The foundations of an online marketplace

In this story, I break down online marketplaces into simple foundational capabilities that technology managers can use to build, grow and monetize their own marketplaces or standalone foundational offerings.

The basic definition of an online marketplace is “a website that enables commerce between Providers (sellers) & Users (buyers) of products & services”. When I browse through my phone keeping that definition in mind, I see at least 15 marketplaces I regularly engage with, ranging from consumer goods marketplaces like Amazon & Instacart to service marketplaces like Uber & AirBnB and content marketplaces like YouTube & Spotify. In my latest role at the AWS Marketplace, I’m also learning about a much more complex marketplace for software offerings. Some of these marketplaces are served by secondary marketplaces as well. For example, the logistics marketplaces that serve the likes of Amazon, Instacart and Doordash to physically fulfill the buyer-seller transactions. While each of these marketplaces have multiple unique elements due to the varying customer needs they serve, my 7+ year journey at Amazon, building marketplace products alongside exceptional thought leaders and builders, has helped me identify the common “foundations” behind them. Since a marketplace enables Provider and User interaction, I classify these foundations into these two categories.

Provider Foundations

At Amazon, my initial focus was on building seller (physical goods and software) and service provider (logistics) facing products and I saw 5 concepts repeatedly come up when building for providers — Profile Management, Operating Workflows, Insights, Payments and Notifications. So, I will classify the provider foundations into these 5 concepts.

Profile Management (Interface, Database, Input Verification)

When associating with a marketplace, any provider’s journey starts with onboarding workflows to create their profile. This is likely the first thing any product team has to think of when building provider features for a marketplace, as a provider’s profile provides the baseline information all other foundations need to carry out their respective functions. Profile management typically includes a provider Interface (either website, app or APIs) to create and update the key attributes of their profile e.g. business name, bank account details, address etc. All these attributes need to be stored in a Database that can scale with the increase in number of providers as well as the number of attributes related to each provider. Another key part of profile management is Input Verification (often known as Background Checks or BGCs). The process & technology to verify attribute inputs is largely undifferentiated and most marketplaces find it useful to outsource this function through API integrations with BGC service providers, though some may choose to do this in-house for compliance or complexity reasons e.g. software marketplaces. Many modern marketplaces adopt hybrid validation strategies as well i.e. automatically verify basic information inhouse (e.g. ID validation against a government database) while outsourcing manual verification needs (e.g. real estate quality).

Operating Workflows (Offer Management, Database, Marketing Campaign Management, Order Fulfillment)

Operating workflows are used to carry out day-to-day business activities and are the hardest to standardize across marketplaces, since they need to vary based on use cases. The workflow for a ride hailing service driver to indicate their availability is vastly different from the workflow for an Amazon Stores seller to create a product listing. Despite the necessary variations, these workflows have 4 foundations. The first, Offer Management, is the act of creating/updating the attributes of a provider’s offering(s). Remember, this has nothing to do with creating the actual offering. This is the workflow for creating the profile of the offering on the marketplace. For example, a content creator would shoot and edit their video first to get it ready for upload to a content marketplace. While uploading, they would go through the offer creation workflow by adding attributes like video title, description, key words, price etc. Just like a profile management interface, an offer management interface enables providers to create and update attributes of their offering, which are then stored in the second foundation, a Database, and used by multiple other provider & user foundations. During or after offer creation, providers also need to engage in defining time bound marketing campaigns on their offers. These could be price drops, sponsored ads, bundled deals etc. The third foundation, Marketing Campaign Management, helps them do it. Once the offers are up on the marketplace and users can review them, we get into the checkout or transaction phase of buying, which is followed by order fulfillment. Fulfillment is the act of delivering on the order received by the provider. In a physical goods marketplace scenario, the workflow includes physical actions like item pick, pack and ship, while in a software marketplace scenario, the delivery (i.e. software installation in the customer’s chosen environment) can be fully automated. All physical actions, and some virtual actions, require guided workflows and automation for providers to offer a consistent user experience efficiently. For example, a food delivery marketplace driver would be less efficient if she was left to sort and route their deliveries themselves. Therefore, enabling the 4th foundation, guided Order Fulfillment, creates value for all parties involved in the transaction.

