According to the FDI policy guidelines, “Marketplace model of e-commerce means providing of an information technology platform by an
e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.”
The main feature of the Marketplace model is that the e-commerce firm, like Amazon, Flipkart, Snapdeal, etc. provide a platform for
customers to interact with a large number of sellers onboard to buy a product online. Thus, when a product from amazon is bought, you
are actually buying it from a registered seller with it. As such the product is not directly sold by amazon. Here, amazon is just a website
platform which facilitates a meeting place for a consumer to meets a large number of seller and offer various options and price levels for a
product or service.
According to the FDI policy guidelines, “Inventory model of ecommerce means an ecommerce activity where inventory of goods and
services is owned by the e-commerce entity and is sold to the consumers directly.” The main feature of inventory model is that the
customer buys the product directly from the e-commerce firm. As such, inventory management, logistics etc. are solely managed by the e-
A Marketplace website offers enormous range of products with multiple sellers at their platform which offers delight and higher
satisfaction to the consumer. He may re-visit, again and again to buy other or similar products, if the website has offered him a satisfying
buying experience. The options thus offered are enormous.
Whereas the Inventory-led websites have specialized but limited product range and the serious customers may log in to these website
for a specific product range, such as caratlane.com for precious jewellery, booknest.in for books, swiggy.com for food, 1mg.com for
Anchor Seller and a Level Playing field
Most of the marketplace players have anchor sellers on panel, who are either their subsidiary entities or a large enterprise who have
entered into privileged deals with them which helps them offer great deals or discounts to the customers. This may include a higher discount
on products, FREE shipping, compensation for sales returns etc. The losses incurred on these deals /services are compensated by the
Marketplace Player under a pre-agreed arrangement.
As per the amended laws, it was made very clear that marketplaces shouldn’t influence pricing, directly or indirectly. Thus, it would not be
legal for marketplaces to give discounts now. In the light of this, such opaque arrangements with these anchor sellers are contrary to the
prevailing rules of the land.
You often find that some products are available on the website at 40% -60% discounts which is even hard for the manufacturer to offer.
You often find that there are 40-50 sellers for a product but excepting one anchor seller, no one is able to offer such exciting discounts or
offers. They even mask other seller completely and corner almost entire demand for these products, thereby also frustrate these multiple
genuine sellers to reach the customers with their honest pricing offers.
These bargain offers are made possible through these Anchor sellers while the losses are funded by the Marketplace player. May be one can
feel this practice offensive for other registered sellers as being unduly skewed against them.
Business Model and Bottomless Pit
A marketplace recovers commission and administrative costs amounting to nearly 15% to 20% for the services rendered from Sellers.
Besides, some large players also generate revenue through advertisements on their websites. Many large players have started recovering
the advertisement & publicity costs incurred from the Sellers, during the Special Offer/Seasons sale announced.
Notwithstanding, one often wonder at the bottomless pit of these players who have been able to remain in business despite incurring huge
losses ranging between Rs.1,500 crores to Rs.2,500 crores year after year. All these marketplace players have raised enormous funds
from Investors and these funds are utilized for subsidizing offers besides meeting advertising & publicity, Logistics costs besides meeting
enormous administrative costs.
The hypothesis that volume of business is anticipated to grow significantly in a few years from now to help the commission revenue to
grow significantly to cover their costs and help them revenue positive is far-fetched. Amazon has though envisaged a 7-year time horizon
to achieve revenue positive sales volumes.
Buyers Delight Vs Sellers plight
In marketplace model, Buyers delight comes at the cost of enormous misery of the sellers. A seller is required to offer best deal to
consumers and also share exorbitant 20% plus rate of commission to the Marketplace entity. Besides, they have to bear complete logistics
cost which often are not fully or partially passed on to the customer.
The fierce competition has led these sellers to work on wafer-thin margins which often get eroded with increased sales returns and the
associated costs with it.
On today’s Marketplaces in India, sellers are mostly individuals or small businesses, selling at thin margins on product they might be buying
from local markets that means they cannot bring out the best deals to the customers. As a result, the recent trend shows that discounts
offered from Sellers are becoming smaller by the day besides logistics charges incurred are recovered in full. The product listings, prices are
also mostly outdated due largely to lack of knowledge and the time to handle customers keep them overall low-rated.
Whereas, the Manufacturers or large Distributors who were seen sitting on fences have become active and they have been offering still
better terms or discounts on their exclusive products on their stand-alone websites. Birla’s abof.com, Tata’s croma.com, Biyani’s Big Bazar
are few example under inventory-led model which may disrupt the online market. Many others like booknest.in and bookadda.com have
placed themselves strongly in online bookstore, a segment now no longer a priority for the top 3 e-commerce players in India.
There is a growing pressure from investors for the marketplace players to cut their losses and turn profitable soon. As a result, the
discounts are likely to get reduced further in the coming months and years. Globally, marketplace pricing strategy have rationalized in an
average of 5-7 years and the maximum discounts are usually restricted to 15-20% as anything beyond this is practically unsustainable.
There is a myth that by offering greater discounts and freebees, the marketplace would gain customer loyalty and retain their customers
for longer periods. My belief is that consumers in India are price-sensitive and look for more value for their money. The Inventory-led
websites could thus be able to match or offer better discounts on their products. This may consequently lead to disintermediation of
consumers to these websites.
Almost all e-commerce players are on the verge of re-discovering their business models and aspire to become profitable sooner. The fact
is, none have been able to see a penny in profit so far. Many big and promising e-commerce and unicorn players have perished due to
unsustainable losses and many have been sold out to others. Year 2017 would see many more to fasten belts and pursue to solve this
riddle lest they perish in the race to the survival of the fittest.