Utter the word “marketplace” and it’s hard to ignore the Amazonian elephant in the room. It appears everyone has been avoiding its path and in the meantime, the focus has been on building and investing in stand-alone brands with vertical efficiencies from manufacturing through point of sales. But how viable is this investment strategy in the long term unless someone solves the noise problem? As new brands flood the market and compete with established brands marketing becomes more expensive, users are buried in a barrage of content and similar products, so how will brands manage to break through the noise?
Enter the vertical marketplace. An e-commerce platform that simplifies the customer’s shopping experience to a singular point of access to brands and collections while sourcing inventory vertically throughout an industry’s supply chain such that this marketplace becomes the shortest and most efficient path between any two levels in the chain from raw materials to the brands and from the brands’ stock rooms to the end consumer. The business model with a technology to power such a platform must unlock its own vertical efficiencies and dynamically handle discrepancies in pricing and profit margins in ways (i.e. normalized pricing, prioritization of higher margin inventories, etc.) that does not interfere with the simplified and enjoyable shopping experience offered to the consumer. Vertical marketplace opportunities are rare because they require a specific set of circumstances to be present. Here are some characteristics that make them so elusive yet so powerful:
Antiquated, Fragmented and Inefficient Industries Lead to Subpar User Experiences
The more antiquated, fragmented and inefficient the industry, the more likely the user experience is terrible. Either no one has managed to create a cohesive, improved experience or no one has bothered to do so. It requires not only an incredible amount of domain expertise to pinpoint the issues but also the creativity and broad technical insight to design tech-enabled solutions for these specific industries.
The fine jewelry industry is a great example of this. Its international market size is $264Bn annually, it’s so fragmented that the 10 largest players account for less than 12% of the overall market, and it is so inefficient that the entire industry operates on consignment which means the brands are burdened with the cost of the inventory while the product sits with the retailer and the brands don’t get paid until the product sells. It is not surprising then that this results in a poor customer experience—due to the costliness of the inventory, brands cannot sustain the financial burden of producing enough inventory to distribute evenly to retailers and thus, consumers don’t have convenient access to a broad selection of products or a comprehensive range of sizes. To solve the experience for consumers, we must first create a more efficient ecosystem for the vendors and that can only be done within a vertical marketplace.
Win-Win Business Models Create Network Effects
When marketplaces charge vendors to be on the platform they create an adverse selection problem. Weaker vendors with lower quality products tend to have a higher incentive to pay for more opportunities to move their stagnant inventory, this creates a decline in the overall quality of the product propositions sold in the marketplace, an increase in competitive pricing to attract customer purchases, and consequentially, reputable brands will not work with the marketplace because it damages their brand image and equity to be associated with a discount site – a perpetual downward spiral that will eat away at their own margins and handicapped growth beyond repair.
Alternatively, imagine a vertical marketplace that lowers cost barriers of entry, maintaining the margins of already successful products and instead encouraging scale with broader points of sale and efficiencies for vendors. It would have no problem attracting reputable brands or vendors, creating momentum for others to join. The challenge becomes keeping a balance between more product selection being available and tailored product curation to customer profiles to produce a convenient and quality shopping experience. By working with the top brands, customers’ loyalty to brands gets them in the “door”, convenience and selection keeps them coming back, lifetime value of customers is extended, customer acquisition cost decreases, margins remain healthy, the company can expand rapidly and fuel its own growth.
Vertical Marketplaces are Easy to Overlook
Vertical marketplaces are not obvious because they are not built on the back of a single piece of ground-breaking technology and most likely can’t be described in a pithy once-sentence elevator pitch. Rather, they are nuanced and often involve improvements to and applications of frontier technology (such as machine learning, RFID, VR, blockchain, etc.) adapted to solve unique problems in a specific industry. Thus, the industry problems are just essential to the business model as the tech that solves them. These vertical marketplace opportunities are the underdogs who go unnoticed because their business model and/or products aren’t suited to incubators or crowd-funding, their growth is deliberate and strategic, and their KPIs are not based on the number of users, page views, and bounce rates but rather on sales metrics and margins.
I believe we are about to see a new era of digital platforms ushered in by this breed of marketplace and here’s what they will have in common:
A founding team with deep domain expertise and multi-disciplinary skill sets;
Antiquated, fragmented, and inefficient industry;
Superior solution to a consumer or user experience problem;
Win-win business model that encourages network effects;
Branded vendors or service providers;
High margins resulting from the vertical efficiencies (as opposed to affiliate commissions typical of the first generation of marketplaces that we know now).
I believe vertical marketplaces will be the next behemoths—multi-disciplinary skillsets combining industry and tech expertise will allow them to create opportunities their competitors don’t see coming. They will build barriers to entry naturally through network effects and data, roll up market share horizontally and leverage that to swallow up the vertical supply chain, their margins will continue to increase, and it will all happen while everyone else is distracted by that lone elephant in the room.
Jean Z. Poh is the founder and CEO of Swoonery. She was recognized by Luxury Daily as one of Luxury Daily’s Luxury Women to Watch 2017. Jean will be a panelist on “How Ecommerce Sites Stand Out Against Online Marketplaces” at DTS on February 15th at 12:00.