The complete marketplace glossary
Your lexicon to the world of marketplaces.
Marketplace terminology can sometimes feel like a bunch of buzzwords. What exactly are network effects or platform leakage? How about commission and liquidity? Though these terms may seem inaccessible at first, they were coined for an important reason: to explain the concepts, challenges, and opportunities unique to marketplaces. In this glossary, we’ve compiled definitions for the essential terms you need to know to make the most out of the marketplace content and conversations out there.
The basic concepts
A marketplace is an online platform where multiple providers and customers offer and buy products. The marketplace facilitates transactions between these users and creates value for both – the ease of purchase and a large selection of options for the customers and access to demand and revenue for the providers.
Marketplaces can also be called two-sided marketplaces or multivendor marketplaces. The term two-sided marketplace emphasizes the two user groups the marketplace brings together, i.e., the customers and the providers. Multivendor marketplace highlights the difference from single-vendor online stores: instead of just one provider or seller, marketplaces have several.
Supply and demand
A marketplace has two types of users: supply and demand. The supply side has the product; demand consists of customers who want that product. Growing your marketplace requires attracting both types of users. Depending on the marketplace, supply and demand can be called providers and customers, sellers and buyers, hosts and guests, and so on. In Sharetribe content, we primarily refer to supply and demand as providers and customers.
Chicken and egg problem
The chicken and egg problem is one of the unique challenges of marketplaces: how to get customers without many providers and how to get providers with only a few customers. When launching your marketplace, this is the problem you need to solve. Depending on the providers and customers you’re trying to reach, the best strategies can vary. It is also essential to know your potential users and industry to communicate your marketplace’s value proposition effectively.
An admin, or administrator, is the operator of a marketplace. They can be the owner or an employee. They provide service and instructions to users, are in charge of the platform’s day-to-day operations, and have access and rights to manage the marketplace’s data. As a marketplace grows, it may have multiple admins, possibly even with different access rights.
A listing is an entry that’s posted on a marketplace to reach customers or providers. It can be a product or service, a rental property, a job offer – whatever it is the marketplace in question offers. Through the listing, other users on the marketplace can initiate a transaction. For example, on Airbnb, a provider can post a listing of the house, apartment, or room they want to rent. On Upwork, a customer can post a job offer listing to reach qualified freelancers.
Network effects are a phenomenon where a product becomes more valuable as the number of its users increases. The telephone is an often-cited example of a product with a strong network effect, and most platform businesses and social networks belong to this category as well. The more people use Facebook, the better it can create value for all users.
Cross-side network effects / Two-sided network effects
Cross-side network effects, also known as two-sided network effects, mean that the more customers you have on your marketplace, the more providers you’ll attract, and vice versa. This might happen, for example, when a new provider with an existing customer base joins your marketplace. Network effects are built into marketplaces in a way that they are not in traditional e-commerce platforms because of this cross-side effect.
Liquidity is the probability of providers selling what they offer and customers finding what they are looking for on your marketplace. It is a key metric to determine the success of your platform. On marketplaces, you have two types of liquidity, provider and customer liquidity, and both should be measured.
Business model terminology
P2P, B2C, and B2B marketplaces
Peer-to-peer (P2P), business-to-customer (B2C), and business-to-business (B2B) are types of marketplaces. The terms describe who sells and who buys on the platform. P2P marketplaces are platforms like Airbnb, where both providers and customers are mostly private individuals. On B2C marketplaces like Amazon, businesses connect with and sell to individuals. B2B marketplaces connect businesses specifically, like the commercial property platforms GREXI and LoopNet.
As a marketplace grows, the lines between marketplace types can start to blur. For example, Etsy started as a P2P marketplace with strict guidelines that allowed only individual handicrafters to sell on the platform. However, as Etsy grew, so did its top sellers. Since 2013, Etsy has allowed sellers to hire employees and sell items produced by third-party production partners. This means that small businesses can now also sell on Etsy.
Service, product, and rental marketplaces
Service, product, or rental refers to what is provided on a marketplace. Service marketplaces are for providing services. Good examples are Fiverr, Thumbtack, Uber, and Urbansitter. Product marketplaces like Amazon, eBay, and Etsy are for selling products. Rental marketplaces like Airbnb and Swimmy can offer long- or short-term rentals of anything from items to spaces.
Local vs. global marketplace
Local marketplaces serve a specific geographic area, while global marketplaces operate worldwide. Local and global are a spectrum, with hyperlocal marketplaces serving small, local communities on one end and global marketplaces that have supply and demand across the globe on the other. Many marketplaces operate somewhere in the middle, such as in a few cities, states, or countries.
For some marketplaces, like ones selling digital products or remote services, location may not be a factor at all. For platforms with product shipping or in-person services, location and reach are essential considerations.
If your marketplace is location-based, starting local is a good idea. A narrow geographical focus helps you find liquidity faster. Even Airbnb, which now operates globally in over 220 countries and regions, began by renting and sharing apartments in one city: San Francisco, California.
