The digital marketplace dilemma: Growth opportunities and challenges for small businesses

This post is part of a series on our findings from Mastercard Strive’s Small Business Digital Evidence Map. The Evidence Map, developed by Caribou Digital, is the first interactive public tool charting evidence on the impact of digital and data-first interventions on small businesses. It documents the impacts of digital upskilling, digital market participation, digital financial services, and tools for digital business operations programs against seven core outcomes for small businesses. To learn more about the Evidence Map, visit the website and read our previous posts.

Digital marketplaces continue to rise — global online purchases were expected to reach 20% of total retail spending in 2023, double that of 2017. Advancements in e-commerce provide companies of all sizes unprecedented opportunities to access global markets. The COVID-19 pandemic accelerated this shift, compelling many small businesses to adopt digital and e-commerce capabilities. Yet for small businesses, engaging in e-commerce can require substantial investments in tools, skills, and systems; therefore, the business case needs to be clear. So, what are the potential benefits and downsides to investment in digital market participation for small businesses?

We turned to the Mastercard Strive Small Business Digital Evidence Map to address these questions. Digital marketplaces are online platforms that facilitate the buying and selling of goods and services, typically by making more customers or suppliers available to small businesses, or deepening access to existing clients and suppliers. Digital platforms or other online channels (like virtual storefronts) allow small businesses to interface with and use web-based applications to facilitate their transactions and often create trust by integrating payments, ratings, logistics and delivery, and other security measures. Small businesses engage with a spectrum of digital marketplaces, from general-purpose platforms with low entry barriers (e.g., social commerce) to platforms offering a deeper set of services and customization (e.g., specialized platforms for specific small business segments). As small businesses begin to engage with digital marketplaces they adopt a variety of practices and services that enable them to buy and sell through digital platforms and online channels.

In the Small Business Digital Evidence Map, 56 studies document the impacts of digital marketplaces of all types on small firms. Of these, 21% investigate digital marketplaces as standalone interventions, while 78% provide insights on digital markets bundled with other services, such as upskilling and digital financial services. To date, there are no impact studies on small businesses and digital markets that have used comparison or control groups, but rather all 56 studies are theory-based evaluations of impacts.

Using these insights, our review of the evidence led us to four key takeaways on the effects of digital marketplaces on small businesses and how to encourage their uptake and adoption.

1. Engaging with digital marketplaces allows small businesses to access a larger customer base, increase sales, and boost brand recognition — all of which lead to revenue growth.

Thirty-one studies measured the impacts of digital marketplaces on small business growth, with 94% of these finding positive results. In multiple studies, researchers found a consistent result: once small businesses start selling on e-commerce and social commerce platforms, they report access to a larger customer base, which increases total sales volume and ultimately revenue. This is particularly true for business-to-consumer (B2C) retailers.

• In Indonesia, small retailers selling on e-commerce platforms reported higher brand recognition and customer awareness, leading to more customers and higher sales.
• A majority (73%) of women-owned small retail businesses surveyed in the Philippines reported that their biggest gain since adopting e-commerce was business growth, and 67% cited higher profits through adopting e-commerce and digital solutions.
• A review conducted in collaboration with Amazon of the perceptions of Italian companies that had started selling on the platform found that half reported an increase in sales turnover, and over 60% reported an increase in their customer base. Small and medium enterprises reported more benefits (related to turnover, margins, and exports) overall than companies with more than fifty employees — suggesting that adopting e-commerce had more benefits for smaller businesses.
• An analysis of data from a large Indian B2C platform showed that e-commerce helped businesses of all sizes grow revenues by 3% to 5% due to access to a larger customer base for marketing. Small — usually informal — businesses saw rapid growth in sales per employee (typically 50% higher than for formal businesses) and online revenue per employee after joining the e-commerce platform. Once they became established e-commerce players, they saw the same steady growth in monthly revenue as larger businesses.

The studies indicate that small retail businesses can grow by integrating e-commerce as a sales channel. The limited studies that look at sustained growth suggest that this growth is additive to existing business rather than replacing other (offline) sales. Overall, however, the lack of precise measurement and the trend towards concentration of online sales into a few firms highlight the need for a more thorough measurement of the long-term impacts of e-commerce on small businesses within retail and in other sectors.

2. Digital marketplaces that include embedded digital products and services support the adoption of better business practices.

E-commerce and social commerce platforms often embed additional digital products and services, including payment solutions, communications apps, logistics, and data analytics. These embedded products attract small businesses by offering simple, one-stop solutions that often enhance the quality of their experience on the platform.

In the Small Business Digital Evidence Map, we found evidence that participation in digital marketplaces contributed to small businesses increasing their use of digital products and services (29 studies).

• A 13-country study by DAI found that small businesses increased their use of social media apps to communicate with customers and suppliers during the COVID-19 pandemic. In 11 countries, 35% to 55% of small businesses increased their use of social media, while in two — India and Bangladesh — rates remained low (8% to 18%, which did not increase significantly during the pandemic). Adopting social media tools allows small business owners to answer questions, provide additional details, and gather feedback about their products, and it is often built into the e-commerce social commerce channels they already use.

Small businesses are also increasing their use of digital payments, including mobile money, after joining e-commerce platforms.

• A majority (90%) of small businesses in a six-country survey in the OECD agreed that the efficient management of digital payments was a major benefit of selling online. These embedded apps are easy to use, making the on-platform experience easier or better for small businesses, regardless of sector.

