The Real Deal About Marketplaces and Whether They Can be Profitable.

By October 22, 2019 Blogs

You know those moments in life, where it takes your breath away a little bit? 

Looking at this photo does that to me. 1) because I can’t believe I actually have twins, it is quite incredible what the human body can do and how life can pivot so quickly, and to think my body grew and birthed two humans. Crazy. 

But 2) because these little onesies they are wearing was another one of those pivotal moments that changed my whole life.

Since I was about 21 I’ve been dreaming of the entrepreneur life and in fact, 2006 was when I registered my very first business name and started working on side businesses. I setup classifieds websites, marketplaces, directories, affiliates and fumbled my way through learning the ropes of business. I really had no idea what I was doing, and I had some success, but also many failures.

After my daughter was born, in 2009 as I was breastfeeding her one night, the idea to start an organic cotton baby clothes business came to me and over the next few years, I learned the ropes of manufacturing and selling a physical product. 

What my naive little self learned over time was that I needed to be centring myself in the profit producing areas of the business but due to the nature of the business model, I kept on getting sucked back into dealing with inventory, manufacturing, dispatching and the logistics side of the business, and also anytime I had a lump sum of cash it needed to be invested back into the business. 

In a nutshell, this is the process:

  1. Research viability of potential products
  2. Design product and variations of that product
  3. Source manufacturer, materials, pricing etc
  4. Pay money up front to start production, approve samples and make changes
  5. Approve final production and pay remaining amount to the manufacturer
  6. Import or get products delivered to your house, pay for duty, gst and delivery costs
  7. Sort out inventory
  8. House products at warehouse (or somewhere else)
  9. Start the selling/advertising/promoting process
  10. Re­order stock and repeat steps 1 – 8
  11. Attend to customer service enquiries/issues/etc.

Phew, it is a lot, right? And between each point is sandwiched a million other little details.

Step 9 is a whole new massive sequence in its own right. The standard markup on your products will be around 100%.

So if your end price is $10, you want to be selling it for $20.

Once sold, you take $10 to reinvest into a replacement product and you are left with $10, less the funds that are needed for promoting/advertising and running the business.
Which really, at the end of the day means you’re left with a few dollars as I was. 

But you know what? I saw that Pure Baby could do it, I saw that Sapling Child could do it. My competitors validated that it could be done and I was determined. I pondered this for a long time, and wondered how can a low priced ticket item be profitable? So profitable it would provide me with a proper income?

I thought of all the things in the supermarket you can buy for .50c or $5? How is there a successful business behind that that can have it’s products stocked in Woolworths? How do app owners that only charge a few dollars for their app become millionaires? How does Kayla Itsines have a net worth of $486 million when her program is only $19.95 per month?

What was the magic trick? As I got more experienced within business, I realised what it was.

Volume. 

Which in online terms, means traffic. Any product based business needs high volumes of traffic, because the industry standard conversion rate is approx 1-3% which means for every 1000 website visitors 10-30 should buy. What does this boil down to? That you need to sell loads of products and find ways to do it. That is what countless businesses do all around the world, some very successfully, like Kayla and her $486 million net worth.

But as a one woman show with two kids and after suffering PND, I realised I didn’t want to be working 24/7 and that there had been a smarter way.

I realised I had been on the money with my marketplaces all along back in the early days. I could sell a product for around 50 – 70% less time than it would take in my physical product based business. It is just common sense to realise that when you can invest more time working on your business, rather than in it, you are going to scale it faster. 

So, there is a lot of chatter about marketplaces and whether they are a viable business model but screen what you hear, and take advice from those who actually have experience with the model and have a read of the following low down.

What is a marketplace?

Think Esty, Ebay, Amazon, Brands Exclusive, Ozsale, Bike Exchange, Not on The High Street and before you start to think you could never create a business as big or successful as those, check this photo out: 

The key is to just start, and to start simple.

Marketplaces can be broad, like the above, or they can be niched like My Deal, Down That Little Lane, Temple and Webster, Harper and Harley. Sometimes a marketplace is also referred to as dropshipping.

Who are they best suited for?

Marketplaces are great for anyone but especially someone who doesn’t have any skills or knowledge they can sell as service, so choosing a product niche and jumping into business this way is a great way to learn the ropes.
Technically, you could drop your products into some FB groups and get sales straight away, but I wouldn’t count on it being that easy or sustainable. Like any business and what I advise my clients everyday, all day, lots of times a day, you need to build a simple strategy of mindset > audience > traffic > leads > sales.

