Abstract

Platform-based digital marketplaces are the most efficient mechanism yet devised to match buyers and sellers, as demonstrated by the table below. Digital marketplace companies account for half of the world’s top 10 most valuable companies in 2022, and four out of five of the top five. None of them except Microsoft was in the top 10 in 2000 and since then it has pivoted to become a platform player.

Top 10 most valuable companies globally in 2000 by market cap* Market value all in billions Top 10 most valuable companies globally in 2022 by market cap** Market value in trillions then billions
1 General Motors $485.25 1. Saudi Aramco $2.392 tn
2 Microsoft $455.4 2. Apple $2.371 tn
3 Cisco $420.82 3. Microsoft $1.948 tn
4 Intel $383.75 4. Alphabet (Google) $1.499 tn
5 Exxon Mobil $265.98 5. Amazon $1.072 tn
6 Walmart $254.08 6. Tesla $760.43 bn
7 Royal Dutch Shell $203.48 7. Berkshire Hathaway $687.77 bn
8 IBM $199.64 8. Meta (Facebook) $539.6 bn
9 Citigroup $196.44 9. Johnson & Johnson $463.46 bn
10 Toyota $170.58 10. United Health $456.09 bn

This platform-based approach to doing business (as opposed to one-to-one customer/provider relationship of the traditional transaction model) is an apparently simple idea, but the mechanism is so flexible, it can support just about any kind of business and many different business models and variations of them.

It also enables small companies – such as the start-up online bookseller that Amazon once was – to extend their reach and potential market almost overnight, without big upfront costs. It is not necessary to make or own what you sell in a digital marketplace, as Tom Goodwin1 famously noted: “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate.”

The two major tenets of digital marketplaces are being easy to do business with – the platform must enable frictionless interactions and transactions – and economies of scale.

Naturally, adopting a platform-based model on which to run a next-generation digital marketplace is not an automatic guarantee of success – in fact there are many potential pitfalls. In particular, the network effect – that is, the impact that the number of users of a platform has on the value created for each user – can be an unprecedentedly powerful driver of growth, but it can also work in reverse if a digital marketplace owner starts to lose users.

This white paper looks at how to maximise return on investment (ROI) from digital platforms.

Introduction – the evolution of the model

Digital marketplaces support many different business models and have been adopted across a range of sectors.

E-commerce at its simplest

The original e-commerce model was for a company to offer its products and services – or resell them from a third party or parties – to customers online. This had a lot of advantages – it made it easier for customers to search for and buy what they wanted at any time that suited them, and they could serve themselves through automated payment mechanisms. This was more common in the business-to-consumer (B2C) market, rather than for business-to-business (B2B).

Marketplace 1.0

To extend their reach, many organizations trade through digital marketplaces as well as their own websites because the more sellers there are in a marketplace, the more potential customers it should attract, which makes it more attractive to more sellers and the circle keeps expanding. This is known as the network effect, a term coined by Professor Geoffrey G. Parker and his co-authors in the seminal work on platforms2. In Marketplace 1.0, the digital marketplace’s owner is the aggregator, enabling a community of providers and consumers to interact and transact quickly and efficiently because customers can find what they want from a number of suppliers, compare their offers and complete the deal using automated processes. As Professor Parker et al so clearly spell out – and the results outlined in the Abstract show – the successful platform owner that is by far the biggest winner.

Marketplace 1.0 can be a B2C or a B2B model as shown below, where the provider could also be the producer, and a customer could be another company, an individual or a non-commercial organization such as a government department or agency.

Marketplace 1.0 could also run on a B2B2X model (see below), whereby the platform owner delivers products or services from a business customer to that business’ own customers. An example might be a network provider delivering online gaming – or any other kind of content – as a services from a games firm or streaming service or a healthcare monitoring provider. However, the B2B2X model is more flexible and complex than that: For example, not all users are customers – people use Google to search billions of times a day, but Google’s customers are the advertisers. The ‘X’ could also be a public sector agency.

Section 1:

Marketplace 2.0 is how to get the greatest return on investment (ROI)

We are now moving into the era of the Market 2.0 digital model. This supports communities of buyers and sellers, plus offers the necessary tools, services and products to digitalize interactions for partners and customers. This is taking the maxim of being easy to do business with to the next level, and brings new opportunities to boost return on investment.

Whether a retail chain decides to have its own marketplace or sell via Amazon, say, or both via both channels, it must fulfil the order – combining the physical and digital – and pay the courier. From the end customers’ point of view there is no great differentiator, and differentiation is the name of the Marketplace 2.0 game.

For example, in Marketplace 2.0 model, if you’re selling wine via a digital marketplace, you could reach out to a cheese producer and:

offer to bundle its cheese with your wine to expand your portfolio; or deploy a digital marketplace for the cheese producer in the cloud, configured so that all sales bundle in your wine.

In both scenarios, it would be possible to run a forum where the producers could make recommendations about pairings of the products and subscribers/buyers could add their own comments, which boosts engagement and loyalty of buyers and sellers.

