How Do Marketplaces Work?

Posted by Checkbook on Jul 22, 2020

With the popularity of brick-and-mortar stores slowly crumbling, online marketplaces are seeing increased consumer traffic. Partnered with the current pandemic, physical locations are becoming less preferred places of transactions.

Online marketplaces provide easy platforms where consumers can seek specific products or services. These products and services are offered through third-party vendors, purchased by remote customers, and transacted through the online marketplace provider. People no longer have to go to grocery stores as there are now other options such as Amazon Fresh and Instacart.

These marketplaces are not limited to big product-selling players such as Amazon and eBay, but also include service promoters such as Airbnb and Uber. None of these marketplaces directly own the products that they list for sale. Instead they “sell” the products that third-party vendors own, such as a bedroom in a host’s home.

Amazon is one of the biggest players in the online marketplace for products. In 2019, Amazon’s annual revenue was approximately $280 billion. Amazon’s marketplace revenues generated by Amazon Marketplace earns commission from third-party sales. In addition, the company generates money from ad sales for third-party sellers and from services to sellers known as Fulfillment by Amazon.

Uber builds a convenient taxi-like system and charges based on estimated time and distance. These rides are directed to nearby drivers who supply the system with their own vehicles. Uber’s ride revenues are also driven by ride types as well as surge pricing, in which prices increase when ride demands increase. Using internally-built algorithms for pricing models, Uber then charges about 20 to 25% of the fare and apportions the rest to drivers.

Airbnb, similar to Uber, is fueled by third-party owned assets – in this case, houses or rooms. Guests can book rooms in local homes instead of staying at hotels which are usually priced higher. Airbnb earns money from both ends of the equation. Airbnb charges hosts a commission per booking and charges guests a 5 to 15% service fee per booking

In all of the cases, marketplaces generate revenue from internally developed pricing models. In relative terms, overhead costs are lower and intellectual property is highly valued. Working as a middleman for business transactions, online marketplaces operate efficiently and vigorously.