The Backpack Blog

Building and Controlling Marketplaces: Harder than It Seems

Originally posted in .



Building a marketplace relates to tapping into an untapped market where there is a need unfulfilled (demand side) and some part of the market fills that need (supply side). Marketplace interaction from both demand and supply side is interesting as to determining why and how demand and supply side of market forces interact. This article will examine the nature of marketplaces, especially online and mobile based marketplaces and outline the critical features of marketplaces.

Marketplace as We See It:
A typical marketplace has two sides: buyers and sellers. Both buyers and sellers interact at a marketplace only when each party finds incentives in the forms of profit, product, service, or other needs. Therefore, market makers need to "wire up" both buyers and suppliers of the market, serving each side's specific interest. For instance, Amazon and eBay did an amazing job at creating online marketplaces where both supplier and consumer sides of market interact and do business. Amazon and eBay fulfill an important job here by providing both sides of the marketplace the right information in right time: letting buyers find what they want to buy and enabling sellers to sell what they want to sell.
Since the focus of this article centers on online marketplace, let's look at some examples of efficient online marketplaces and how they brought two sides of the market together.

Amazon: Amazon created this online marketplace where buyers can choose products from numerous sellers from all regions and continents across whole spectrum of price ranges. This marketplace provides buyers an enormous leverage to decide which product to buy and at what price and from where. It empowered buyers by enabling them to make intelligent and informed decisions based on a set of information and tools, covering a whole set of relevant variables of the market. On the other hand, it enabled sellers to market their products to millions of customers online, surpassing the extent of reach of physical retail place by insurmountable margin.
Another very interesting example of marketplace will be Uber.

Uber: Uber is a service that's reshaping the transportation marketplace by providing point-to-point private transportation through the use of mobile smartphones on the both side of market. Uber has done an impressive job here. The company built a market place on top of smartphone platform. Smartphone platform is an interesting platform in the following ways:
1) Smartphones are becoming more and more ubiquitous. Ubiquity of smartphones connects both buyers and sellers in a marketplace at the same time within same platform like it happened for Uber. Building marketplace on top of smartphone platform is the easiest, fastest, and most cost-effective ways to connect both side of the markets.
2) As smartphone penetration is getting higher around the world, several marketplaces like Uber are going to be built on top of smartphone platform. Considering the ease and cost-effectiveness in terms of customer acquisition and retention, smartphone marketplace retains the top interest of market makers. As the following diagram suggests, the opportunity for market makers in smartphone realm is predicted to be huge in coming years.



What It Takes to Build a Marketplace
Market makers "wire up" both buyers and sellers based on incentives that benefit both party. It's a challenging task.
Moreover, to build an efficient marketplace, it is mandatory that every marketplace provides necessary decision making information to both buyers and sellers. Otherwise, the marketplace will not function efficiently, leaving the room for information distortion, thereby confusing both buyers and sellers. Ensuring that buyers have access to what they want and sellers can sell what they sell (at market-driven price) is harder than just creating a marketplace.

A Case Study of a New Marketplace: Backpack
In this context, an interesting case study can be Backpack, a new start-up in the town which connects shoppers and travelers and uses peer-to-peer network to deliver products. Examining the marketplace that Backpack created provides an interesting context:

First, like a typical marketplace, Backpack connects two sides of the market: shoppers and travelers. The incentives for the shoppers to come at Backpack's platform are to
1) Find and buy foreign products that are either not available or more expensive than buying it on Backpack platform.
2) Spend less money on shipping fee than that of regular shipping services (e.g. FedEx). The reason that Backpack claims it works because as part of Backpack's business model, travelers are not allowed to charge more money as shipping fee than that of global shipping services.

The incentive for travelers is simple: they can charge the shopper a shipping fee, which is a nice way to earn some money if they have spare suitcase space.

The major challenge that Backpack faces in the marketplace is that whether it is providing the right information and timely service to both sides of the market. For instance, if a kid in Uganda wants an Xbox within 7 days, can Backpack ensure finding him a Backpacker who will be visiting Uganda within 7 days? Like it's said in this article, controlling and sustaining a marketplace is harder than building it.

The more travelers join Backpack, the faster it will expand. On the shoppers side, the more unique and niche products (e.g. Nakhshikatha from Bangladesh) Backpack can market on its website, the more diverse choices that shoppers will have, thereby accelerating the process of creating an efficient marketplace.

Connecting both sides of the market and providing them right information characterize Backpack's market creation challenge. How far this company can ship android, iOS, and other smartphone services application also signifies its growth strategy to expand the existing marketplace. In this smartphone era, it's an interesting time for this innovative idea to take off.

We live in an exciting time when the virtual marketplaces are redefining the shopping experience. The vision of a new marketplace for start-ups like Backpack will bring new trends in global outflow of products. As marketplaces continue to change with the changes in technology and communications platforms, it's interesting to observe how businesses like Backpack adapt in this dynamic environment of marketplace interaction.