Bicycle sellers could partner with those who provide accessories, from clothing to cycle repair kits, as well as cycle insurance (against theft and accidents) as a kind of one-stop-shop cycling club with discounts for subscribers, say. The idea is – going back to the network effects we talked about in Section 1, that this attracts both more buyers and sellers, and the owner of the digital marketplace sells more of their own products as well as making a commission on those it sells on behalf of its partners.

Likewise, a bank that offers loans to customers to buy vehicles could also offer vehicle insurance, bundled with the loan, on its digital marketplace – or via selling marketplace-as-a-service on the cloud, to the insurance company, deployed and maintained by the bank where it configures the bank’s vehicle loans onto the marketplace as a default offering, to be bundled with the insurance packages of the insurance company. In both cases, this should increase the size of the addressable market, leveraging B2B2X models. In effect, the digital marketplace owner gains a new distribution channel with every new customer, potentially multiplying the customer base through every new partner added to the owner’s digital marketplace or a digital marketplace supported by that owner.

In summary

So, you can expand the owner’s marketplace and host many partners’ marketplaces simultaneously, and make money from them all. In the next section, we look at how to do it.

Section 2:

Making Marketplace 2.0 more profitable for you

Successful digital marketplaces are all about being easy to do business with and attracting the right buyers and sellers. The plan is to save the buyers time, effort and money, while expanding the sellers’ reach. The more buyers, sellers and users are active in a digital marketplace, the greater its gravitational pull: More participants join, generating more transactions and the owner of the digital marketplace makes more money.

However, if a digital marketplace doesn’t work well, customers start to leave and reverse network effects escalate rapidly – MySpace and Friends Reunited are runaway examples of how to destroy value. Here are some of the most important issues to take into account to make sure the network effect works in your favour to boost and speed up return on investment (ROI).

The right marketplace for your market

The main responsibility of the marketplace’s owner is to generate reach and supply traffic. The first step in developing the right marketplace for your market is to create a framework that encapsulates how you intend to appeal to both sides – buyers and sellers and maybe users, who aren’t necessarily either.

The business model canvas is a deceptively simple but useful tool, created by Alexander Osterwalder and Yves Pigneur. They wrote in their international best-selling book3, “A business model describes the rationale of how an organization creates, delivers, and captures value” which became the widely accepted definition of a business model.

The benefits of your marketplace need to be immediately apparent to visitors to your site or portal. Maybe you enable sellers to track stock, run sales analyses and prompt restocking and allow buyers to apply meaningful filters to their searches. This initial phase cannot be hurried but it can be as efficient and thorough as possible if you use the right tools, which can include consultancy from a company that lives and breathes digital marketplaces and has a proven track record. As we keep saying, avoid reinventing the wheel wherever you can.

Spotting the gaps

We typically think of B2C or B2B2C models when we think about digital marketplaces. According to a Forrester blog, “In the past few years, 82% of global B2C e-commerce growth came from marketplaces, and we expect similar trends to be replicated in B2B and B2B2C.

Established B2B procurement practices tend to be protracted and inefficient, plus the pandemic conflated two big trends:

  • Lockdowns greatly accelerated the pace of digitalization as the usual channels of interacting and transacting with customers were not available; and
  • Geopolitics were already causing disruptions to supply chains in some sectors but COVID-19 made things much worse and highlighted the dangers of relying on a single source for supplies.

Digital marketplaces make it easier and faster to find and compare suppliers – the big tricks to success are having a well curated supplier base (see above) and ensuring that the industrial scale of the business is matched by a sufficiently robust infrastructure and back office, with all the appropriate controls and compliances built in (see Cashing in on as-a-Service below).

Differentiation is the name of the ROI game

From looking at the FAANGS and other examples, it is clear that digital marketplaces can support many business models, which is one of their greatest attributes. When setting up a marketplace business, it is essential to have thought through the business objectives of the marketplace and which business model, including how to monetize the marketplace, will help you achieve those business objectives.

The question is, what will make you stand out from the crowd and appeal to buyers, sellers and other users? Rakuten is a fascinating example. Rakuten Mobile is the world’s first fully virtualized mobile network, built that way from scratch in Japan. The telecoms world has watched its progress with fascination but tends to forget that it was conceived as a way of expanding Rakuten Group’s ecosystem and stimulating greater usage of the constituent parts: It is an e-commerce giant (Ichiba), credit card provider (Card), an online bank (with more than 11 million customers in Japan alone) and a mobile wallet (Pay).

And this is just the tip of the iceberg in terms of fostering synergies between Rakuten Mobile and the rest of the group, which also has rights to broadcast sport, TV content and much more besides, with operations in 30 countries and regions.

*1 Ratio of Rakuten Mobile users who began using the respective Rakuten service(s) within 12 months of signing a Rakuten Mobile contract and who had not previously used the same service(s).

*2 Applicable subscribers: those who signed a contract between Jan 2021 and June 2021.

Monetizing fewer tangible assets

Organizations have immense amounts of knowledge and experience with them, which could be highly valuable to other firms in the same or even different sectors, and could be offered as a product or service. This is where the age-old boundaries between co-operation, collaboration and competition potentially blur. For example, Rakuten Group is also looking to leverage the experience and expertise garnered from and demonstrated by Rakuten Mobile through Rakuten Symphony which, among other things, hosts the world’s first app store for telcos - Symworld.