Marketplaces are great for:

  • Someone that wants to get really good at driving traffic to their website, and selling a product.
  • Someone who doesn’t want to sell and write sponsored posts for income.
  • Someone who doesn’t want to put tacky ads on their website.
  • Someone who doesn’t have any skills or expertise to leverage off.
  • Someone who has a love or interest in a specific niche.

How much can you earn with a marketplace?

Commissions can either transact via your website, where you set the percentage, the norm is 10% – 30%. While you are new, and have no real value to demonstrate yet, that is going to be closer to 10%. The key here is to build your value (traffic and eyes on pages and page views) whilst also building your halo effect (positive impressions of a person, company, brand or product) because when you combine both, you can yield higher percentages towards 30%. Until you have this, you have to start small and play the long term game to systematically build.
As I teach all my clients and include in my e-course, it is important to understand the law of conversions, I have also chatted about this many times in my Facebook Group, Remarkable Business Mums.

So the law of conversions is, if you are attracting 10,000 visitors to your website per month and have a conversion rate of 2%, you should be selling 200 products, which is $2000 per month @ $10 profit per product.

Want to up that income? Up your traffic. Up your conversion rate from 2% to 3%. Up your commission from 10% to 15% to 30% and get really good at digital marketing and understanding how to do that. For example, 20,000 visitors per month converting at 3% means you are selling 600 products per month and @ at 30% commission on a $100 product that works out at $18,000 per month.

The silver lining here is you don’t have to reinvest that into product replacement, but don’t forget the law of conversions – to make a proper income you need to scale your traffic, like any low priced ticket item strategy, and understand that any online business needs to have an online marketing strategy behind it. This strategy takes time to build, craft and refine and whilst it is possible to quit your job from this business model, I never advise anyone that it is an overnight or fast process. 

You can also add additional income streams and levels into this as well, for example:

  • You can cap the number of products you allow a supplier to have and then charge an additional fee for extra products
  • You could create aligned digital downloads like e-books, planners, checklists, photos as a cross sell and extend your customer journey
  • You could offer advertising in banner format, like my buddy Belinda Jennings from Mum Central did, when she started charging for advertising in 2010, she had 10,000 visitors hitting her website and banners cost $400 pm.
  • Jody Allen from Stay At Home Mum also confirms, a website really needs a starting point of 10,000 unique visitors and if she were starting today she would charge $400 for a sponsored post.

Pros of a marketplace:

  • Suppliers deal with the time and energy of handling and managing stock
  • You can choose from products that already have brand awareness, trust and credibility
  • You don’t have to store stock in your house
  • All packaging and postage is taken care of
  • You only pay for the stock you sell, so you don’t have to invest $1000’s in product or worry about MOQ’s
  • You can try and test different products to see which ones convert
  • You don’t have to create, design or manufacture products

Cons of a marketplace are:

  • Stock control and keeping it up to date (Go for suppliers that always have loads of your product in stock and when you can afford it, hire a VA from Upwork from the Philippines for $10ph) 
  • Slightly higher cost to sell compared to wholesaling (but less time involved meaning more time to sell)
  • Generally lower profit per product especially if you are starting out on a 10% commission (go for higher priced ticket items, bundling products together, or accept that this is also business and part of business is nailing a product and then scaling the orders)
  • If the supplier packages the item poorly, causes delays in shipping, or makes a mistake with the order, then you are held responsible, even when there is very little you can do about it (trust and relationships build over time)
  • While you are new and little you may find it harder to secure suppliers (stay true to your vision and build the value of your business up through the traffic you can command to your website and this will get easier. 
  • Shipping and postage is annoying, but possible to configure (Go for less suppliers that have bigger product lines or build shipping into the pricing)
  • NOTE: You can bypass a lot of these cons by setting up the structure as an affiliate model, instead of a direct commission model.

Conclusion:

Marketplaces are a great business model to learn the ropes of online business, will it be successful? The industry has already validated it can be, but will you make it successful? That is up to you to decide. Remember the following key points:

You need traffic – any online business does
You need to know the law of conversions – to understand if you’re on the right track
You need to know the difference between a low priced ticket item and higher priced ticket item – to understand volume
You need to know it is about learning digital marketing – to understand the strategy
You need to learn from people who have been there, done that – because otherwise the information is not accurate

Most importantly remember – no business model is perfect, they all have pros and cons but choose the one that allows you to position yourself in the profit producing areas of your business and within your natural strengths so you can work from within your zone of genius and you’ll be off to a great start.