Are you planning a new marketplace business? Or maybe you’ve just joined the team creating one? You have to know that marketplaces have their own “secret language”. Today, we will decode it for you.
We all know globally recognized marketplaces, such as Amazon, eBay, Zalando, and Airbnb. Marketplaces are websites or applications that allow customers (both professionals and individuals) to easily buy goods or services at competitive prices from various vendors. These platforms have constantly been evolving to meet customer preferences, build trust, and offer top-notch UX. Before we explain all the relevant terms related to marketplaces, let’s take a look at what influences their development.
What influences the development of marketplaces
Sellers appreciate marketplaces mainly due to the possibility of reaching a vast group of customers in one place. Brands also notice a significant increase in demand for products and sales thanks to the presence on such platforms. On the other hand, consumers appreciate access to a broad, diverse offer in one place, as well as quick order fulfillment and delivery.
Now, let’s take a closer look at 20 popular terms that you have to understand before you start selling on a marketplace.
Terms related to marketplaces
- Average Order Value (AOV)
Average Order Value is the average amount customers spend each time they place an order with a specific vendor. To calculate it, divide the seller’s total revenue by the number of all completed transactions. By knowing the AOV, sellers can better understand how customers buy from their stores and calculate shipping and promotional costs.
- B2B, B2C, C2C
When we talk about the marketplace, we often use the terms business-to-business (B2B), business-to-customer (B2C), and consumer-to-consumer (C2C) to describe the type of the market and to identify who buys and who in a given relationship sells on the given platform. The goals of sellers and consumers will be different depending on the sector of activity chosen, so suppliers should adapt their marketing strategies accordingly. For example, B2C is a model in which the company trades with individuals. In this case, the seller will offer products that are intended for strictly personal and individual use. On the other hand, B2B defines suppliers who target their offer to other companies. B2B, in most cases, is aimed at more demanding customers who are looking for a long-lasting partnership relationship with their supplier. In the C2C model, both sellers and buyers are individuals. An example of such a marketplace is Etsy or Airbnb.
- Buyer/Seller Overlap
The marketplace brings together various sellers and buyers in one place. Buyer/seller overlap is an indicator that describes the number of consumers who are suppliers in a given marketplace. That is an essential metric for platform owners as a high buyer/seller overlap ratio reduces the Customer Acquisition Cost (CAC). Therefore, the high overlap is beneficial to the markets, as each new user acquired is a new buyer and seller for the platform.
The commission or a take rate is the remuneration for commercial brokers. In the case of a marketplace, sellers pay commissions to settle accounts with the platform’s operator. The commission is calculated based on a predetermined percentage of sales made via the platform and may vary between categories of sold offers.
This term describes the process by which the offers of individual sellers in a particular marketplace become almost indistinguishable from the same products or services offered by competing suppliers. Commodity offers within separate categories are very similar to each other. This action aims to build a competitive moat by the marketplace operator. If sellers are similar and offer a unified experience, there is less benefit in bypassing the marketplace to conclude the transaction.
Concentration is the opposite of fragmentation. The revenue of a highly concentrated marketplace usually comes from a limited, narrow number of sellers or buyers. For the platform itself, this means that the loss of even one user can cause significant drops in revenue, see also Commoditization.
Disintermediation (or leakage) is when marketplace participants find an interesting offer and finalize the transaction outside the platform. For example, a consumer may search the internet for the seller’s phone number and order the chosen product offline.
- Feedback extortion
That is an undesirable situation characterized by buyers making specific demands or threats of negative feedback to sellers to obtain some benefit. For example, they can give a positive review conditional on reducing the product’s purchase price. Ratings and opinions are significant for sellers, which is why it happens that customers use this type of unfair practice. The vast majority of the marketplace is combating this occurrence by prohibiting opinion enforcement and appropriate verification measures.
The marketplace is fragmented when many vendors and consumers are trading on a given platform. Such a marketplace is characterized by the fact that there is no single company on it that could significantly impact the platform. Instead, it consists of many competing small, medium, and large enterprises and a large number of buyers with different amounts of spending.