Insights (Performance, Financials, Marketing Campaign)

While operating workflows help run the day-to-day business for providers, insights can help them identify growth opportunities. Typically, providers benefit from 3 types of insights — performance related, financial and return on marketing spend. Performance Insights provided to a logistics service provider help them act on improving delivery timeliness and user satisfaction. Similarly, ride hailing service drivers use customer ratings of their service to attract more business and improve their service. Financial Insights include sales, profit, returns etc. trends and summaries to showcase business trends and anomalies. Marketing Campaign Insights tell them how their marketing spend is being used and what it is (or not) driving. While some sophisticated providers may be interested in raw data as well, majority of the providers rely on the marketplace to leverage their scale & technology to provide recommended actions along with insights to help them grow. Therefore, providing curated insights and personalized actions to providers can be a big differentiator for a marketplace.

Payments (Rate Cards, Fulfillment Tracking, Incentives, Disbursement)

For any provider, accuracy and speed of payment is critical to maintain healthy cash flow and hence a healthy business. Additionally, marketplaces can leverage payments to drive the right behavior with providers, in turn improving user experience. Payment accuracy at scale is achieved by building scalable Rate Cards which is a library of payment dimensions and the value of payment per dimension (e.g. $ 2 per shipment delivered by a logistics provider). Therefore, they form the foundation of what to pay to the provider. In case of sellers, rate cards are typically structured as product listing price minus marketplace listing fee. Most marketplaces require complex rate cards at scale, which build on basic dimension and value parameters to include tiers, incentives et al. But rate card doesn’t calculate ‘what to pay’ on its own. Fulfillment Tracking follows the transactions closely, with data feeds from operating workflows, to calculate the ‘quantum of offering’ as per the dimension(s) specified in the rate card and enabling the final calculation of ‘what to pay’. As Charlie Munger said, “Show me the incentives and I will show you the outcome”, most modern marketplaces leverage performance based incentives to drive desired outcomes through provider actions. For calculating incentives, Fulfillment Tracking also tracks the ‘quality of offering’ using performance insights to reward or penalize providers. In summary, these 3 foundations calculate the final payment by tracking the quantum & quality of offering, followed by using the rate card to generate the $ value of the payment. Once the $ value is ready, Disbursement sends the payment to the provider’s instrument of choice using the payment information from the profile management database. Disbursement complexity typically arises from taxation or other compliance mandates. However, marketplaces may choose to build more complex disbursement policies and systems in pursuit of arbitration gains when enabling payment exchange between users and providers. For example, a marketplace may choose to collect payment from the user after every transaction but pay the provider at a pre-defined frequency (weekly or monthly), thereby earning interest on the payment they temporarily hold and sharing the interest proceeds across the marketplace, user and provider.

Notifications (Listener, Events Library, Message Template, Mode of communication)

Most provider experiences include notifications about the status, progress, action items etc. For example, notifications on when an order comes through or when payment is disbursed. Notifications are a sum of 4 foundations — a listener service to keep track of relevant events along with associated data, a library of event IDs to index message templates and mode of communication, actual messages templates consisting of static and dynamic content and lastly the mode of communication (email, SMS, website etc.) with details like email address, phone number, app user ID etc. pulled from the profile management database. A notifications platform allows internal users to create new event IDs and define the triggers for those event IDs as well as messaging content corresponding to those event IDs. For example, when a new order is placed, providers typically receive a notification. In this case, a Notifications Listener observes the marketplace events. As soon as the order generation event happens, it uses the relevant information from the event like Order ID, provider ID, ID of the product/service ordered et al and triggers the event ID from the Event Library. The corresponding Message Template is populated with dynamic content like Order ID, product name etc. using the information the listener collected from the event and the message is triggered via a push notification, SMS, email etc.

