Digital marketplaces help democratize the digital world, enabling its benefits to reach all economic segments of society and not limit them to a few elite enterprises. The fact that digital marketplaces are some of the world’s biggest and most profitable companies illustrates just how efficient they are at matching buyers and sellers of products and services.
The benefits of small-, medium- and micro-sized businesses – generally referred to as SMEs –selling their products and services via digital marketplaces allows them to reach a larger market quickly and potentially at little cost. Interactions between buyers and sellers are automated and can take place at any time, from just about anywhere.
Well-run platforms protect all parties: for example, recommendation engines can help customers and sellers make informed choices. On eBay and Airbnb, for example, consumers/buyers are subject to feedback, and any SME could set up a platform this way, helping sellers decide if they want to engage with particular buyers.
Also, a fast and efficient, clearly spelled out and executed dispute-resolution process is critical to give all participants confidence.
Participating in or running a digital marketplace enables all of them to benefit from various types of network effects due to the flexible platform business model. Despite the diverse nature of their businesses, Airbnb, Alphabet (Google’s parent company), Amazon, Apple, Meta (formerly Facebook), Netflix, and Uber are all platform-based digital marketplaces.
At its simplest, network effect means that the more vendors and resellers join a platform, the more potential buyers it attracts because it offers more choices at competitive, comparable prices. The more customers buy, the more vendors join, creating an escalating, virtuous circle.
SMEs punch well above their weight because:
- They make up 99% of all firms in the US (and in the EU) and contribute 43.5% of the US’ GDP, employing vast numbers of people.
- They can help shape innovation as, for instance, they generally have less rigid processes and mindsets than their larger counterparts.
- Some governments regularly offer incentives, including favourable tax treatment and better access to loans, to help keep SMEs in business.
It is important to note that it’s not only these businesses themselves that benefit significantly from the democratization of digital, but the OECD found in its 2021 report 1 that digitalization of SMEs is fundamental to building inclusive and resilient economies and societies.
In recent years, two global seismic shocks have proved to be catalysts for the democratization of digital marketplaces: The global financial crisis of 2008-2009, which kick-started the so-called gig economy followed by the COVID-19 pandemic.
Introduction – SMEs and the impact of two global crises
There is no universal definition of SMEs except that they are usually defined as being within certain thresholds, such as turnover or number of employees. In addition, some countries set guidelines across industries to define what a small business is within different sectors. For the purposes of this white paper, the Organisation for Economic Cooperation and Development (OECD) definition, which classes micro firms as having one to nine staff, small companies have 10 to 49 employees, and medium-sized enterprises’ workforces have from 50 to 259 workers.
The boom in online labour platforms has been boosted by two global phenomena more than a decade apart. The first driver of the ‘gig’ economy was the worldwide financial crisis of 2007-2008 when many people found themselves unemployed or underemployed, and so sought work or extra work in their own time, using their own resources such as doing laundry or ironing at their own premises, catering, child minding, cleaning, gardening or dog walking.
The timely arrival of apps
The rapid growth of the gig economy was fuelled by the arrival of apps, which became mainstream after the launch of the iPhone in 2007 and Android in 2008. Apps linked those offering services directly with those seeking them via a platform-based digital marketplace, saving both parties time and effort, and giving both more protection (see Section 2) than simply employing a stranger from some sort of directory.
According to the OECD, this trend of individuals offering services via online digital labour platforms at the moment only accounts for a modest share of the overall labour market. However, it also found the share is rising fast. Global gig-economy transactions are forecast to grow by 17% a year to around $455 billion by 2023, according to a report from MasterCard.
These discrete tasks are in addition to more established work patterns of bigger undertakings and projects, or use of assets, from ride-hailing or someone letting out a room in their home or a property they own for short stays.
The second big driver of digital marketplaces for services was lockdowns during the ongoing COVID-19 pandemic. They accelerated digitalization at a previously unimaginable rate. SMEs, along with their larger counterparts, had to digitize their interactions with customers, and fast, when the usual way of serving them, in-person, was not possible, nor was staffing up overnight to handle increased volumes of phone calls.
As research reported in the Journal of Open Innovation, published in 2022, puts it, “The COVID-19 pandemic is not only a medical emergency but also a business emergency that has created the need for organizations to be resilient and versatile in managing the impact of the pandemic on their business operations. At this time, small- and medium-sized enterprises (SMEs) are the most vulnerable to the economic disaster caused by the recent crisis because these companies do not have the necessary resources to absorb losses.”
