketplaces have tackled this situation well and Amazon is just a smart-ass company when it comes to marketplaces and they are trying to be a monopoly on this.

Shifting track a little bit, I wanted to shed light on how to predict demand that can help with this chicken & egg situation.

• Two types of algorithms work in the Marketplace Visibility-led and Search-led. Let me explain with examples - Amazon is search-led which means you can find products only if you search them. Whereas Myntra is visibility-led, which means they majorly concentrate on things like - “What’s hot”, “What’s new”, and “What’s Trending” giving the users to explore the products rather than to search.

• Marketplaces use their search bars as their genie to understand what customers are searching for and arrive at Nullsets - these are basically keywords where no results were displayed on the product page which helps marketplaces to identify their niche segment. They target this unmet demand using these nullset keywords based on the demographics, age, sex, etc of the customers.

So this chicken and egg problem is a major issue, especially for marketplaces like Uber, Zomato, Zepto, and Deliveroo which sell only targeted products/services.

👗 Problem #2 - The Return rate

Well, to establish what product return is - when a customer is unhappy or unsatisfied with the product, he/she can return the product for a full refund or replacement. Usually, most of the marketplaces have a 30-day return policy i.e. you can return the product within 30 days of the product being delivered provided it is not damaged.

And one of the major KPIs these marketplaces track is - The Return Rate. For instance, if they are selling 100 products in a month and 40 of them return at the end of the month, ideally their sales are only 60 that month and their return rate is 40.

While the Industry standard return rate average is 25-30%. But for fashion marketplaces, it is even higher. Myntra is at 35%-38%. This is because Indians wear an expensive dress probably for an occasion and return it in the 30-day withdrawal period.

Only The Souled Store has the lowest return rate of 6-8% cause they got the product and design correct. This was even openly said by the co-founder of The Souled Store Vedang Patel in Raj Shamani's Podcast

Courtesy: Statista

In fact, there are scamsters created out of this industry where these people are buying new original Adidas hoodies and returning fake hoodies.

Processing returns costs companies ~$165 million for every $1 billion of merchandise they sell

- National Retail Federation

This is really a dark pitfall of the e-commerce industry since you launch a product, make really good sales and in the next month 50% of them return. You assumed that you were strong on the balance sheet in month 1 but in month 2 when you refunded those 50% of products, that's when you realised you were burning money.

Btw found this meme on social media (lmao 🤣)

Well, few marketplaces have tackled these problems very effectively.

Amazon now charges $1 for returns made at a UPS store and when there is a closer Amazon Fresh, and Amazon Go users can return their products for free of cost. Incentivizing these in-store returns saves Amazon on costly shipping, but the new logistics strategy also aims to boost foot traffic and impulse purchases at their partner stores.

Reverse logistics is a lesser-known but swiftly expanding sector of the economy. Its growth is closely tied to the surge in online shopping that emerged during the pandemic. In 2022, venture capital firms invested almost $200 million in startups specializing in reverse logistics, marking an increase of over 2.5 times compared to the funding in 2021, as reported by Bloomberg. Apparently, Loop Returns, a reverse logistics firm secured $115 million in funding. The company offers software solutions to businesses aiming to streamline the customer-side return process.