Online marketplaces and blockchain: the race for innovation

12/19/2017 02:17 pm ET
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Trading in the era of digital globalization

With the introduction of the Internet and its proliferation in the 21st century, trading has opened up new channels, allowing even greater connectivity between buyers and sellers, and widening access to a far greater range of goods and services.

The Internet was a major innovation in technology and, after a slow start, mainstream adoption saw it disrupting almost every sector in the 1990s, changing the face of conventional trade and commerce.

Expressed as e-commerce, trade that takes place electronically, mostly over the Internet, was a $22 trillion industry in 2015, according to the UN Conference on Trade and Development (UNCTAD). While most is comprised of the business-to-business (B2B) industry at $19.9 trillion, business-to-consumer (B2C) is still significant at $2.2 trillion.

Among the most prominent of B2C channels online marketplaces, which today refers to various websites or platforms that act as facilitators to merchants selling products and services from different sources to a growing legion of consumers who now prefer to do their shopping over the Internet.

Google search (License: Free-to-use, even commercially)

In fast-developing economies, such as that of China, online retail has been cutting into the share of traditional retailers since 2008, with online retailers gaining a 6.3% share of retail value in 2012, growing annually.

The innovation history of online marketplaces

eBay’s fame as the very first major online marketplace began in 1995 as AuctionWeb, introducing the new idea of being able to bid on items from the comfort of your home and have your purchase delivered to you without every having to be physically present for the shopping or payment. The added innovation of online bidding is still a popular concept today, pitting shoppers against each other to obtain an item at a price typically lower than retail.

By the turn of the century, the same player and others began introducing the concept of hosting personalized digital stores, where traders could pay a fee to set up their home pages within the marketplace, setting the scene for customized shopping experience and home-based traders.

Then, with the advent of digital payment processors, such as PayPal, local markets suddenly became global, with this new innovation allowing customers from all over the world to transact and pay for items online, to have them shipped internationally.

Marketplaces began to branch out, some vertically (focusing on a category of product) and some horizontally (focusing on a range of products within a certain industry) and continue to find great success with niche markets, such as Etsy (handmade and novelty items) and Rover (pet-related services).

The key features of online marketplaces are that their operators do not own any inventory or territory, they merely present the inventories of others to users, facilitating the payments and transactions and earning a fee from it.

Owing to the convenience and usually lower prices when compared to buying the same items from physical retail stores, online marketplaces have been flourishing over the past years. As most also offer real-time access to supplier inventories, all products are always available, including full details of features, shipping times and pricing – details not always available at physical stores, with the diversity typically absent from shopping at a single store.

The online marketplace sector today is dominated by household names, including the likes of Amazon.com ($136 billion revenue in 2016), eBay ($7.26 billion revenue in 2016) and the fast-rising star of Alibaba ($22.9 billion revenue in 2016). All are considered as hybrid marketplaces, offering some of their own products and services alongside those from other companies, while also being a platform for sellers and buyers to transact with each other, often playing some form of mediation role when needed.

They are fast replacing the era of multi-brand retailers, by appealing to consumer needs of price, convenience and trust.

A continuous need to innovate

The chief advantage of online marketplaces is the reduction of costs related to both buying and selling to create sufficient liquidity on both sides of the marketplace. Thanks to a system of scoring on sellers and buyers, these platforms also encourage interaction to create a common standard for trust and transparency within the marketplace. Finally, they have initiated mechanisms that mediate between participants when inevitable issues crop up.

Naturally, online marketplaces do have several downsides. Consumers still cannot reliably compare products and services between many sellers, and score ratings can be deceptive, with consumers unable to distinguish fraudulent or malicious ratings from genuine ones.

The challenge for online marketplaces will be their ability to draw as many suppliers as possible, while ensuring buyers have a seamless experience. More importantly, it is their ability to continuously innovate that will determine how they survive or fail in the increasingly competitive world of online marketplaces.

Alibaba’s self-professed secret in capturing a global market share has been in its integration of three innovative core models of business, profit and credit. With a unique targeting of small enterprises and individuals, profits derived from marketing services and tech support, as well as a credit system built on feedback, Alibaba has found great success with its platform.

Where revenue was conventionally from commissions and hosting fees, Alibaba derives most of its income from marketing and technical support for its vendors.

Others are trying to stay even farther ahead of the curve, with the likes of Hamster Marketplace keen to introduce blockchain innovation to create a decentralized marketplace centered around the sale of niche electronics and unique gadgets from manufacturers, including DIY manufacturers, start ups and local projects.

Interestingly enough, it aims to target the niche innovation market, bringing together the small market segment of innovators and early adopters.

Banking on the global appetite for sophisticated and unique consumer gadgets, the UK-based online marketplace wants to allow thousands of global vendors to gain access to hitherto unaffordable markets, with an audience of early adopters and technology enthusiasts. Its blockchain solution will offer a more reliable trust system through transparency in defect tracking and vendor reputation, with a parsing system that guarantees lowest pricing.

The project is still in early development, and is currently raising venture capital through a token generation event, with an alpha version predicted to be released early next year.

As with all disruptive innovations, online markets will proliferate and continue to grow, until the industry is saturated and only the most successful will be able to adapt and survive. And there, the challenge will be to provide the most efficient and unique values to consumers, while maintaining profitability.

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