So, these foundations drive the ideal provider experience on a marketplace. I often get asked about which of these provider foundations to build first when starting up a new marketplace product. The answer varies by business case. However, more often than not, Profile Management Database, Order Fulfillment, Disbursement and Notifications are my top 4 choices for the MVP. This MVP can guide providers to fulfill orders efficiently and pay them on time, while the other foundations are being created to enable scale.

Now, on to the second category of foundations…

User Foundations

The primary goal of the marketplace is to maximize the long-term value of “transactions” on it. Therefore, I’m using transactions as the basis for classifying User Foundations i.e. user experience before, during and after the transaction on the marketplace.

Profile Management and Notifications

Profile Management and Notifications are called upon across the buying experience, and are common across providers and users. So, I won’t repeat their descriptions.

Pre-Transaction (Aggregation, Marketing Associates, Discovery, Search, Ads)

A user’s pre-transaction journey could start from multiple places on the online marketplace — Home Page, Search Bar, Provider Storefront, Product Detail Page etc. and continue till the time they have made up their mind on what to buy. This process could last from 5 secs (e.g. hailing a cab) to months (e.g. enterprise software buying process). And the primary objective of the pre-transaction experience is to help the user quickly look for what they need and help them make a decision what to buy. Today, marketplaces also leverage this experience to “shape demand” i.e. nudge users towards a specific set of offerings.

Aggregation picks up and organizes relevant information from Provider Foundations like Profile Management Database (e.g. provider credentials), Offer Management Database (e.g. product or service details) and Marketing Campaign entries (e.g. search results ads and their keywords). Having this organized information saves the effort for every new user foundation to integrate with other foundations and serves this pre-computed information to user foundations with low latency. While aggregation gets most (if not all) information from other foundations described above, there is another foundation called Marketing Associates which serves content like blogs, videos etc. to users to aid the buying decision. Associates is a library of 1st and 3rd party content metadata (attributes, link, preface et al), tagged with keywords for use in various contexts e.g. as part of search results or on the homepage based on user profile. The key to scaling this library is to scale keyword tagging with automation and scale content builder networks with promotions and investments. Discovery presents all relevant information, ranging from product/services attributes like name, pricing etc. to content like articles & videos, to constitute the user experience. User experience teams leverage this information to build novel front-end experiences. The extent and type of information vended by Discovery varies by use case e.g. consumer marketplaces have a lot of more variety of product information to share with their users, whereas ride hailing discovery foundation focuses on fewer attributes (e.g. driver location, ratings, vehicle attributes and price). The next foundation, Search, simplifies discovery when there is too much to discover and choose from on a marketplace. Therefore, you don’t exactly search for rides on the Uber app but you do on the Amazon consumer marketplace. I would argue that a marketplace with any more than 20 offerings needs to have search. The larger the number of offerings on a marketplace, the bigger its need for advanced search capabilities. Better discovery & search foundations bring in more traffic to the pre-transaction workflows of a marketplace and thereby increase the probability of more transactions. Once this traffic breaches a threshold, the marketplace is presented with an opportunity to monetize the traffic by selling marketplace real estate for advertisements. This is where the Ads foundation comes in. Using the marketing campaign management foundation (described under provider foundations), providers give inputs for ‘what to advertise’ and ‘desired audience for ads’. The Ads foundation figures out where to put which ad based on customer profile, search inputs etc. and then uses other foundations to triggers ads in the form of sponsored search results, user notifications, home page banners etc.

These foundations enable the marketplace experience up to the point where the user decides to transact (hopefully, on the marketplace!).

Transaction (Ordering, Payment, Contact Center)

