By Ramy Youssef, SVP & Global Head of Marketplaces, BORN Group
The verdict is in, and it could not be more clear: Digital marketplaces represent the most effective way to expand your reach and grow your revenues. But this reality prompts an important question for any company looking to put the power of digital marketplaces to work: Should you build your own marketplace capabilities or should you buy a marketplace solution?
When it comes to software investments, the build or buy question is always a tough one, and the answer cannot be generalized. But the route to the answer is crystal-clear, as we have discovered over the course of many different marketplace projects with a wide array of clients: You must start from a position of insight and understanding – with a deep-dive along two dimensions: first, strategy and goals; second, organizational readiness.
You will already have some good ideas about why you want to develop a marketplace, but in our view, the key strategic question is this: What do current marketplaces in your sector look like, and how can you differentiate yours?
The answer will depend on your sector, obviously, but to take a simple example from the retail category: Amazon’s marketplace is defined by incredible breadth coupled with a consistently excellent customer experience. Customers know they can find what they’re looking for, they can buy and receive things fast and easily, and they are protected against fraud. A marketplace like Etsy, on the other hand, differentiates itself by its focus on unique, handmade, and vintage items. Customers know they can find something different when they shop at Etsy.
When thinking about your marketplace strategy, it’s crucial to distinguish between marketplace features that are commodities and those that are differentiators for your enterprise. Commodity features are basic functionalities that any marketplace should have, while differentiators are unique capabilities that set the marketplace apart in the market. “Buy it now” or “Save for later” are examples of commodity features. An example of a differentiating feature might be creating a Zero-Touch Marketplace.
Once we’ve explored the strategic components of marketplace decision-making, we look at the level of effort, investment, business expertise, and support required to implement the marketplace – in other words, your organizational readiness for this new challenge. Here, we ask questions like What are the specifics of your existing ecosystem and business model?
And we look at a slew of relevant factors including the eight we consider to be of paramount importance:
- Total Cost of Ownership (TCO): A comprehensive TCO analysis – looking at all costs associated with the development or purchase, implementation, maintenance, and scaling of the marketplace – helps in understanding the true financial impact over time.
- Time to Market: Realistically, how quickly can your marketplace go from concept to reality? Building in-house may take longer but allows for more customization while buying a ready-made solution can significantly reduce time to market.
- Resource Expertise: Marketplaces usually demand unique expertise, so we evaluate your existing in-house team’s capabilities versus the expertise provided by a vendor.
- Resource Availability: Are the resources – human and technological – you need readily available, or would you have to acquire them? Addressing these issues requires assessing current workloads and the availability of specialized skills.
- Feature Scalability and Relevance to Market: A key upfront step is to evaluate the ability of the marketplace to scale as the business grows and what features will be essential at launch and to future development. Your solution design must be flexible enough to adapt to future needs.
- Risks: A thoughtful examination of the potential risks of both scenarios, buying and building, is crucial to the decision-making process. For example, building in-house might entail risks relating to project delays and technological challenges, while buying might entail risks related to vendor dependency and integration issues.
- Opportunity Cost: As you know, whatever decision you make has an opportunity cost beyond its actual costs. What might you have to forgo by allocating resources to building or buying a marketplace?
- Value Proposition: At the end of the day, the buy vs. build analysis must articulate the unique value proposition that your marketplace will bring to your organization and your customers. This part of our analysis circles back to the original strategic objectives for the marketplace in terms of enterprise strategy as well as customer expectations.
It should be clear that we are essentially agnostic about the buy vs. build decision. The analysis leads us, and our client, to the right decision. But in our extensive work in this area, we have discovered some interesting trends:
- Approximately 30% of the opportunities we encounter involve enterprises that have outgrown their build model approach.
- Almost all our clients, and particularly large ones (Fortune 500 enterprises) consider adopting a marketplace platform goes hand-in-hand with rethinking their business model – and this generally leads to replacing their previously built solutions.
- Marketplaces mean more participants (customers and prospects), and this inevitably amplifies the requirements of platforms. Many clients that initially favored the build model, hoping to revamp an existing ecommerce ecosystem, ultimately opted to acquire marketplace platforms due to the inherent complexity and need for scale.
- Enterprises that decide to build their own marketplace solutions come to appreciate the importance of separation of concerns, particularly in managing third-party sellers and providing them with the comprehensive support they need. This often becomes a key factor in their decision to adopt dedicated marketplace platforms.
- Most successful marketplaces demand feature-rich platforms capable of managing the complexity that rises from more entities – company, partners, third-party sellers – and more buyer personas.
- Developing a marketplace always demands ongoing investment because market trends evolve continuously. For instance, we’ve seen a growing interest in hybrid models that combine third-party (3P) and drop-shipping.
- Finally, unlike the configuration of an existing platform, constructing a marketplace doesn’t add any distinctive business model or value proposition (although it does offer the opportunity to add differentiating features).
For all kinds of businesses in all kinds of sectors, a marketplace strategy can be a game-changer. But once you’ve decided you want to pursue this approach, the hard work lies in understanding what’s possible, what’s necessary, and how to get there. Analysis is the path to effective, more informed, and more strategic decision-making.
To learn more about the BORN Group’s approach to marketplace creation, we would love to walk you through our proven approach.
