Pure Merchant or Pure Platform – The Pros & Cons of Owning Versus Facilitating the Transaction
Thinking about building an eCommerce business? There’s never been a better time. Oberlo points out that by the end of 2020, there will be 2.05 billion global digital buyers. Yes, that’s b-i-l-l-i-o-n with a B. It amounts to 25 per cent of the entire planet’s population. According to Statista, the UK’s eCommerce segment is quite robust. Consider the following statistics:
- The UK is home to the third-largest eCommerce market on the planet.
- In 2017, the UK’s online retail sales surpassed £586 bn.
- By 2021, 93 per cent of the UK’s internet users are predicted to engage in online shopping, which is expected to be the highest rate for Europe as a whole.
- These studies were conducted before COVID-19 which has vastly accelerated the e-commerce industry as demand for shopping online increases.
So, eCommerce? It’s a no-brainer. What does require a lot of thought is the type of setup you want to run. There are two primary options today – pure merchant and pure platform – and they are far from being equal.
- The right choice will allow you to build a thriving, profitable eCommerce business that will grow in the coming years.
- The wrong choice could leave you with a failing business that’s struggling just to meet its financial obligations, much less turn a profit.
In this guide, we want to explore those options and help you determine which would be best suited for your needs and goals today, as well as down the road. So, should you own the transaction, or should you own the platform?
Pure Merchant – Owning the Transaction
When most of us think of retailers, we picture the pure merchant model. That is, these companies sell products from a wide range of different suppliers. They allow customers to browse their shelves (virtual or brick-and-mortar), and then make a purchase. They own the transaction and the product that you’re buying because they purchased it first. Tesco is a good example here. You can stroll through their doors (or visit them online) and buy whatever you need. For that matter, any traditional bricks-and-mortar retailer can stand in for Tesco. The merchant buys from a seller, then turns around and resells the product to consumers.
Think about it this way. You decide to go to Curry’s PC World to find a new mouse for your computer. You walk in, browse the shelves, and start comparing mouse models. You get in-depth with feature comparisons, testing different selections. When it’s done, you take the winner of the comparison to the checkout, pay for it, and leave.
Pure Merchant – Owning The Transaction
In this scenario, Curry’s PC World initially owns the mouse that you purchased. They had to buy it from the manufacturer, whether that’s Logitech, Razor, or another company. To have it in stock on their shelves (or made available online with their inventory in a warehouse), Curry’s must pay for the item, then spend more money to have it delivered to their location and yet more money must be allocated to the warehouse and/or to merchandise it.
That doesn’t touch on the costs involved with other aspects that directly relate to having physical merchandise on hand, such as the following:
- The cost of shelving for the store or warehouse
- The cost of materials for displaying/merchandising
- The cost of labour to stock the merchandise
- The cost of security to protect against theft
- The cost of retail space
- The cost of utilities – electricity, gas, water, etc. at the location
To sell you that mouse, Curry’s must make a significant investment. Moreover, that investment is ongoing. They never really get clear of it because of the overhead required to operate a physical store.
Now, you might be thinking that an eCommerce company wouldn’t have many of those costs, and you’re right. But only to an extent. You can eliminate all the costs associated with a physical store, certainly. That’s because your online store takes the place of the bricks-and-mortar one. However, you still have some pretty significant overhead, because you must find a place to warehouse your inventory.
You need an inventory control system, a security system, machinery to pick, pack, and load items. You must pay your staff to operate that machinery and to make the warehouse work. You’re on the hook for utilities at the warehouse site, too.
In addition to those costs, you still need to pay for everything associated with developing and building a robust eCommerce site, complete with modern safety and security features, marketing your products online and off, and more. So, you still have a considerable outlay of cash to sell that same mouse, just not quite as much as a physical retail location.
Pure Platform – Facilitating the Transaction
Now that we’ve dived into the pure merchant platform, we need to contrast that with the pure platform side of things. In this situation, everything is different. While the overall environment is the same – you still have consumers buying goods – the underlying fundamentals have been altered.
- Rather than owning the inventory and the sales floor, business owners following the pure platform model only own the platform itself.