Vertical vs. horizontal marketplace
Vertical and horizontal refer to the scope of what is offered in the marketplace.
Vertical marketplaces have a narrow focus on the products they offer or the target audience they serve. It can be a niche like selling Star Wars figurines or providing a specific service like SEO consulting. On the other hand, horizontal marketplaces offer a wide variety of products or services: think Amazon or eBay. Horizontal marketplaces do not serve a niche or a specific market and instead aim to attract a wide variety of customers with very different needs.
For new marketplaces just starting out, a vertical approach is usually the right one. Even Amazon started selling used books and only later expanded to the all-encompassing product marketplace it is today. In fact, many investors see lots of potential in “verticalization”. For example, a horizontal platform like Craigslist sees increasing competition from vertical players that are able to offer a superior user experience for a small niche.
A reverse marketplace is a platform where the customer creates a listing, and providers bid on it. On a regular or non-reverse marketplace, the provider creates the listing, and a customer purchases it.
In general, the transaction flow is more complex on reverse marketplaces than regular marketplaces. In addition to the purchase, a reverse marketplace flow requires steps for actions such as bidding and accepting offers.
The freelance marketplace Upwork is an example of a marketplace with both reverse and regular transactions. Customers can post jobs that freelancers can bid for but also browse talents and contact them directly. Fiverr, in contrast, is a freelance marketplace with a regular marketplace transaction flow.
Managed marketplaces are platforms that take on additional service tasks to facilitate provider and/or customer onboarding and transactions. This may include services such as verifying or interviewing providers, offering hands-on help with listing creation or pricing considerations, and providing curated lists of suitable providers for customers. Another name for managed marketplaces is concierge marketplace.
Managed marketplaces provide a human element in matching supply and demand and offer both providers and sellers a luxurious, personalized experience. On the flip side, they have higher operational costs than marketplaces with more automated onboarding and matching.
On a curated marketplace, admins review what a provider wants to offer before publishing the listing on the platform. This can be as simple as instituting a listing approval step so that admins can confirm all listings include the necessary information and have appealing images.
Curation can also be a hands-on process, where the admins physically inspect a product or interview a provider in person. For example, if a marketplace offers collectors’ items or vintage furniture, the admins may want to verify the authenticity and condition of the items to guarantee good quality and build trust between providers and customers.
Commission / Take rate / Transaction fee
Commission, also known as take rate or transaction fee, means the percentage or fixed fee a marketplace collects on a transaction. Commission is the most common revenue model of online marketplaces. The rate should not be too high to discourage your users from transacting on your platform but also be high enough for you to cover operational costs and make a profit.
Other revenue models for marketplaces are subscription or membership fees, listing fees, lead fees, charging for additional services and items, and third-party advertising. Many marketplaces combine two or several different revenue models. For example, they may charge a subscription fee from providers to list on the platform and charge a commission from buyers on sales.
Market structure concepts
Fragmentation on a marketplace means that a large number of both buyers and sellers are transacting on the platform. A fragmented platform is not dependent on a small number of high-revenue sellers or buyers.
The opposite of fragmentation, concentration means that a large part of a marketplace’s revenue comes from a small number of sellers or buyers. Losing one or some of these users could lead to a drop in revenue for the marketplace.
Commoditization is the process of reducing variation between the services or products offered in a marketplace. A highly commoditized marketplace offers a uniform supply, where the providers or products offered are not differentiated from each other.
As an example, ride-hailing companies like Uber and Lyft have heavily commoditized their providers and automatically match them with customers based on minimal choices. In contrast, freelance marketplaces like Fiverr allow providers to enter very specific attributes from skills to minimum budgets and location to languages spoken that may be relevant to the customer’s needs.
Homogeneity vs. heterogeneity
Homogeneity and heterogeneity refer to the degree to which a marketplace offers variety in its providers or products.
On a homogeneous marketplace, providers and products offered are relatively uniform, without much differentiation. Homogeneous marketplaces have the advantage of matching providers and customers with minimal search costs. A homogenous marketplace is commoditized, either by conscious choice or the type of product or service provided – or both.
On heterogenous marketplaces, providers have a lot of variation in skill, approach, interest, and other factors. These attributes are often crucial to finding the right provider. However, a heterogeneous offering also means higher search costs and may lead to search fatigue.
Symmetry on marketplaces refers to how much overlap there is between supply and demand. For example, a peer-to-peer marketplace where private individuals both sell and buy is a fully symmetrical marketplace. In contrast, a business-to-customer marketplace where large businesses provide services or products to private individuals is asymmetrical.
User behavior concepts
Platform leakage / Disintermediation
Platform leakage, also known as disintermediation, means that users are going around your platform’s payment system to transact independently off-platform. This leads to a loss of revenue. Platform leakage is a difficult challenge to solve entirely, but providing value and incentives for your customers and providers to complete transactions on your platform helps discourage them from circumventing your payment system.
