There is ample opportunity for small businesses selling through online marketplaces to reach new customers and expand their product base. But there are drawbacks in terms of cost and customer experience.

Greg Chapman, senior vice president of business development, Avalara

Greg Chapman, senior vice president of business development, Avalara

In our global, digital-first society, embracing online selling has become a must for many small businesses as they look to keep pace with increased competition and changing consumer preferences. Thanks to the internet, small businesses can sell beyond their physical stores through ecommerce websites, marketplaces, social media, and more. While each channel has its advantages and disadvantages, the ease of use and massive customer reach of marketplaces has made them an ideal channel for small businesses looking to expand their customer base online.

In today’s “marketplace economy” dominated by players like Amazon and eBay, online marketplace provide a platform through which, for a fee and/or commission, independent sellers can market and sell their wares. Some marketplaces sell their own products in addition to those sold by third-party sellers, but other marketplaces like Etsy function uniquely as a platform for other sellers. There are even a number of marketplaces for niche audiences, like Teachers Pay Teachers—an online marketplace where teachers buy and sell original educational materials.

While the customer experience on marketplaces is generally positive, small businesses sacrifice control over the experience that their customers are having.

There is ample opportunity for small businesses selling through online marketplaces to reach new customers and expand their product base. At the same time, small businesses face a conundrum when considering if they should sell their products through marketplaces. Here are a few key considerations small businesses should keep in mind when selling through marketplaces.

Benefits of selling through marketplaces

Effective online selling is driven by customer experience. Perhaps the greatest benefit of marketplaces for small businesses is the “Amazon experience” that is offered to customers purchasing through any marketplace. In most cases, marketplaces offer small businesses unparalleled scale and efficiency to make the purchasing process simple and easy from browsing to delivery.

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In 2018, marketplaces accounted for 52 percent of global online retail sales. The global reach of marketplaces combined with the sophistication of their marketing efforts enables small retailers to more effectively reach potential customers at a scale virtually unattainable, especially for those with little to no brand recognition outside of their physical location.

When it comes to compliance, the introduction of marketplace facilitator laws in 37 states and Washington, D.C. has placed responsibility for collect and remitting sales tax on behalf of marketplace sellers on the marketplace itself. While sales tax is still being charged on third-party sales, the retailers themselves are not tasked with managing the collection and payment of sales tax to the appropriate authorities.

Drawbacks of selling through marketplaces

While it’s indisputable that marketplaces are a prime selling tool for small businesses, there are also some not-so-apparent downsides to these platforms. The predominant drawback of selling on marketplaces is the potential associated expense. The fees placed on third-party retailers by marketplaces vary by platform but generally come in the form of subscriptions, insertion fees, final value fees, and more. For some smaller retailers, these costs never outweigh the profits driven through marketplace sales, but nonetheless, are important to keep a close eye on.

Additionally, many small business owners are accustomed to being able to establish strong relationships with customers that enter their stores, which is something that is compromised when selling through a marketplace. For small businesses that are working to build brand awareness online, the lack of facetime with customers makes it more difficult to establish a direct-to-consumer presence.

Similarly, while the customer experience on marketplaces is generally positive, small businesses must also sacrifice control over the experience that their customers are having. This can create issues for the seller when customer problems arise that are related to the shopping experience.

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From a compliance perspective, as a result of the South Dakota v. Wayfair, Inc. Supreme Court decision in 2018, more than 40 states have enacted economic nexus laws that place sales tax obligations on remote sellers based on a certain level of economic activity within a state. While marketplace facilitator laws take the burden off sellers for marketplace transactions, those sales still count towards a business’s sales revenue in any given state. So, if you’re a small business that sells mostly through marketplaces but also has an ecommerce store, you could still be responsible for sales tax in some states if you meet or exceed their revenue thresholds.

As we move forward, marketplaces will continue to be an integral part of most retailers’ omnichannel strategy as they work to meet customers where they are shopping across the globe. Whether a business is looking to expand into online sales or reach new prospective customers, there is likely a marketplace that fits every individual need. Keeping these factors in mind will help to ensure that small business owners are making the right decision when it comes to the role marketplaces play in their sales strategy.

Avalara provides tax software and services for online retailers.

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