For the average American consumer, this week heralds what is perhaps the most exciting holiday of the year — and, no, it’s not Father’s Day. Amazon’s Prime Day, which extends from June 21 to June 22, celebrates the birthday of the e-commerce giant by offering members sales on a huge selection of products ranging from the latest Echo dot to a giant tortilla throw blanket. Prime Day has seen immense growth since its conception in 2015 and, already, Amazon’s revenue from the two-day discount bonanza is projected to exceed last year’s earnings by over $2 billion.
The growing popularity of Prime Day — and, more generally, the e-commerce sector as a whole — has only been accelerated by the COVID-19 pandemic. For millions of Americans stuck at home, retail therapy has provided a much-needed respite from the drudgery of quarantine: after all, there’s something strangely exciting about watching the mailman drop a package at your doorstep like some sort of alter-ego Santa Claus. Since March 2020, online marketplaces have seen their revenues skyrocket and early research suggests that, even after the pandemic, consumers’ digital behavior will stick around.
Given the immense growth e-commerce has undergone — and will continue to undergo — now seems to be a prime time (no pun intended) to examine the untapped potential of online marketplaces. Broadly speaking, the value of the digital marketplace model rests on several key characteristics:
- Reach: While offline marketplaces have traditionally faced limitations around the types of buyers and sellers they attract, online marketplaces have the capability to reach any audience with an Internet connection. The expansive reach of online marketplaces gives users a wider range of products — and competitive prices — to select from.
- Scale and defensibility: Once online marketplaces reach sufficient scale, the network effect kicks in and growth follows an exponential trajectory: more buyers attract more sellers which, in turn, attract more buyers. As a result, consumers naturally gravitate towards a singular, centralized, and highly defensible marketplace.
- Low costs: Marketplaces deal solely with transactions and, as a result, they incur neither the costs nor risks of producing a physical product. With reduced COGS, online marketplaces can maximize their monetization strategy.
With such powerful value drivers, it’s no wonder why most billion-dollar “unicorn” startups today are, in fact, marketplaces. And, with the power to shape — and even redirect — consumer behavior, marketplaces are not only fast-growing but also well-positioned to make a positive impact. Take, for instance, Full Harvest, a business-to-business (B2B) marketplace that connects buyers and sellers of excess produce. By creating a market for fruits and vegetables that would otherwise be discarded, Full Harvest harnesses the power of consumer spending to combat food waste — a leading contributor to climate change — head on.
As the world emerges from the pandemic, it’s clear that the unique combination of rapid growth and high potential value will make online marketplaces a powerful force to reckon with in the years to come. What remains to be seen, however, is how marketplaces will choose to wield that power — both for better and for worse.
Caroline Hallmark, Investment Intern
Missed Prime Day? Never fear — see this list of non-Amazon marketplaces with sales extending throughout the whole week.
Online marketplaces aren’t always built with sustainability in mind: this MIT study attempts to quantify the carbon footprint of online shopping.
Those interested in exploring the origins of America’s consumerist culture should take the time to peruse Morgan Housel’s excellent blogpost on the subject.
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