Digitalization of markets increases small businesses’ application of better business practices (36 studies), most often through more and better access to data, which allows for more sophisticated decision-making around marketing, pricing, and inventory management.

• About 51% of small, often informal businesses selling on an Indian e-commerce platform Chaldal reported improvements in how they market products since joining the platform. A large portion (85%) said that joining the platform increased their incentive to formally register their business, and 26% changed their legal structure after joining Chaldal.
• In Italy, more than half of surveyed small firms said that joining e-commerce platforms with embedded analytics expanded their knowledge of consumer needs, and that it led them to expand and differentiate their range of products and services.

3. Digital marketplaces support small business resilience by providing alternative sales channels and generating business performance data to support access to credit.

Participation in digital marketplaces is correlated with increased resilience (20 studies) by building operational and financial resilience.

Operational resilience: Businesses that adopted or maintained digital channels, particularly during the COVID-19 pandemic were more likely to survive.

• Across 12 out of 13 countries studied, DAI found that typically three-quarters of small businesses surveyed reported that digital tools, including marketplaces, were important or essential to keeping their businesses running during the pandemic.

Financial resilience: Joining an e-commerce platform can demonstrate financial viability to lenders, facilitating access to formal credit, particularly when financial services are embedded within the platform.

• In India, 40% of surveyed informal firms said e-commerce participation made obtaining loans easier.
• In Indonesia, participation in online marketplaces was found to have a significant positive impact on financial inclusion, as financial services were embedded within the platforms and leveraging platform data to assess credit scores.

4. The downside: Women-owned and micro-businesses face the largest challenges in entering and maintaining online marketplaces, potentially excluding them from the benefits.

Balancing the opportunities for development and growth, a small body of research (10 studies) highlights the challenges of digital market participation for some of the most vulnerable small businesses.

• One in-depth qualitative study found that women entrepreneurs struggle with the continuous demands of e-commerce. For many women entrepreneurs, online businesses are seen as a “side hustle” that can be done while managing household and family responsibilities. However, the continuous need to learn new social media marketing skills and manage a 24-hour-a-day online presence is in direct conflict with their need for flexible employment that fits around other responsibilities.
• Another study of small third-party resellers on digital marketplaces highlighted the adoption of risky and predatory practices (e.g., stockpiling inventory or selling at losses) to try corner niche markets. While these practices have led to short-term gains for some businesses, they can cause significant financial strain and are ultimately unsustainable for most retailers.
• Research from DAI in Cambodia, India, and Kenya found that, while digital tools offer many advantages, they can expose small businesses to risks of misinformation, fraud, and cyberattacks that can lead to reputational damage and loss of trust from customers.
• At a macro level, the concentration of online sales in a few firms may widen the gaps in performance (and productivity) between smaller and mid-sized or larger firms, further harming small businesses.

Key takeaways

So, what do these findings mean for organizations that are supporting small businesses to engage in digital marketplaces?

1. Small firms that adopt social commerce and e-commerce solutions benefit from access to a broader customer base. As a result, they tend to experience business growth and higher profits, as they can market their products to a wider audience more efficiently. This is especially the case on B2C platforms that offer other services, such as marketing support, to help small businesses effectively engage this new customer base.
2. Digital marketplaces encourage small businesses to expand their use of various digital products and services and to engage in new, better business practices through embedded services. However, the more sophisticated marketplaces — which offer additional benefits to small businesses — typically come with higher costs (e.g., through commissions) and with higher skill requirements (e.g., through the need to manage accounts and profiles, understand and satisfy the platform’s terms, engage with customer ratings and requests through the platform’s channels, etc.). Ensuring that small businesses have the capacities needed to take advantage of these platforms is essential to ensuring they deepen their digital presence.
3. Digital marketplaces provide additional sales channels for small businesses without significant costs. These efficiency gains help small businesses better withstand and recover from disruptions and become more resilient. There is significant and growing potential for digital market providers to work with financial institutions to use the significant volume of data generated on platforms to support greater financial inclusion.
4. Without proper capacity to address these challenges, small businesses expose themselves to risks that can undermine their business. While digital marketplaces offer significant opportunities for small sellers, digital also has the potential to exacerbate analog trends by placing small businesses in direct competition with larger firms and exposing businesses to new (cyber) risks that they may not have the skills to address.

Programs that support small businesses should ensure they have the access and capabilities to take full advantage of the growth opportunities digital markets provide while navigating the challenges. Mastercard Strive works with organizations that promote the effective participation of small businesses in digital markets. Through our programs, small businesses are being supported to adopt digital marketplaces and are being equipped with the capabilities to use those markets effectively and safely to grow their businesses.

• In Kazakhstan, Accion is working with KMF, the largest microfinance institution in the country to launch a new digital marketplace for small agribusinesses.
• In Samoa, through our Innovation Fund, SkyEye will be building out and promoting an e-commerce platform that overcomes barriers of digital payments, non-existing street addresses, and language barriers to realize the benefits of digital technologies. Small businesses will be introduced to the benefits of data analysis to improve their decision-making and day-to-day business operations.

Through these projects (and more to come) Mastercard Strive is working to make sure that small businesses have the ability to participate in and reap the benefits of digital marketplaces.

The studies in the Evidence Map represent our best knowledge of digital support for small business insights. New studies are continuously emerging, and thus, the Evidence Map will continue to evolve. If you have questions on the Evidence Map, are interested in discussing research priorities, or know of relevant digital support for small business impact studies, please contact hello@strivecommunity.org.