- Global/local marketplace
A marketplace may be local, limited to a specific geographic area, or global, i.e., international. An example of a local market is a domestic market where sellers and suppliers come from the same country. Acquiring and interpreting data on local marketing trends is easier and faster, so it is worth taking your first steps on platforms with a limited geographical range, but local markets are not as large as the international market, so most companies aim globally. However, selling in the international arena requires more time and effort, let alone high risk.
- Gross merchandise value (GMV)
Gross merchandise value (GMV), also known as gross merchandise volume, is the total value of sales a company makes over a specified period, measured monthly, quarterly, or annually. Notably, the GMV is calculated before any advertising or marketing expenses are deducted. Gross merchandise value, by itself, can be a practical value to use as a rough estimate of a company’s earnings and also as a metric or rough predictor of growth.
This term describes the likelihood that the seller will be able to find a buyer, and the buyer will be able to find a product they are looking for. Liquidity can be divided into two aspects:
– Buyer liquidity (a percentage value showing how many product searches end up in a purchase)
– Seller liquidity (percentage of items sold in a particular period)
You could say that a marketplace is just an online supermarket. It is a platform where numerous products from various manufacturers and vendors are available. Entrepreneurs can place their products in such marketplaces by paying the owners a fixed subscription or using the commission model. On the other hand, consumers can purchase different brands in one place without checking individual offers on manufacturers’ websites.
This term describes the algorithm or a process by which customers and sellers find each other on the platform. Customization is a factor that has a very significant impact on the user experience of the marketplace. Quick, accurate, and personalized matching significantly improves the consumer experience. For the seller, it means constant learning and adjusting to the ever-changing algorithm to get their offer to the top positions and in front of as many customers as possible. Sometimes, a marketplace is pay-to-play, and merchants will not be successful without investing in paid promotional mechanisms.
- Net Promoter Score (NPS)
Net Promoter Score (NPS) is an effective measurement tool for estimating customer satisfaction. It is based on one question: “Would you recommend our brand to your friends and family?” The answers obtained allow you to assess the brand’s fame, loyalty, and effectiveness of the actions of marketing teams aimed at customer satisfaction. The answer to the question is measured on a scale from 0 (completely unlikely) to 10 (entirely probable). This customer satisfaction index puts buyers into three categories:
– Promoters = respondents giving a rating of 9 or 10
– Neutral = respondents with a rating of 7 or 8
– Critics = respondents giving a grade between 0 and 6
The formula for calculating the Net Promoter Score is as follows:
NPS = Percentage of Promoters (scores 9 and 10) – percentage of critics (scores from 0 to 6)
For example, if the critic percentage is 47% and the promoter percentage is 73%, your NPS is 26 (73-47).
- Network Effects
It’s a term describing an occurrence in which the marketplace’s value grows along with the user base. In other words – the more customers you have, the more usable your marketplace becomes.
- Payment gateway
A payment gateway, also known as a payment service provider, enables consumers to make money payments on a sales platform. This software protects customer data by encrypting stored confidential information. This process ensures the secure transmission of private personal data between the customer and the seller. The most popular payment service providers include PayPal, Dotpay, TPay, and Stripe.
- Buy now, pay later
BNPL is a type of credit that a merchant offers. It allows the consumer to pay in installments for a more costly one-time purchase. Many marketplaces offer BNPL to their users. All users have to do is select a specific payment option and pay for the product later, usually in three or four interest-free installments.
It is a method of settling accounts with the owner of the marketplace for the presence on the platform. In return for a fixed flat fee, merchants can use the marketplace and sell their products through it. Typical for B2B marketplaces.
- Transaction flow
A transaction is the transfer of value between a customer and a seller and can involve money or the exchange of goods. Even if the supplier offers their products or services for free, it still is a transaction. Transaction flow, in turn, determines how this exchange takes place after prior matching of individual users on the marketplace. Before a transaction on the platform is carried out, several factors are worth paying attention to as they can make it difficult or even impossible to complete the entire process. Such factors include the transaction flow that is most likely to be problematic if the marketplace records multiple visits but does not record the associated increase in sales.
It’s easy to start selling on the marketplace. New sellers have numerous analytical tools at their disposal on most platforms, including sales tools, price monitoring tools, and competition reports. Very often, these websites also provide extensive educational materials. Yet, there is no doubt that the industry language in this market segment is specific and may seem difficult. However, thanks to our marketplace glossary, we hope that some of the relevant phrases are no longer a mystery to you.