The research reviewed the impact of digital technologies on SMEs’ resilience during the pandemic, surveying 96 companies in six developing countries. The study found that digital technology has helped SMEs to survive the pandemic and to become more robust, ensuring their survival.
So while SMEs might, in some respects, be more vulnerable than their larger counterparts, they are also often more agile and adaptable. Many were wise enough to understand that the way to succeed was not to try and reinvent the wheel in the middle of a global catastrophe but to adopt proven, readily available, affordable technology that starts to pay for itself almost immediately. In other words, join or create a platform using ready-made, proven tech with support, security, and protection wrapped around it.
We look at some success stories in Section 1 before going onto the ten most important dos and don’ts in Section 2.
Section 1 – Achieving success at speed and scale
Digitalization suddenly went from something SMEs planned to do eventually to being a survival. It became a route to future prosperity because most of those who shifted to digital interactions or increased their use of them have and will maintain those habits as the pandemic subsides.
There is another lasting knock-on effect from the lockdowns. People now prefer to work from home (WFH), although employers’ support for this varies. The boundaries between work and private time are more blurred, and more people – especially parents – feel they are suffering more acutely from time poverty. Those who can afford it are open to paying for help – a mirror image of those seeking to supplement or replace income in the gig economy.
Letting the HomeJini out of the lamp
Online marketplace HomeJini (launched in 2015), preceded the pandemic but anticipated the rising trend and the rapid rate of digitalization in terms of easier access to the internet and greater availability of smartphones helped by the Government Digital India push. According to Future Market Insights (FMI), this has led to people becoming relaxed and confident with the digital world, for example communicating through social media and embracing the digital revolution in general. This is reflected in the fact that India is now one of the most appealing markets for vendors of Gigabit Wi-Fi devices.
HomeJini was set up to link trusted, semi-skilled people as well as professionals to those needing their services via a mobile app. There is a vast array of services on offer, from social event planning to cooks, fitness training and hairdressing at home, architects, construction, interior design, decorating, drivers, security guards, gardening, and much more.
The award-winning platform (UK Digital Experience Awards 2019) uses DigitMarket™ to combine API management and onboarding new partners. Participants can use it to buy, sell or rent within neighbourhood communities.
Results between December 2018 and March 2019
An important element of HomeJini‘s success was building the business on Torry Harris Integration Solutions’ (THIS’) DigitMarket™ digital marketplace. The marketplace solution can be deployed by platform owners in just about any sector using various models, including business-to-business (B2B) and business-to-consumer (B2C) or any combination of the two (B2B2X).
Using tried and tested technology with expert support is a no-brainer for SMEs who generally lack IT resources in terms of expertise, staff, and budget. Speed and knowing that the platform has been tried and tested are very important because they can radically shorten the time from concept to cash for all parties offering a service or product.
In Section 2, we look at the top six tips for SMEs launching or joining a digital marketplace.
Section 2 – Top six tips for SMEs operating in digital marketplaces
Experiment before taking the plunge
As the OECD observes, “Online platforms are very heterogeneous in their functionalities, structures and in the services they offer,” which is why it could be a good idea for SMEs to join a digital marketplace or marketplaces as a vendor for a short time to find out what works, what doesn’t if they intend to set up their own digital marketplace.
This is a great way to find out firsthand what they would like to add or remove in the way the platform/offer from the platform owner is set up.
- Are some terms and conditions too onerous?
- Is the platform too hard to use?
- How fast is the payment?
- What do your customers think, and how many new customers have you attracted?
- How and how much has it contributed to your top line/bottom line/reputation?
- What have you learned from customers’ feedback?
- Are your sales what you expected, or are you selling more of certain things now the platform has expanded the addressable customer base?
Try ordering your own products and services – regularly – to really understand your customers’ experience.
It's also a good way to expand and build a brand before opening its own digital marketplace.
DIY: ROI and ‘defensibility’
Being a platform-business owner is more profitable than participating in someone else’s digital marketplace, as the owner gets a cut of every transaction that takes place. Hence SMEs should think about adopting a Market-place 2.0 to improve their return on investment, and this also bolsters ‘defensibility’ – increasing customer loyalty by offering ‘more than one thing.
