Edit No. 21: Why do third-party marketplaces work, and how are they inspiring long tail merchants?

I’ve been thinking about marketplaces a lot lately – specifically third-party marketplaces. But before explaining why, it’ll be helpful for me to define what they are exactly for readers that may not know.

Third-party marketplaces represent one type of relationship that brands and suppliers can have with retailers within the context of e-commerce sales. There are three different types of such relationships that can be observed in the market today. Definitions for each are noted below, courtesy of a helpful blog post by OneStone.

Defining the Three Key Relationships Between Suppliers and Retailers

1. First-Party (1P)

When a supplier is selling directly to a retailer such as Amazon or Walmart. The retailer takes ownership of the supplier’s product and stores it in their own warehouses. This has traditionally been the primary arrangement for brick-and-mortar retail. Customers will see that the item is sold and shipped directly by the retailer, as noted in this image.

2. Second-Party (2P)

When a seller relies on a distributor partnership to get their products shipped. A brand or supplier will sell their products to a distribution partner and the retailer then buys from that partner. Per this image, customers will see “sold by [brand], ships from Amazon” for example – this is because the supplier’s products are in Amazon warehouses and when an order comes in, the Amazon fulfillment centres ship out the product to complete the order.

3. Third-Party (3P)

Often referred to as the “marketplace” model. This is when a brand or supplier retains ownership of their product and uses a platform to market the inventory. The seller oversees their own fulfillment strategy. When the products are up on the marketplace, it will show the seller that they have complete ownership and control of the product. See this image for how the “ships from and sold by” denotes the same vendor.

Why Third-Party Marketplaces are Popular Among Suppliers, Retailers, and Consumers

Amazon really popularized and operationalized the third-party retail marketplace model by training consumers to want to visit one e-commerce destination for most of their shopping needs, while simultaneously making it easier for suppliers from all over the world to easily list their products on the Amazon marketplace.

Incumbent mass retailers such as Walmart have had no choice but to launch online third-party marketplaces of their own that feature products from a diverse mix of independent suppliers. They are doing this in a bid to maintain relevance in a post-Amazon world. Every major retailer wants customers visiting and shopping on their website. And to prevent online visitors from defecting to shop on competing e-commerce stores, the name of the game as a retailer now is maintaining your ability to lure customers in with as much choice and diversity in product selection as possible. Third-party marketplaces have made the retail holy grail of an “endless aisle” possible.

The economic value of third-party marketplaces can be demonstrated by recent retail sales figures. As reported by Marketing Dive, Shopify states that third-party marketplaces now account for half of the $5.9 trillion in global e-commerce sales volume, with the top 100 marketplaces raking in nearly $2 trillion in combined annual sales in 2020. Trade publication Retail TouchPoints also recently reported that the number of third-party marketplaces increased 81% year over year (YoY) in the fourth quarter of 2020, a figure more than double the already-impressive growth rate of international e-commerce.

These numbers aren’t particularly surprising. The broader the product selection that a retailer can offer, the higher the likelihood of customers checking out with larger online shopping carts, thus leading to increased sales. And incumbent retailers have an added incentive of pushing the third-party marketplace model – they can charge suppliers subscription fees for listing their products on the marketplace (as is the case with Amazon) or a referral fee for each sale that is made through the marketplace (as is the case with Walmart).

Retailers with endless aisles also score higher among customers with respect to experience. After all, third-party marketplaces aren’t simply about providing more choice and product selection. They feed directly into the notion of experience-driven shopping. For example, if you’re a retailer that is selling barbeques online, why not offer a seasonal pop-up for summer backyard essentials? These essentials can be stocked by third-party sellers offering complementary products outside of what’s already in your own warehouse.

Third-Party Marketplaces are Being Made Possible by Various Tech Startups

The popularity of third-party marketplaces has been a boon for technology startups that have been equipping retailers with the capabilities to activate this new sales channel. For example, French startup Mirakl recently closed a new Series E funding round of $555 million. Following this round, the company is now valued at $3.5 billion. As reported by TechCrunch, Mirakl helps you launch and manage a marketplace on your e-commerce website. Many customers also rely on Mirakl-powered marketplaces for B2B transactions. Some of Mirakl’s clients include Airbus Helicopters, Carrefour, Express, The Kroger Co, and Toyota Material Handling.

One of Mirakl’s earliest supporters, @BainCapVC @sfriend37 saw the future of eCommerce with us. Read his piece on why he has been a sustaining investor from day one. https://t.co/uUtsmnaxsN

— Mirakl (@Mirakl) October 15, 2021

I foresee Mirakl, and startups like it, continuing to equip incumbent mass retailers with all the necessary tools and capabilities to manage and scale third-party marketplaces effectively. What I’m more intrigued by today though are companies that are looking to bring these “big retail” third-party marketplace capabilities and sensibilities to smaller scale merchants. My excitement for this prospect is why I’ve been thinking about third-party marketplaces a lot lately. It’s high time that long tail merchants really tap into the possibilities around acting as affiliates and re-sellers for one another, particularly when they share a complementary customer base.