Multi-tenanting is user behavior where users post the same listing on multiple platforms to reach a wider audience. The provider benefits from a larger pool of potential customers but may have a harder time managing the listing’s availability. Multi-tenanting is likelier to happen if there are no disadvantages to offering duplicate listings across many marketplaces.
From a marketplace’s perspective, multi-tenanting reduces the likelihood of a sale on their platform. It can be discouraged by providing the most value to the user through platform functionality and attracting a large customer base.
Multi-tenanting can also be encouraged by allowing providers to automatically sync their listings between different platforms. This allows marketplaces to attract providers from other platforms and can be a strategy to build initial supply.
Feedback extortion is user behavior where a user makes a good review conditional on exorbitant demands or threatens to give a positive review only in exchange for one.
On many marketplaces, a good rating means access to further customers or services, which can lead to good feedback being used as leverage. For example, on ride-hailing apps, providers that go under a certain rating will be banned from the platform. Good reviews can be integral to their livelihood. For customers, a low rating can mean no longer having access to services through the platform, as providers will not accept your requests.
Most marketplaces prohibit feedback extortion and use a double-blind review process to enforce the rule. However, feedback extortion still remains a problem on marketplaces.
Marketplace UX concepts
Search costs / Search friction
Also known as search friction, search costs refer to the effort users have to expend to search and be matched with the product or service they’re looking for. High search costs can lead to customers abandoning a transaction before it even begins, so planning a good search experience is a vital part of designing your marketplace.
Matching is the process by which your customers and providers find each other on your marketplace. For the best user experience, fast and accurate matching is key.
A transaction is an exchange of value between a customer and a provider. The transaction flow defines how this connection happens once these users have been successfully matched on your marketplace. Effortless transactions are a large part of the value any marketplace provides to its users, which is why designing a smooth and secure transaction flow is extremely important.
On a single-vendor eCommerce site, a transaction process can be as simple as 1. buyer purchases a listing and 2. the seller delivers the product. However, since marketplaces have multiple providers and customers, their transaction flows tend to be more complex. Maybe your transaction flow includes price negotiation before payment is initiated, or the provider and customer are prompted to review each other at the end of the purchase. Payments are usually first held in escrow and then split between the provider and the platform. There may be additional service fees and different kinds of policies for cancellations and refunds. All these steps are part of your transaction flow.
Payment service provider / payment gateway
A payment service provider or payment gateway is a third-party service provider that facilitates monetary payments on your platform. Examples of payment providers are Stripe, PayPal, and MANGOPAY.
Providing online payments is a heavily regulated field where security and technical reliability are of the essence. Third-party providers take care of compliance and security for you. The providers usually charge a fee per transaction and/or payout. Maintenance fees may also apply.
When evaluating payment service providers, you should compare their marketplace-specific features, pricing, customer service, and ease of integration to find the right one for your marketplace.
Splitting payments means that the customer’s payment is divided among multiple recipients. On marketplaces that use commission as a monetization method, this often means the provider and the marketplace. The provider receives the price of the listing with the marketplace’s commission deducted, if applicable. The marketplace collects its commission from the payment in the form of a fee from the provider, customer, or both.
Not all payment service providers offer the option to split payments between different parties, so it’s an important consideration in choosing the right provider for you.
Delayed payout / escrow
Delayed payouts mean that the funds are held and not released to the seller before agreed-upon conditions are met. These conditions can be a predetermined date or the completion of an order. Delayed payments resemble escrow, which is a legal, contractual arrangement for holding funds. Delaying payouts is heavily regulated, and not all payment service providers offer delayed payouts or escrow. At the same time, being able to delay payouts is important for a marketplace because it helps build trust between customers and providers.
In a transaction flow with delayed payouts, the customer initiates a payment, and the funds are held by the payment service provider. The seller does not receive the money outright. When the conditions for a payout are realized, the payout is made, and the seller receives the payment.
In a double-blind peer review process, the provider and customer review each other at the end of a transaction but can only see the review they received once they’ve sent a review themselves. Many marketplaces utilize a double-blind review process to prevent feedback extortion. Famous examples are Airbnb, where both hosts and guests are prompted to review each other after a stay, and Uber, where drivers and passengers leave each other star-based reviews at the end of the ride.
Reviews are a great way to build trust on your marketplace. Reputation plays a vital role in accessing revenue or services, encouraging users to strive to get good feedback. A marketplace can also use reviews and ratings to weed out bad and reward good behavior.
From the basics to business models and market structures and user behavior to UX concepts, we’ve defined terms that exist to explain the unique nature of marketplaces as businesses.
You can continue learning by diving into Sharetribe’s Marketplace Academy, which has a host of excellent articles designed to guide you through your marketplace journey.
Were you looking for a definition and did not find it? Let us know which term (firstname.lastname@example.org) – we’ll be happy to add it to the glossary! 👋
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