Strategies to optimize return on investment (RoI), in a next-gen digital marketplace

Abstract

Platform-based digital marketplaces are the most efficient mechanism yet devised to match buyers and sellers, as demonstrated by the table below. Digital marketplace companies account for half of the world’s top 10 most valuable companies in 2022, and four out of five of the top five. None of them except Microsoft was in the top 10 in 2000 and since then it has pivoted to become a platform player.

This platform-based approach to doing business (as opposed to one-to-one customer/provider relationship of the traditional transaction model) is an apparently simple idea, but the mechanism is so flexible, it can support just about any kind of business and many different business models and variations of them.

It also enables small companies – such as the start-up online bookseller that Amazon once was – to extend their reach and potential market almost overnight, without big upfront costs. It is not necessary to make or own what you sell in a digital marketplace, as Tom Goodwin1 famously noted: “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate.”

The two major tenets of digital marketplaces are being easy to do business with – the platform must enable frictionless interactions and transactions – and economies of scale.

Naturally, adopting a platform-based model on which to run a next-generation digital marketplace is not an automatic guarantee of success – in fact there are many potential pitfalls. In particular, the network effect – that is, the impact that the number of users of a platform has on the value created for each user – can be an unprecedentedly powerful driver of growth, but it can also work in reverse if a digital marketplace owner starts to lose users.

This white paper looks at how to maximise return on investment (ROI) from digital platforms.

Introduction – the evolution of the model

Digital marketplaces support many different business models and have been adopted across a range of sectors.

The original e-commerce model was for a company to offer its products and services – or resell them from a third party or parties – to customers online. This had a lot of advantages – it made it easier for customers to search for and buy what they wanted at any time that suited them, and they could serve themselves through automated payment mechanisms. This was more common in the business-to-consumer (B2C) market, rather than for business-to-business (B2B).

Marketplace 1.0

To extend their reach, many organizations trade through digital marketplaces as well as their own websites because the more sellers there are in a marketplace, the more potential customers it should attract, which makes it more attractive to more sellers and the circle keeps expanding. This is known as the network effect, a term coined by Professor Geoffrey G. Parker and his co-authors in the seminal work on platforms2. In Marketplace 1.0, the digital marketplace’s owner is the aggregator, enabling a community of providers and consumers to interact and transact quickly and efficiently because customers can find what they want from a number of suppliers, compare their offers and complete the deal using automated processes. As Professor Parker et al so clearly spell out – and the results outlined in the Abstract show – the successful platform owner that is by far the biggest winner.

Marketplace 1.0 can be a B2C or a B2B model as shown below, where the provider could also be the producer, and a customer could be another company, an individual or a non-commercial organization such as a government department or agency.

Marketplace 1.0 could also run on a B2B2X model (see below), whereby the platform owner delivers products or services from a business customer to that business’ own customers. An example might be a network provider delivering online gaming – or any other kind of content – as a services from a games firm or streaming service or a healthcare monitoring provider. However, the B2B2X model is more flexible and complex than that: For example, not all users are customers – people use Google to search billions of times a day, but Google’s customers are the advertisers. The ‘X’ could also be a public sector agency.