In this situation, your eCommerce platform simply acts as a facilitator or connector. It allows sellers, or affiliates if you prefer, a place to sell their goods. Customers use your platform to connect with sellers offering items they want. You own the platform and facilitate the transaction, nothing more.
Pure Platform – Facilitating The Transaction
To explain the differences here, consider a real-world example. While there are several well-performing businesses following this model, eBay is probably the best-known representative. With eBay, there are some very stark differences to the pure merchant model, including the following:
- eBay owns none of the merchandise being sold. It is all owned by private sellers. That means eBay has no initial investment in inventory to worry about.
- eBay does not have to warehouse any of the items sold on the site. That immediately reduces the company’s overhead by a dramatic amount.
- eBay does not have to market any of the items sold on the site, further reducing the company’s financial liability.
So, how does eBay make money if they don’t own any of the products being sold? There are multiple methods of cash flow at work here, including:
- eBay takes a percentage of each sale on the site from qualifying sellers.
- eBay generates some revenue from the placement of ads on its website.
- eBay allows some sellers to pay for product listings in specific categories.
Of course, it might be helpful to see how that works out in real-world figures. The three sales methods of profit generation listed above don’t sound all that impressive, after all. And, there’s still a notion that a company that doesn’t sell products has little to offer shareholders in the way of income, either.
To put things in perspective, here are a few pieces of information Kumaran Adithyan, eBay UK’s Trading Director, revealed at Europe’s largest online marketplace conference, Retail Without Borders.
- A watch is purchased every 5 seconds.
- A sports trading card is purchased every 1 second.
- A tool is purchased every 3 seconds.
- A smartphone is purchased every 5 seconds.
Remember, all these products were sold on eBay’s platform, but without eBay ever needing to lay a finger on them. They simply connected the buyer to the seller.
That’s a lot of volume for just a few categories of products, which is one of the great advantages to marketplaces; your catalogue and range can stretch much wider than traditional brick and mortar businesses. Let’s look at eBay’s 2019 fiscal year, which was the most recently available data at the time of this writing (all figures are in US dollars, as eBay is a US company).
- eBay generated $10.8 billion in revenue.
- The company’s GMV was $90.2 billion.
- The company paid out $473 million in cash dividends.
- eBay repurchased $5 billion in common stocks.
- eBay projects that in the first quarter of 2020, the company expected to generate a net revenue of around $2.60 billion.
Yes, eBay has indeed grown into a monolithic company. However, it remains true that the firm still sells no products of its own. It does not work as a reseller – the pure platform model is firmly in place and has been since the beginning. While the company’s earnings might not be comparable with other multinational businesses, the truth is that they are far, far more profitable.
Because there is virtually no overhead here, and no need to invest in merchandise, marketing, or any of the other costs that affect businesses following the pure merchant model, eBay can direct an immense portion of its revenue into its bottom line. For instance, in 2017, The Motley Fool, a US-based financial website, indicated that “Because eBay doesn’t have huge shipping, fulfilment, and product-procurement costs, a bigger chunk of its sales can flow directly down to the bottom line. In fact, the $1.6 billion in earnings it has generated so far this year translates into a 23% profit margin. Meanwhile, the comparable number for both Amazon and Walmart is below 5%. eBay’s operations gush cash, too, with free cash flow last quarter amounting to a whopping 30% of sales.”
Ultimately, both the pure merchant and pure platform methods have a place in today’s eCommerce world. However, for those seeking an option that delivers the greatest benefits, the most flexibility, and the greatest chance to generate profit, the pure platform option is the better choice. With virtually no overhead and no risk or financial investment in inventory, a significant portion of the revenue goes to your bottom line, fostering growth and stability in ways impossible with the reseller model.
While eBay is a multi-billion marketplace, there are many other smaller marketplaces who are having success with the pure platform model. In fact, platform marketplaces can be seen across virtually every industry. Just look at the example below.
And that’s the simple key to marketplace success; connecting buyers with sellers and facilitating the transaction. You no longer need to hold stock, real-time demand drives supply, your existing crowd can be commercialised, and suppliers deliver in a whole new way. Marketplaces are defining retail and Storesome’s Marketplace Lab can help you build, manage, grow and scale your own.