Marketplaces thrive when their supplier base is highly fragmented. This ensures that they have a higher negotiating power and can, therefore, command a higher take rate. E-commerce marketplaces such as eBay, Amazon and many others have lived in this fragmented supplier state since they were founded. However, the accelerating shift of commerce from offline to online is changing these dynamics.
E-commerce SaaS players are inserting themselves as powerful middlemen between the suppliers and the marketplaces and/ or the buyers (graphic below). Serving multitude of seller needs, these players have become de facto gateways to selling online. In the process, they have become owners of large parts of the supply. Marketplaces can view this as supplier consolidation, and it will, sooner or later, lead to some of the margins shifting from the marketplaces to these SaaS players.
Shopify, BigCommerce and Magento are a few notable SaaS players, serving all businesses except the really large ones. Thanks to the convergence of multiple trends highlighted below, they will become increasingly important in the still young world of e-commerce.
Brands will push direct-to-consumer in a significant way
A lot of brands have not yet fully embraced the online world. They still honor and depend on the relationships with distributors/ retailers that they had established to thrive in the offline world. There is an increasing need and an opportunity for brands to go direct-to-consumer. They will need some offline distribution but not at the scale of what exists today. Online first brands such as Warby Parker and Bonobos have proven that there does exist a fundamentally different approach to sales and marketing, outside the old distributor/ retailer relationships. This approach is not only more profitable, but it also allows the brands to understand and serve their customers better.
As brands make this transition, they will look up to SaaS solutions to help them build scale online. They will invest in a stronger online presence, outside the marketplaces, to earn higher margins. SaaS players will help them build all the shipping, payments and merchandising solutions, and promise to keep them at the cutting edge. This will allow the brands to focus on what they know the best, brand building and delivering physical products that customers love.
Offline and online integration will accelerate
As brands become more serious about online, they will stop treating it as an experiment and finally push to merge offline + online. This will mean that they will need a centralized view of their inventory, irrespective of where it is selling. They will demand that their point-of-sale (POS) solutions evolve to give them all the benefits that online has such as rich data analytics, seamless transactions and returns, etc. Again, they will look up to e-commerce SaaS players to make this happen. There is already an intense battle underway to own the shop counter and it is only going to get more fierce.
SMB sellers will want to have a multi-channel presence
Small & Medium Business (SMB) sellers have historically picked their preferred marketplace, focusing first on building expertise on how to sell online. However, as the process of selling online becomes standard and more and more sellers come online, SMB sellers increasingly want to have a presence on multiple marketplaces to maintain their growth rates. Add to this the fact that marketplace policies/ algorithms can change arbitrarily leading to volatile sales, there is all the reason for sellers to want to smoothen out their cash flow by selling on multiple channels. A lot of sellers I have talked to sell on both eBay and Amazon. SaaS solutions are the best best for any seller who wants to do this. They offer a centralized administration across marketplaces much like Hootsuite does for social media.
Barriers to entry for new marketplaces will reduce
By owning the supply side, e-commerce SaaS players have solved the chicken and egg problem of starting marketplaces to some extent. Getting supply on-board is now a lot about partnerships. An example of this is Facebook’s partnership with Shopify that allows Shopify sellers to sell products using Facebook Shop. Shopify has similar partnerships with Pinterest and Twitter. The interesting thing about these partnerships is that they not only give the sellers using the SaaS solution (here Shopify) an additional way to sell, but also increase the bargaining power of the SaaS player by ensuring that the e-commerce ecosystem has more than a few dominant marketplaces.
Best seller products will come from the SaaS players
Even if we don’t consider the points above, there is a strong likelihood that many sellers will gravitate towards these SaaS players as their business matures and their needs evolve. This is solely because these SaaS players offer better seller facing products. They have the benefit of focus that comes from having a more narrowly defined job. For example SaaS Inventory UX solutions will always be better than that of Amazon and Walmart because Amazon and Walmart have limited bandwidth to keep on iterating on their Inventory UX. They need to invest on many more products including the ones on the buyer side.
In addition, SaaS players also have the advantage of being in an ecosystem of software developers who don’t feel the compulsion to make it big. SaaS ecosystem is full of apps that fulfill tactical needs such as drop-shipping, email marketing, SEO, etc. These apps just want to hook into the bigger SaaS platforms such as BigCommerce and make enough money to spin a profit. Marketplaces can never build the exhaustive set of such solutions. These solutions will help the bigger SaaS players capture a boarder seller base with niche needs. In addition, it will give them a chance to become deeply ingrained in the business processes of these sellers which always is the key to higher profits.
Watching e-commerce SaaS players build a moat around themselves could offer interesting lessons for a lot of other industries that SaaS is trying to penetrate. It will be worthwhile paying careful attention to what happens next.