Having made the buy decision, users kick off the ordering workflow. Ordering has 2 responsibilities — first is to create a binding agreement between the user & provider and the second is to automatically trigger the downstream actions laid down in the agreement. If don’t remember seeing an agreement for something like hailing a cab, let me clarify the meaning of agreement in this context. In the case of a simple low value transaction like paying for a cab ride, the agreement terms are simple: Origin, Destination, Vehicle, Rider and Driver. Both parties agree on it and if there is a variation from the terms, either party has a right to not honor the agreement or seek help to rectify it e.g. refunds for poor service. So, an agreement is not always a detailed document, it is just the statement of facts for both parties like the details of the parties, what was ordered, at what price and on what additional terms. In case of B2B transactions, agreements can contain elaborate legal & compliance details as well. So, in order to create an agreement, ordering asks the user and provider to add in their terms to the standard agreements. Let’s take another example of this. When placing an order on the Amazon consumer website, a buyer enters (or selects) their address, delivery speed and payment instrument after reviewing the terms the service providers — seller and logistics provider — have already laid out. The combination of these terms constitutes an agreement. As an agreement is created, ordering triggers downstream actions i.e. the order fulfillment workflows for the provider(s) and notifications to all parties involved. The most critical part of a transaction is the payment and it may happen before, during or after the agreement creation. While the terms of payment i.e. timing, returns etc. are defined in the agreement, this user facing Payments foundation is responsible for executing the payment from the user’s chosen payment instrument to an intermediate payment instrument owned by the marketplace. The funds from this intermediate instrument are used for provider and marketplace payments. The payments foundation comprises of user interface for data entry (e.g. card number, expiry, CVV), KYC capabilities (input verification), integrations with banks to trigger funds transfers, payment processor integrations (e.g. Visa & Mastercard), financing integrations (e.g. Buy Now Pay Later financing), tax/compliance integrations (e.g. GST filing) and an internal database of these financial transactions. Ordering and Payments are often referred to as “Checkout” as well. The last foundation in this category is the Help Center. While help may be needed at any point in the user’s journey, I’ve classified it under Transactions as help is generally required with respect to a transaction. Also popularly offered as Contact Center as a Service (CCaaS), this foundation enables users to seek help via phone calls, live chat, email, support tickets, and text messages, while enabling a marketplace to optimally route queries, resolve queries (semi-)automatically and generate insights on obstacles in the user’s successful engagement with the marketplace. In summary, ordering, payments and help center enable users to successfully complete a transaction.

Post-Transaction (Work Tracking, Notifications, Upsell)

After the users have completed the transaction, their post-transaction experience is critical to retain them as customers and grow the marketplace. The key foundations that improve their experience are Work Tracking, Notifications and Upsell. Work Tracking includes tracking the delivery of product/service after the transaction is confirmed, tracking the usage of product/service by the user and providing insights to permitted parties about it. For example, a logistics marketplace tracks the progress of the delivery and notifies the user until the delivery is completed. Once the user has received the product, the marketplace enables the user to report quality of usage of the product through reviews. In another example, when an individual or enterprise subscribe to content on a marketplace like YouTube, the marketplace tracks the usage of that content with the user’s consent and also takes feedback from them (e.g. Thumbs Up/Down). This tracking may include number of users, number of minutes watched, key sections watched etc. This work tracking also enables payment calculation for pay-as-you-go products like SaaS offerings on software marketplaces (often called as Metering). With the customer’s consent and insights available through Work Tracking, marketplaces have an opportunity to upsell relevant products/services to the users. An Upsell foundation contains data on usage patterns from multiple users, which it can use to predict the future needs of it users and offer products to address the needs before the user thinks of it. A strong upsell product reduces the user’s effort to search for new needs again and maintains customer stickiness with a marketplace.

Conclusion

Today, while I see these marketplace businesses which are a sum of these foundations they have homegrown, I also see new businesses offering one or more of these foundations as standalone or bundled SaaS products e.g. Checkout Solutions (Ordering and Payments), Contact Center as a Service (CCaaS), Marketing Campaign Management, Ads Placement APIs, Notifications Service, Search as a Service, Product Listings Creation service for sellers etc. With these foundations available as plug-n-play APIs and widgets, setting up a new marketplace is easier and, arguably, cheaper than before. But it comes with interesting inhibitions around customer data security and long-term external dependence. Therefore, enterprises looking for such off-the-shelf offerings should build a holistic build v buy strategy for the long-term success of their customers.

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Interested in building MarketPlace as a Service (MPaaS) offerings? At AWS Marketplace, we are building all these foundations and more. DM me on LinkedIn to learn more.

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