What’s attracting investors to the marketplace business model?
For one, marketplaces have the opportunity to be very profitable since there is little upfront costs, says Eric Roth, managing director at investment firm Lazard Market LLC. For example, a marketplace with $100 million in gross merchandise value may take $10 million home in revenue. Of that $10 million, the profits could be high (at $5 million or more) because the marketplace model means lower costs, as the company doesn’t store inventory, doesn’t have to spend as much on marketing (because sellers often advertise their own products) and may have fewer employees than traditional retailers.
But it’s not that easy to run a successful marketplace. “The challenge of marketplaces is you have to have the network effect, which means you have enough scale so that you can have lots of sellers to get the traffic from customers,” Roth says.
In essence, marketplaces have to scale both—sellers and customers—at the same time, which can be challenging. And since most shopping platforms make money by charging a small listing fee and a commission of 5-20% on each sale, it may take years for the company to get big enough to make any real money. That’s why marketplaces often have to raise money.