Ryan Lee, founder and CEO of Nautical Commerce, an on-demand multi-vendor marketplace platform.
Understanding the distinction between multi-vendor and single-vendor e-commerce platforms is essential. When marketplace operators minimize their differences, they make decisions that set their marketplace up for a future of technological hardship, trouble scaling and hidden costs.
The difference all comes down to infrastructure. Single-vendor e-commerce platforms only focus on the commerce requirements of a marketplace, but fintech and logistics are equally important.
Multi-vendor marketplaces have high-maintenance fintech, logistics and e-commerce challenges that the right software can help overcome. Sure, traditional e-commerce involves some fintech and logistics, but their needs pale in comparison to multi-vendor marketplaces.
If a platform only focuses on commerce, you’ll quickly learn that you need to make significant investments to bridge the wide and onerous fintech and logistics gap.
The Three Main Components Of A Marketplace: Commerce, Fintech And Logistics
To build a marketplace that’s set up for success and efficiency, marketplace operators must look at the complete package. Keep this in mind: Marketplaces must operate at the intersection of commerce, fintech and logistics.
Marketplace Commerce Components
Commerce refers to the ability to purchase. It begins with enabling a vendor to put an item or service up for sale and ends with an order confirmation email to the buyer and a fulfillment notification to the seller.
Marketplaces require the following commerce functionality.
Multi-vendor checkout: Marketplaces need the ability to check out from multiple vendors simultaneously. Think Amazon. You can purchase a blender, golf pants and a laptop from different sellers and delivery times in one order.
Vendor portal for uploading products: Sellers will require a backend where they can manage their shop, upload products and update inventory. Single-vendor e-commerce only requires a single product management backend for the store owner.
Buying experience: The buying experience is all about browsing a voluminous product catalog intuitively, searching the catalog, easily adding items to the cart and checking out efficiently.
Marketplace Fintech Components
Fintech refers to the complex accounting and payment requirements involved in running a marketplace. Payins, payouts and reconciliation are key components of a successful marketplace and are far more involved than a single-vendor e-commerce site.
Marketplaces require the following fintech functionality.
Payment processing and returns: Like all e-commerce stores, marketplaces must process payments, support a variety of digital wallets and reverse transactions. Unlike single-vendor e-commerce stores, marketplaces have to process returns on behalf of hundreds or thousands of vendors, which increases complexity.
Vendor/seller payouts: Unlike single-vendor e-commerce, which only takes money in, marketplaces take money in and pay out to vendors. When multiple vendors are involved in a single transaction, the marketplace platforms must also slice and dice payouts accordingly when paying commissions.
Revenue Recognition: Adding on to the buyer money-in, seller payout equation, marketplaces have to calculate the operator’s revenue on products sold. Further complicating calculations, your cut may differ based on a vendor’s contract.
Regulatory compliance and tax: Traditional e-commerce businesses pay the taxes of their head office’s jurisdiction. One region, one set of rules. Marketplaces, however, can have sellers that cross state and country lines, which means they’re subject to the regional tax laws of their sellers. Marketplace platforms need the intelligence to divvy amounts due to multiple governmental bodies at the period’s end.
Marketplace Logistics Components
Logistics refers to the operations that occur after an item is purchased and until the product or service is delivered. In other words, execution.
Marketplaces require the following logistics functionality.
Warehouse inventory management: Marketplaces work with multiple sellers who all operate their warehouses. While single-vendor e-commerce solutions allow one vendor to sell from multiple warehouses, they are unable to handle the warehouse scale required by marketplaces. Each marketplace vendor could have multiple warehouses they are shipping from, leading to hundreds or thousands of shipping locations for the marketplace.
Order management: A buyer places an order, but what happens next is critical to the continued success of your marketplace. Once an order is placed, your marketplace platform must communicate that order to the vendor. From there, the order passes through a workflow.
• Order received: The vendor’s fulfillment center receives the order and begins packing it for delivery.
• Order ships: The order ships out to the buyer, and the vendor shares a tracking number with the marketplace.
• Delivery monitoring: Notifications are communicated as the tracked delivery journeys to the buyer.
Shipping integrations: In many cases, marketplace operators won’t be responsible for the physical act of shipping. Instead, shipping will fall on the seller. But that doesn’t completely release marketplaces of responsibility. Operators must still notify sellers of purchase details and provide a workflow for returns. You’ll likely also be responsible for communicating shipping details to buyers.
Returns: With a marketplace, returns involve more than reversing a transaction. You may be dealing with hundreds of return locations, and you’ll have to recalculate or reconcile seller payouts and your commissions accordingly. A single-vendor e-commerce system is not built for complex multi-vendor returns.
The Bolt-On Solution Problem
Most marketplace platforms require an underlying commerce system to operate, bolting onto an existing system. This means fintech and logistics are essentially nonexistent in the foundation of the marketplace.
Even once a marketplace is bandaged together in this way, it’s difficult to scale. The flawed foundation sets you up for constant tailoring, custom coding and patchwork processes that will guzzle human and financial resources.
The future of commerce is connected. As more and more companies realize the potential growth opportunities of becoming a marketplace, technologies become available to serve the specific needs of marketplace businesses. However, it is important to get the marketplace infrastructure right to set up your business for success. Marketplaces should operate at the intersection of commerce, fintech and logistics to avoid technological hardships and scalability issues down the road.