The real purpose and value to running a marketplace is to have control over the entire process of payment process and charge a fee for each transaction that takes place.
The model works well because you generate a lot of value on your site. However, the downside is that because you obtain so much value, you need to provide great value for your users in the process. Otherwise, users will find a way to go around your payment system to avoid your fees. This is known as a platform leakage, and is a problem that many marketplace owners face.
Be sure to provide acceptable value in the transaction
How can you prevent this from happening? Because we are dealing with two-sided marketplaces, there are two parties involved in each transaction, the seller (the party that providing the product or service) and the client (the party receiving the product or service). You should take into consideration how you can provide value for both parties. The best strategy depends heavily on your specific concept. Is it a low value items or high value items? Does it involves the provision of services, selling of products or renting them out? Is the marketplace business-to-consumer (B2C), business-to-business (B2B) or consumer-to-consumer, (C2C)?
Today In this article, I will include the most common ways to provide better value for both parties in the transaction.
Security is a key value point
If your users are individuals, the best way to deliver value is to focus on confidence and security. People are timid to trust strangers. If I want to rent my boat or lawn mower to a stranger, I need to be sure they will not steal it, or damage it? This distrust creates lots of friction in Consumer-to-Consumer marketplaces. The marketplace itself can reduce friction by stand-in as a trusted intermediary.
If you have a rental marketplace, you can offer insurance. If a product is stolen or broken, you cover, but only if the payment was carried out by means of payment system of your marketplace. Just having a formal contract between the parties may be enough to provide a sense of security.
Another option is to use an Escrow account, What this means is that, the customer (buyer) deposits the payment to the marketplace prior to any products or services being exchanged. The funds are held safe until both parties are happy with the transaction.
If you are not renting the goods but rather selling them, then you do not need to be worried about items being damaged; you probably don’t care what happens to the goods after receiving your cash, but is still reassuring to sellers that the funds are secured prior to shipping the goods.
But there are other things that can cause problems for sellers, especially if they are shipping items. For example, the buyer can claim that they did not receive an item or that it was broken, and ask for a refund. Or they can simply file a dispute with their credit card company and get their money back. This can be a big problem for the seller. The marketplace can decide to reduce this risk by handling all dispute situations to protect sellers. If you do not want to take on the financial risk related to this, then you should leave it to your payment provider. PayPal, for example, offers a comprehensive seller protection program.
Feedback and ratings systems is another way of providing knowledge and assurance. Most popular marketplaces encourage the buyer and the seller to leave feedback after each successful transaction. Both the seller and buyer will have the incentive to behave well, since they know getting a bad rating could ruin their future chance of successful business.
Reputation systems have additional advantage for providers: it helps them to sell more. Research shows that sellers with good reputations are able to bill their client higher prices than sellers of same products with low ratings or no reviews.
Tools are the added value for service providers
If your marketplace service providers are experts who make their whole living (or at least a large part of it) by providing an expert service, you may need to provide value in additional ways. Transactions in these marketplaces—for roofers, web designers, and lawyers—are usually recurring in nature: after a client finds a provider they like, they will probably use the provider’s services another time.
What frequently happen is that the first transaction is done on the marketplace, but the following ones are handled through other channels. The reason why this happen is because the seller and the client have trusted one another after the first transaction was successful.
They do not get additional value from the safety offered by the marketplace. They might have exchanged their personal contact details, and no longer need to communicate on the marketplace. Since the seller can offer the client a cheaper price, one without the marketplace charges—this option turn out to be quite enticing.
Marketplaces can be relatively successful by concentrating on only capturing the first business deal between sellers and clients. However, there are tactics to capture preceding ones as well.
Reduce friction for customers
From the viewpoint of the customer, the main function of a marketplace is to make the transaction as smooth and easy as possible. There are many ways to do this: by removing steps from the transaction process, by removing the need for cash, and by increasing confidence, for example,
Paying for something is always difficult. Research shows that if the purchase is easier, people will buy more. People may give up on a transaction simply because the payment process is too tedious.
If there is an advance payment, the customer takes on the risk that the provider is a no-show or that they do not receive the product they ordered. Again, the marketplace can be of help by becoming a third party. An “escrow” service is a means of doing this: the marketplace collects the money and alerts the provider about it, but will not release the money to the provider or seller until they have completed the service or shipped the products.
If you decide not to use escrow, you have another option. You can preauthorize the client’s credit card without charging it, keep the preauthorization and charge the card when the money needs to be moved. This is always enough in most cases. But, the longer the hold period, the lower the chances of getting the money transfered successfully when you finally initiate it. This would leave the provider or seller in trouble.
Automation to help users run their business
One way to do this is to become a Software-as-a-Service tool for your suppliers. Your marketplace is no longer just about getting new users—you also help your sellers run their business by computerizing everyday tasks.
There are many ways to provide value. If your users need to provide their products or services at an exact time (maybe consultation, babysitter, or rental provider), you probably want to help them manage their availability with a scheduling feature. If the sellers are shipping goods, you can offer flexible shipping options and quick ways to manage their inventory. By providing adequate tools, you can be an important part of your provider’s business process, and your commission is a small price to pay for that level of service.
If you're not able to provide adequate value in the transaction process, there are some other ways that may deter people from going around your payment system. However, none of them are invulnerable, and a few of them can do more harm than good. You should therefore be use them with care.
They're best used as a complement to the strategies mentioned above. One method is to communicate to your users, let them know that commissions are what is keeping the website up and running, and if people bypass it, your website will go offline. Alternatively, instead of appealing to your users, you can take an additional harsh approach and remind users that people who bypass the system will be banned. However, this may not be the most effective way to build a sense of community.
You can decide to make it hard for people to exchange contact information before a transaction takes place using keyword filters. There are some big marketplaces that are currently using this approach. Some marketplaces ban or hide contact details (like phone numbers and email addresses) from private messages between its users. It is, however, always possible to by-pass this limitation—by writing a phone number with alphabets, for instance. They say they do this to protect their users, but it is quite obvious that the motive is to prevent users from circumventing their payment system.
You can, of course, decide not provide a messaging system at all. But in most cases, this will not work since the buyer needs to have a conversation with the seller before placing an order. Putting too much communication barricades in place will create friction on your website, annoy your users, and they might likely abandon your site.
Your providers should be your associates. You can consider playing hardball and imposing communication-related restrictions to make users behave well, but this method can easily backfire since it breaks your relationship that is based on mutual trust. A better approach might be to align your interest with your providers’ by offering them a stake in your business.