Marketplaces Glossary: Key Terms You Need To Know in 2023
The terminology used to describe the dynamics of a marketplace can often feel overwhelming because of the vast array of definitions and jargon to take into account. But the reason that marketplaces are so complicated is because of the specificities and subtleties that come into play when managing a business.
This marketplace glossary is designed to make key marketplaces terms less complicated and intimidating. Read on to discover essential terms and definitions that will aid you in building your businesses’ marketplace in the best way possible!
Key terms in marketplace
There are several essential marketplace terms to define when considering the basic structure of a marketplace.
The liquidity of a marketplace is how easily a buyer and a seller can find each other. This is the most important part of a marketplace operating effectively, and without it, a marketplace has no value to the buyer and seller. The number one reason that a marketplace fails is because of a failure to maintain liquidity. In other words, if buyers can’t find the product or service that the seller is offering, then no sale can be made, rendering the marketplace useless.
Before you can build and grow your brand within a marketplace, you must first understand what a marketplace is. Simply put, a marketplace provides the basic infrastructure to facilitate a purchase. A quality marketplace will be the connection between you (the seller) and those who are purchasing your products (the buyer). This infrastructure is made up of payments, messaging, reviews, and more that can aid in the transaction process and help to complete the purchase of your goods and services.
The process of matching is very similar to and dependent upon the liquidity of a marketplace. When a consumer finds a supplier, they are matched. Buyers and sellers finding each other is the overall matching process. Matching can be orchestrated in a number of different ways, from automated matching, where the seller decides which customers to transact with (example: Uber) to demand matching, which is the exact opposite (example: Airbnb). Regardless, once the transaction has taken place, the buyer and seller have been effectively matched, and the marketplace has served its purpose successfully.
Supply and demand
A marketplace is ineffective without a buyer and a seller. The seller who is providing the product or service is the supply side of a marketplace, while the buyer who is acquiring the product or service is the demand side.
Two-sided network effects
A properly functioning marketplace will have two sides. The more valuable a network becomes, the more users are on the other side of the marketplace. For example, people who are looking to buy apples obtain more value when there are more apples available for sale. Each marketplace has a different level of effectiveness on a network’s strength.
Types of marketplaces
One of the factors that can make understanding how a marketplace works challenging is that there are several types of marketplaces, and each serves a different purpose.
A business-to-business marketplace, or B2B for short, aims to match one business with another. An example of a B2B marketplace would be a shirt manufacturing company that supplies clothing directly to Walmart.
A marketplace can function differently based upon your geographic target market of consumers. For example, a manufacturer of skis won’t have many sales in Florida, but they can geotarget areas with mountainous terrain to increase views and sales. Location-based marketplaces can be split into two categories — local and global. A local marketplace is where a user is only relevant in a particular geographic location. A global marketplace has a supply worldwide that can create additional value for a user that resides in a different region or country.
An example of a local marketplace would be a small-business hardware store that primarily sells to only people that reside within the town that it is located in. A global marketplace, for example, could be an online hardware store that can ship to any location in the world.
A managed marketplace is designed to take on additional activities in the hopes of building and establishing better trust with users. These activities can include verifying product authenticity, providing guidance on pricing, and vetting sellers to help ensure quality products and services.
There are two different types of multi-sided marketplaces: two-sided and N-sided. A two-sided marketplace is the traditional buyer and seller, supply and demand model that most marketplaces are based upon. An N-sided marketplace, however, can include three, four, or even five sides that are integral to the marketplace functioning properly. An example of an N-sided marketplace is the restaurant industry, which is made up of three sides — food suppliers, restaurant staff, and consumers.
An online marketplace is a platform where different businesses can collectively sell their products or services to a pre-established customer base. Online marketplaces create a place for people to see all available options for a product or service from different sellers. Ex: Amazon Marketplace, Facebook Marketplace
The main function of a vertical marketplace is to fit the needs of a specific industry, product, or customer. Vertical marketplaces are often hyper-targeted and tailored to these specific needs to better reach target audiences.
The structure of a marketplace is essential to its success. Each marketplace’s structure is slightly different, designed to be catered to its specific target audiences.
The degree to which a marketplace creates or diminishes variation between suppliers is known as commoditization. A commoditized good or service is nearly indistinguishable from competitors offering from another supplier. Commoditized goods will be displayed in the same way and in a way that takes from any differentiation between the products. The purpose of commoditization is to keep from overwhelming consumers with too many options and to point viewers toward the relevant aspects of each product that are most beneficial to them.
Size of marketplace
The volume of buyers and sellers in a marketplace can help determine the marketplace’s structure. A smaller market is known as a concentrated market, while a larger market is called a fragmented market. Typically, a fragmented market is more desirable because the more buyers and sellers in a marketplace, the more opportunities there are for high rates of liquidity and matching.
Variety of marketplace
The variety of a marketplace can be measured in two different ways — homogeneity and heterogeneity. A homogeneous market is a market in which the properties are uniform throughout the entire system and products cannot necessarily be distinguished from competing products.
A common example of a homogeneous product would be industrial goods such as steel or cement, which have very few differentiating characteristics from competing products. Steel will always be steel because it is a raw material.
Most products on the market are heterogeneous. An example would be flat-screen televisions which can be differentiated easily by brand, size, shape, color, etc.
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