For example, as the cost-of-living crisis grips much of the world, consumers’ attention naturally turns to discretionary spending and what they can cut. Some pundits have suggested that they are more likely to cut spending on Netflix because it ‘only does one thing’ – offering streaming video content. On the other hand, Amazon Prime subscriptions bring a whole clutch of benefits, from free, fast deliveries from groceries to furniture and more – and streaming content. In fact, Netflix is already building up its gaming business, announcing it would partner with Ubisoft to bolster its own fledging gaming division in September 2022.
Leveraging the advantages of network effects
As mentioned in the abstract, one of the biggest draws of the platform-based digital marketplace business model for SMEs is the ability to increase their addressable market quickly and potentially at less cost than any other method. Although, simply participating in or creating a digital marketplace isn’t a guarantee of achieving network effects, though. A critical element to grasp the full importance of getting onboarding right, is explained in detail here. If you get it wrong, no amount of retro-fixing will ever make it truly right.
Security is paramount
How good is your platform’s security? That means securing payments on both sides and protecting customers’ details and those of all the vendors and resellers that participate in the digital marketplace. It also means the platform provider must comply with the local and regional data privacy regulations and legislation – this on its own is a good reason to opt for a tried and tested platform from a reputable provider that will automatically take care of these issues, assuming it’s set up properly.
Feeling safe is essential
Beyond the obvious security measures outlined above, people and companies that offer services and the people and companies that buy them, need to be safe – and feel safe. That means:
- Knowing that their personnel will be treated properly and paid promptly from the SMEs’ side and from the customers’ side
- Having confidence that they will get what they are paying for, on time, to the required standard.
This means a proactive approach and good governance by the platform owner, whether that’s the SME or the digital marketplace the SME belongs to.
Although recommendation engines can be powerful guides, they need constant, thorough oversight to prevent abuse and bias. Also, in an era when everyone is asked to leave a review of everything, customers increasingly can’t be bothered. This is why Netflix gave up requesting reviews and asks for a thumbs up or down instead.
Working out ways to address complaints from customers or vendors is critical. For example, a big issue among Airbnb’s hosts was their properties being used for parties – which resulted in damage and didn’t go down well with their neighbours either. Airbnb understood this could damage its reputation and business. During the pandemic, the company introduced a ban on parties and events at its hosts’ properties which was successful – it cut violations by 44% – so it was made into a permanent, official policy in June 2022. In August, Airbnb went further, announcing it would rollout ‘anti-party technology’ across the US and Canada.
Problems won’t sort themselves out; it behoves the platform users and owners to act and avoid negative net effects.
Pay attention to changes in the market
We saw in Section 1 that part of HomeJini’s success was from riding the digitalisation wave in India, so being tuned to wider market forces will always be fundamental to the success of SMEs leveraging digital marketplaces – and things change all the time.
Interestingly, Airbnb’s actions, which started during the pandemic, are proving unpopular with some guests. More rigorous cleaning regimes and guests being asked to help with anti-COVID-19 measures, such as doing laundry, are wearing thin with some guests who are returning to hotels. They are finding the cleaning fees that are, in addition to the rent, too high and the list of chores they must do to secure a good review too long.
Also, as long as the ready-made platform they have built their digital marketplace on, is sufficiently flexible, SMEs can pivot as new trends arise – and even become market disruptors. Not so long ago, it seemed like the social media market was sewn up by a handful of platforms, then TikTok and its short-form video format came along, passing the billion mark for subscribers in September 2021. And one of the big reasons for its on-going success is that it constantly introduces new trends that keep users interested in creating new content.
The potential benefits of digital marketplaces for SMEs can be huge because they have the potential to bring these advantages, some of which were previously not possible before, while others were only available to much larger businesses:
- They are open to the low and highly skilled alike
- An online platform quickly raises its reach at a very low cost
- Depending on the nature of an SME’s business, it can scale rapidly
- It is easy and quick for those requiring products or services to find someone who can deliver them
- Recommendations – overseen properly – give people confidence in who they are employing and for whom they are working
- It provides workers with a bigger ‘shop window’ for little outlay than they could possibly achieve any other way
- The platform should provide quick, secure payments for the work done – delayed payment causing poor cash flow is what puts many SMEs out of business
- Security and making all parties feel safe can be addressed centrally
- There are proven toolkits that disguise their sophistication with easy-to-use features and enable SMEs to launch their own digital marketplaces with the flexibility to adopt new business models as they evolve.