We have previously touched choosing the right marketplace pricing strategy, where full control over the entire process and collecting a commission for each transaction typically yields the most profit.
This method is effective as it leverages the value generated from every activity happening on your site. It’s important to remember that if you opt for this approach, you must ensure that in exchange, you are providing significant value to your customers and vendors; if not, they will likely figure out a way to complete their transactions without your involvement.
This scenario represents what is referred to as ‘marketplace leakage’, a potential issue that every marketplace founder should keep in mind.
How to minimise marketplace leakage
As already highlighted, there are two groups to whom you must deliver value – your customers and your vendors. The method by which you do this will hinge on your concept and your multi vendor marketplace – whether you’re dealing with high or low value products or services, whether you are selling or renting, etc.
There are several methods to showcase the added value that your marketplace provides to encourage people to keep transacting within it.
Firstly, the sense of security is a vital aspect of marketplace usage. People need to feel safe when using your site, and this added value is an excellent strategy to prevent marketplace leakage. Users are more likely to trust a marketplace that has positive reviews and a good reputation than they would trust a stranger.
Moreover, when relevant, you could offer insurance (assuming payment goes through your payment system) in the event of an item being broken or undelivered. Such incentives will encourage users to continue using your site instead of being tempted to transact directly with each other.
If offering insurance is not economically viable, you could introduce a deposit system on rented goods instead, where customers pay a deposit that is returned if the item remains undamaged. However, overly large deposits might deter people.
For items being sold instead of rented, issues may arise with items not being received or arriving broken. This can pose challenges for vendors, so your marketplace can protect them by handling all disputes directly.
There is a financial risk involved with this approach, though, so it’s an important factor to consider when choosing a payment method. If you select a payment provider like Stripe, a seller protection programme is offered as part of the process.
At times, simply having a contract in place is sufficient to instil a sense of security and ensure everyone behaves appropriately.
The significance of reviews cannot be overstated. They are a powerful way of helping people feel more at ease and, therefore, more secure with your marketplace. It provides both vendors and customers with a motive to communicate and trade to the best of their abilities, which can increase the likelihood of future sales and transactions. Vendors with good reputations typically generate more sales and, as a result, can demand higher prices compared to those with no or poor reviews.
Beyond security, marketplaces where all vendors offer professional services can derive added value in other ways. It’s likely that once a service has been provided, the vendor and customer could shift their business relationship off your site if they have established a good rapport, plus the service could be provided at a lower cost without your commission.
Strategies to circumvent marketplace leakage
There are strategies to circumvent this potential issue. For instance, your platform could become a Software-as-a-Service tool for your vendors to automate some of their more routine business tasks. Once they have availed of that service, they will be less likely to abandon it and lose those tools.
Your marketplace could also provide an integrated scheduling tool if services need to be delivered at a specific time, an inventory management tool, or a delivery handling tool. Any feature that simplifies your vendor’s operations will be advantageous for you in the long run. By offering such tools, your commission will appear as a small fee to pay in exchange for the benefits they receive, creating a win-win scenario for all parties.
The notion of an excellent reputation is a value-added proposition shared by both vendors and customers. However, customers generally seek a different kind of added value compared to vendors. For them, a smooth transaction process is paramount. Customer leakage can be mitigated by simplifying the steps involved in the transaction process, enhancing trust, facilitating easy payment, and more.
Research indicates that the more streamlined the payment process, the more customers will make purchases. Conversely, if the purchasing process is too cumbersome, customers will simply abandon it. We delve deeper into purchasing options and their respective advantages and disadvantages in ‘Understanding the buyer journey on your marketplace’ and ‘Understanding the transaction flow on your marketplace’.
How to reduce marketplace leakage
Alongside added value, there are a few other factors that can help reduce marketplace leakage. Keep in mind, though, that added value will always be the most effective strategy, but these other elements are useful supplements.
Firstly, open communication is often appreciated. If users understand that your platform relies on commission for its operation, they may think twice before departing and may even enjoy being part of your marketplace community.
Secondly, you might consider making it challenging for users to share personal contact details with one another. For instance, you could remove phone numbers and email addresses from direct messages (similar to Airbnb), or even remove the ability to send direct messages altogether and keep all communications ‘public’. This doesn’t mean eliminating a messaging system entirely, as people do need to communicate, and doing so would only lead to early frustration with your marketplace platform.
Having full control over your own purchase process pairs well with delivering enough value to make users want to keep engaging with your platform. This can be achieved through providing security, fostering trust, supplying helpful additional tools, and ensuring the overall process is straightforward.
In essence, if you offer something of value to both vendors and customers, they won’t want to conduct any transactions outside of your marketplace.