Business Models of Marketplaces
Dimensions, attributes and specifications
INTRODUCTION
We tend to associate industry’s transformation with the adoption of recent technological advances. These recent technological advances, enabled the creation of new marketplaces, such AirBnB or Uber, that often provide entirely new value propositions, based on a digital platform: web-based platform or mobile app. Characterized by their open business model that rely on independent participants to co-create value and rapid growth, they enable and support transactions between independent supply-and-demand side participants.
The transformation of an industry is not ensured by introducing new technologies, but by the business model that can link a technology to an emerging market need. According to Teece, “the essence of a business model is that it crystallizes customer needs and their ability to pay, defines the manner by which the business enterprise responds to and delivers value to customers, entices customers to pay for value, and converts those payments to profit through the proper design and operation of the various elements of the value chain”.
Follow the sections below and discover the value dimensions of creation, delivery and capture of the business model created by Karl Tauscher and Sven M. Laudien, and find out how many attributes and specifications exists on this business plan and the combinations that you can do on your business.
- VALUE CREATION DIMENSION
The value creation dimension is architectured to be the foundations of what will your offer proposition be. It is standardly organized in four attributes: type of platform, key activity, price discovery and review systems.
The type of platform will be basically set what kind of system will be the output for end-consumer to deal with. It can be by mobile app or a traditional web-based platform, which will be chosen according to your end-consumer primary usage habit.
The key activity is an important thing that will make the difference as the business function. For many companies that rely of data performance to drive the business, marketplaces with the key activity based on data services and visualization will the option to make.
Another key activity is the community building, that is an option when act in a cluster or niche market. That way a marketplace with a strong community will more easily have quality growth and more value to the sellers since it’s well clustered and with more potential buyers.
The content creation-based marketplaces are adapted and used by services companies that will be selling services like education like Udemy or Lynda.
The price is almost always set by the seller, but there also cases that depending of the business can be automated or flexible price, by auction, able to be negotiated or even set by the buyers.
The review system is used by the majority of the companies to build trust, being more used in the services marketplaces than in the products. Depending on the business and marketplace characteristics we can find some that don’t have that ability, other can have users reviews or even marketplace own reviews.
2. VALUE DELIVERY DIMENSION
The value delivery dimension covers the six attributes that produce value1 for the customer (pre-defined target):
i) Value proposition, specified over a framework with three types of perceived value: a) utilitarian value through price, cost, or efficiency advantages, b) emotional value through superior user experience or the associated image with using the marketplace, and c) social value through the interaction with other marketplace participants;
ii) Transaction content, namely if it is provided a material product or a dematerialized service;
iii) Transaction type, that is the mean of provided value — digital (virtual environment) or offline (real world);
The combination of these two attributes defines whether the marketplace offers physical products (e.g. clothes), digital products (e.g. digital music), online services (e.g., e-learning), or offline services (e.g. transportation services).
iv) Industry scope, such as vertical market when the customers are in one particular industry, regardless of where in the value chain they are (e.g. healthcare or insurance) or horizontal market if all the customers use the product to do the same thing, regardless of what industry they are in;
v) Marketplace participants, which refers to the type of user segments that the marketplace primarily connects — consumer-to-consumer (C2C), business-to-consumer (B2C), business-to-business (B2B);
vi) Geographic scope, which addresses the client’s physical location attribute, and it can be global (worldwide), regional (e.g. Europe or a specific country), or local (when it is covered only a determined metropolitan area, a city or a neighborhood). This is a very important issue because impacts on business in terms of regulation and laws, time zones, coins, languages, culture and so on.
3. VALUE CAPTURE DIMENSION
The value capture dimension describes how the company transforms the value delivered to customers into revenue and profits, as explained below:
In the key revenue stream revenue flow options can be distinguished among the four categories; commission model where the company receives a fee for each completed sales transaction (72% of the companies analyzed by Karl Tauscher and Sven M. Laudien use this model); in the subscription model the company sells a service contract with recurring fees that continue automatically; the advertising model is based on fees that are paid for companies to have an opportunity to access potential customers who are not direct users of the market; finally, the service sales is a model in which companies are paid for non-standard services.
According to Tauscher and Laudien, commissions are the main option for C2C (79%) and B2C (70%). The B2B markets are concentrated less in commissions (33%) and more in registrations (66%).
In the pricing mechanism derived from Osterwalder, we distinguish between the three specifications; fixed pricing, market pricing and differentiated pricing.
The fixed pricing is based on static variables and is not differentiated between customers or product characteristics. The market pricing category describes pricing methods based on market conditions and contains negotiation, yield management, real-time markets and auctions (Movahedi et al., 2012). The differentiated pricing can be further divided by its discriminating factor: characteristic product, customer characteristic, volume or geography.
Pricing discrimination can be done between different groups of users: feature based (e.g. premium services), location based, which takes geography into account and quantity based (or volume).
In the revenue source for the markets, the business model is further defined by the decision to monetize the participants on the supply side, the demand side participants or a third party.
BUSINESS MODEL ADOPTION
We can assume that business models of marketplaces follow a linear path. Due to their variety of characteristics, attributes and dimensions, they are very dynamic so that way that can adapt to business model pretended, consumer profile and his purchase journey, as it may vary from product/service offer.
The adopted option influences the communication and relationship with the community and limits the boost of the business. The strategy must be well defined to fit the best marketplace business model to choose in order to take advantage of this e-commerce fast growth.
This post is based on Karl Tauscher and Sven M. Laudien article “Understanding platform business models: A mixed methods study of marketplaces” published on European Management Journal (2017) and was written by Abdul Karim, Gustavo Leitão, Luís Machado and Marcelo Bassi Gomes.
Footnotes:
[1] James C. Anderson and James A. Narus purposes (Harvard Business Review) a definition of value in business markets: “value is the worth in monetary terms of the technical, economic, service, and social benefits a customer company receives in exchange for the price it pays for a market offering”.
[2] Rebecca O. Bagley explains (Forbes) that to develop a clear and compelling value proposition is the first and the most important stage of an effective market opportunity assessment. She also elaborates about the three stages process to develop a compelling value proposition: 1) identify customer benefits, 2) link these benefits to mechanisms for delivering value, and 3) map the basis for differentiation or market play.
References
Kavadias, S., Ladas, K., & Loch, C. (2016). The Transformative Business Model, in Harvard Business Review.
Tauscher, K., & Laudien, S. M. (2017). Understanding platform business models: A mixed methods study of marketplaces, in European Management Journal.
Teece, D. (2010). Business models, business strategy and innovation. Long Range.