Symworld was announced in February 2022 and initially it is offering productized versions of applications developed by Rakuten, but the goal is to add them from third parties, starting shortly with Nokia. Rakuten Symphony is already working with DISH Networks which is building the first cloud native, 5G national network in the US and 1&1 Drillisch which is doing the same in Germany, as well as working closely with Telefónica, AT&T in the US and others.

Everything it develops and learns in the process will be productized where possible and funnelled back into the Symworld platform for resale to other telcos, with the option of consultancy and other services.

Start small, build in scalability

Starting small is a good idea, although ultimately to succeed as a digital marketplace business, possibly running multiple marketplaces for others, scalability must be inherent. With Marketplace 2.0, where you offer all the tools, services and products necessary to digitalize your partners and customers, the aim is to facilitate better and faster participation on your platform.

Scalability is all about repeating and replicating the steps and processes you have in place, avoiding reinventing the wheel and, wherever possible, leveraging what’s readily available on the market with a proven track record.

Cash-in on the as-a-Service model

The marketplace’s owner must be a true enabler for all participants in multi-faceted models, which means being a systems integrator and offering core assets – via an as-a-service model – to them all. If this looks too onerous or too expensive to set up, think again. There are ready-to-go toolkits on the market to get you started quickly and support you throughout without big upfront capital investment.

To get the best return on investment, check if they include the following elements:

  • On-the-go management that enables the marketplace’s owner to manage, monitor and customize the marketplace to meet changing needs. This is essential because customers’ needs, behaviour and preferences change over time.
  • Secure payments mechanism that complies with all the necessary regulations and can be integrated with the major payment gateways. Frictionless transactions are the oil that smooths the digital marketplace machine and keeps abandoned virtual shopping trolleys to a minimum.
  • Simple shipping open APIs to manage and run orders and shipping that works with third-party logistics firms or for services, that can be configured to accommodate bookings and trace vendors’ availability. Again, this is key to being easy to do business with.
  • Efficient taxonomy that enables users easily to tag products and services with their attributes so they can be housed under the right categories to maintain order but also to take advantage of multimode filter options, and being able to customize layouts and pagination to find things faster. You can’t sell what you can’t find easily and customers will rapidly move on.
  • Access management and user authentication, with the option of adding user authentication or single sign-ons through logins to other platforms (such as Google or Meta/Facebook) – this is all part of being easy to do business with because people hate having to deal with additional passwords, yet safety remains paramount. Trust is foundational to the success of digital marketplaces and its importance cannot be overstated.
  • Measure and track success through out-of-the-box integration with tools like Google Analytics, to accessing key data on the number of visitors to any digital marketplace run by you and for you or on behalf of customers, as well as insights into visitors’ behaviour, bounce rates and more. Pick a toolkit that enables you to customize the dashboard to suit your particular goals (and those of your customers and users) to produce key performance indicators for everything from sales volumes and transactions, to which products are selling well and which aren’t and so on.

Excellent integration is essential to all these attributes working smoothly to deliver smooth operations and good customer experience, which includes being able to scale as required. APIs are the key to efficient and effective integration.

Open APIs make partners (and customers) happy

Amazon’s founder was clearsighted in recognizing the importance of Open APIs to scalability. You can read the gist of Jeff Bezos’ epoch-making memo here from about 2002, in which he stipulated that without exception, and on pain of being fired, all teams would henceforth expose all data and functionality through what he called “service interfaces”.

Building infrastructure and services based on standardized APIs means integration can be automated, internally and with third parties, enabling self-service and self-care, while keeping costs down and making interactions as frictionless as possible for all participants. APIs also give organizations access to data from which to derive greater understanding of customers, both buyers and sellers, and ‘tweak’ or reinvent processes and models as necessary.

In Section 1, we mentioned the possibilities of extending ecosystems in banking to create and extend digital marketplaces. This two-part IDC webinar in partnership with Torry Harris Integration Solutions (THIS) shows how banks are commercializing open APIs to build banking ecosystems and monetize their immense amounts of data.

Creats Digital Ecosystems Faster

A painless and highly efficient way to deploy APIs is by using a ready-made API manager, such as DigitMarket™, which is designed to help companies manage secure APIs and thereby lower the barriers to creating, expanding and running digital marketplaces. Ovum (now OMDIA) described DigitMarket™ as “a single, comprehensive package providing enterprises with a ready set of tools to create and manage digital platforms and a secure channel to share and monetize data as they proceed through their digital transformation journeys.”

The analyst house’s On the radar report also said, “DigitMarket™ allows easy onboarding of partners and curation of content and can function as a marketplace for both physical and digital products (such as APIs) for the enterprise and its partners.

“DigitMarket™ is vertical agnostic (although vertical-specific templates are available) and can be white-labelled and configured to allow enterprises flexibility in how they market the platform.”

The report continues, “DigitMarket™ provides a viable solution for enterprises to quickly build and scale a digital platform to support their customers, at less cost and risk than building one from the ground up, while providing quick returns on investment.”