Online marketplace: Channel cannibalization or synergy?

Ecommerce has experienced exponential growth in the last few years, pushed forward partially by the success of marketplaces such as Amazon and eBay, which have convinced consumers that online shopping is a safe and enjoyable experience.

Despite the positioning of marketplaces in the minds of consumers, some sellers still see this channel as a threat that will lead to channel cannibalization of the market. If you are not familiar with the term, this is a situation where the involvement of new sellers or sales channels draws down sales of in-house products instead of increasing market share.

At VTEX, we believe a marketplace, if implemented well, not only isn't a threat to a business and does not bring the risk of cannibalization, but it's also a tool that a company can leverage to solve stock and logistic problems without needing a huge investment.

In a nutshell, a marketplace allows you to integrate external sellers who might offer products similar, but not identical to yours, and who might also have a better logistics network in certain areas.

Thus, the 'cannibalization' mindset is not justified, and could instead be a blockage in the continuous growth of a company's online business, since it means not taking advantage of an important opportunity. So, let's explore what a marketplace can do for a business.

Did you find everything you were looking for?

Convenience is one of the most important elements in the mind of consumers. Excluding differentiators such as price, quality and delivery time, a one-stop-shop will probably drive more sales than a store that only offers half of what a buyer is looking for. This is one of the reasons why more than half of American buyers use Amazon as the beginning and end of their shopping journey.

This sets a paradox for businesses looking to become more attractive for customers - and by extension more competitive -: how do you grow the number of products offered without the need to invest big. The obvious answer is to let other sellers grow your stock for you.

This tool is great for online stores aiming for expansion, since partners can offer insights into the performance of certain products, especially those which are hardest to keep in stock, without much change from the marketplace's logistics.

It's important to remember that the company that owns the marketplace can pick and choose which products and sellers it'll allow to be integrated into its marketplace, a decision-making process that helps to eliminate product cannibalization in online sales and leads to different marketplace types. With this curation process (or lack thereof), businesses also stay true to their main value proposition and target audience (e.g. FARFETCH and luxury fashion).

If any product in particular has a good performance, the store owners can start stocking the product themselves knowing that the sales will compensate for any expenses incurred in the process. This can mean stocking on previously ignored items, but it can also represent the gateway into new product lines and categories.

Delivered right to your door no matter where

In certain countries, the logistics needed to set up a delivery system around the entire territory might be tricky. This is another area where the integration of more sellers through a marketplace can shine: simply direct the orders of certain regions to a provider that's better equipped to handle them, which expands your footprint without sacrificing too much market share. In some cases, you might even be able to use their brick-and-mortar network for fulfillment.

This operation can help with brand recognition in different regions, which can be leveraged through the sale of other products or services. If at any point the company is ready to set up a logistics operation to cover certain regions, the previous sellers can be notified so that the company can take back the sales.

This is particularly important when trying to gauge the size of a market in order to decide if a logistics expansion makes economic sense. So, instead of losing market share to other sellers, these new sellers can be used to probe into new geographies.

You're still in control

With the last word on what products and sellers are allowed in the marketplace ecosystem, the company that opens this channel can take advantage of the catalog integrations in many other scenarios, such as: emergency stock, low margin items, perishable goods, etc.

For some companies this means expanding the reach of their operations in trying times, which helps establish their brand as one you can trust. For others it means offering services that they hadn't considered previously, but that complement well their current value proposition.

The great control that an owner has over the marketplace product and seller adoption is the main argument against the myth that adopting such an endeavor leads to loss of overall market share. If set up properly, a marketplace actually allows you to discover the hidden capabilities of an online business, capabilities that can be highlighted and empowered by the right partners.

DISCLAIMER: It is important to note that historical financial information or operational KPIs may not be comparable with publicly-filed information at SEC, since VTEX did not report its financials in accordance with International Financial Reporting Standards (IFRS) prior to 2019 and certain KPI definitions may differ from publicly-filed information. You are cautioned not to place undue reliance on figures published before July 21st, 2021 as they may not be comparable to the metrics disclosed from the IPO onwards.

Written byLalo Aguilar

Lalo is a journalist with more than 5 years of experience, who now is focusing his story-telling abilities on the world of ecommerce and the quick revolution happening around it.