Reinterpreting Third-Party Marketplaces for Long Tail Merchants

The idea of long tail merchants launching their own third-party marketplaces and reselling goods on behalf of other brands and suppliers is not new. There continues to be a lot of innovation in this area in and around the Shopify ecosystem, courtesy of various technology partners building on top of the platform.

For example, there is a startup called Carro with its own app on the Shopify App Marketplace. Carro is a cross-store sales channel that enables Shopify merchants to sell more products and increase brand awareness by working together. Through Carro, you can supply your products to top-performing and premier direct-to-consumer Shopify brands, or sell their complementary products on your own store without any inventory costs or commitments. Carro also offer the ability to sell through influencers on Instagram who may wish to act as affiliates for certain brands.

Although apps such as Carro have been around for some time, I’m particularly enthusiastic about the launch of a new startup called Canal, which came out of stealth earlier this month and announced $4.5 million in seed funding. As reported by Morning Brew, Canal helps existing DTC storefronts to sell products from suppliers with a similar ethos. It’s not too dissimilar to Carro in spirit, but there are some nuances worth highlighting.

Canal’s value proposition lies within its “curated network” of high-quality brands. Some of the first supplier brands on Canal’s platform include Fellow, Hydrant, Birthdate Co., and Neuro. Haus, Dims, LesserEvil, and Clio will soon join the lineup. In terms of its business model, Canal doesn’t charge a monthly or upfront fee to host products. Instead, it takes a commission when it facilitates a transaction.

The reason I’m excited about Canal is because of their team’s focus on brand curation, and being strict about who they’re inviting to their platform. This is an important consideration as third-party marketplaces have exposed bigger retailers to challenges that smaller merchants have a lesser incentive to address or be subjected to. Some of the biggest controversies surrounding third-party marketplaces were recently highlighted in a segment on CBC’s Marketplace, per the video below.

As the video summarizes, many third-party marketplaces hosted by mass retailers have become a petri dish for fraud. This is largely due to few controls around which suppliers are able to join and list their products for sale. One of the biggest complaints among customers is that when they order products from these marketplaces, sometimes they never show up or are defected. And when they look to remedy the issue, it can be difficult to get in touch with the supplier. Going through the retailer who hosts the marketplace (such as Best Buy or Walmart) is a futile exercise considering these retailers are in no-way connected to the suppliers they host on their marketplaces. These risks must be addressed as the third-party marketplace model makes its way downstream to longer tail merchants, who do not have the resources or means to deal with them in the same way that an Amazon or Walmart can.

As alluded to by Canal’s Co-Founder and Chief Product Officer in the Morning Brew article, another point of consideration is the fact that long tail brands are afraid of losing control of the customer relationship, and losing control of their products and their brand identity. Consequently, Canal’s focus on featuring inventory from only high quality and vetted suppliers is a welcomed new standard for the industry. Long tail merchants simply don’t have the means to deal with the challenges faced by retailers such as Amazon and Walmart, who are operating extremely large third-party marketplaces with endless suppliers. Unlike an Amazon or Walmart – who compete largely on the basis of value, speed, and convenience – smaller brands and retailers simply cannot think about doing third-party marketplaces right without putting product curation front and centre.

Another reason why startups such as Canal and Carro are currently on my mind is because of the rising costs of acquiring customers for long tail brands and retailers – most acquire customers through popular social media platforms such as Facebook and Instagram. Furthermore, Apple’s recent modifications to iOS – which centre around giving users more control over privacy and the ads they see – runs the risk of putting a bigger black box around a long tail merchants’ direct digital marketing efforts. These emerging realities could see smaller brands and retailers coming together more frequently to resell through one another with the help of platforms such as Canal and Carro — especially if these merchants share complementary customer audiences. The idea of everyone piggybacking off everyone else’s digital marketing efforts – for the greater good of all – conceptually makes a lot of sense. I believe this trend is just getting started.

Any Tips?

As always, if after having read this week’s post you have any additional thoughts or ideas, I’d love to hear from you. I’m particularly interested in talking to startups that are building marketplace capabilities for long tail merchants – introductions are always welcome!

💰 Funding

See below for a list of digital commerce startups that announced a funding round during the month of October.

• Bolt Financial | E-commerce checkout | $389M | Multiple leads
• Pattern | E-commerce accelerator | $225M | Growth Lane
• Fabric | On-demand fulfillment | $200M Series C | Temasek
• Dexterity | Logistics robotics | $140M Series B | Multiple leads
• GRIN | Influencer marketing | $110M Series B | Lone Pine Capital
• Huboo | Warehouse services | £60M Series B | Mubadala Capital
• Italic | Luxury goods retailer | $37M | Canaan Partners
• Favo | Social commerce platform | $26.5M Series A | Tiger Global
• Rose Rocket | Transportation management | $25M Series A | Multiple leads
• Ohi | Instant commerce | $19M Series A | Palm Drive Capital
• Builder.io | Headless commerce | $14M Series A | Multiple leads
• Crossing Minds | Recommendations | $10M Series A | Radical Ventures
• Violet | E-commerce API | $10M Series A | Klarna
• Toolio | Inventory planning | $8M Series A | Jump Capital
• TrusTrace | Product traceability | $6M | Multiple leads