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How Do Online Marketplaces Work?

Jun 17, 2020

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Online marketplaces have many moving parts. Having been in web development and e-commerce for some time, I thought I’d write this helpful article explaining how online marketplaces work.

So, how do online marketplaces work? An online marketplace is a website that allows users to list items for sale. The company that owns the online marketplace uses marketing to encourage people to visit and use their website. In most cases, they take a small percentage of transactions to maintain and improve it.

The way that online marketplaces work from a technical perspective is a bit tricky. There are also ways to get the most out of online marketplaces. BBelow I will discuss how they work from a technical perspective, as well as, how to get the most out of an online market place.

How do e-commerce marketplaces function?

E-commerce or online marketplaces function through a website. The website allows users to create an account. Once their account has been created, they can list items. People who have accounts can also buy products. When the item is bought, it goes through an online payment processor. The money is then transferred between accounts, and the item is shipped or made available for collection.

What website software or programming languages are used for online marketplaces?

An e-commerce website can be designed using premade software or built entirely from the ground up. An e-commerce website is built from premade software often. Both methods require expert help in order for it to work effectively. The most popular website platform is WordPress, which accounts for 20% of websites on the internet. Other popular premade are Shopify and Woocommerce.

A website that is built from the ground up will use the most stable programming languages such as HTML, CSS, Javascript, and PHP. They will often be built using a popular framework such as Laravel or React.js. This goes beyond the scope of this article but gives you more avenues for future research if you are interested.

There are also many varieties of e-commerce websites, and they have different payment methods. The most famous example of an e-commerce website is Amazon.

Amazon allows users to create an account and list items, as well as buy items. Because Amazon has been around for a long time, they have a big focus on innovation. They have also expanded what services they offer based on market feedback.

Market feedback is where they see what their customers like and create products to solve those problems.

How are payments made?

Payments are made through a payment gateway. A payment gateway enables people with an account to perform one-click purchases. This saves time for the users because they don’t have to put in their credit card details every time they make a purchase. It also performs well for sellers because they can withdraw funds to a bank account or spend the money on other websites.

According to Dreamhost, a popular hosting provider, the most popular payment gateways are:

Amazon Payments
WePay
PayPal
Authorize.net
2Checkout
Dwolla
Stripe
Worldpay

There have been cases in the past where people will abuse the ability to refund for digital products. They will get the full digital product and then ask for a refund and keep the product. When a person does a return via a payment gateway, it puts a negative mark on their account. If a seller gets too many refunds, the payment gateway can refuse them service. Therefore, many online sellers sometimes prefer not to accept specific payment gateways for purchases because of issues people taking advantage of the refund policy.

Stripe is a relative newcomer to the online payment scene. They are as good as Paypal and offer lower fees.

A website that sells more expensive items will have more secure methods to protect buyers and sellers. One example is the use of escrow. This is where the money is pre-deposited into an account. Once the product has been delivered, the website owner will release the funds to the other party. This way, fraudulent activity is kept to a minimum.

E-commerce marketplaces that sell cheaper items will usually release the full payment immediately. But, they will closely monitor a user’s activity to safeguard against fraudulent activity. They do this by adding a report listing feature to the website and taking complaints very seriously. This way, if one of two people have a terrible experience, the site will step in and investigate the matter.

This website you are on sheepbuy.com, is an online marketplace. We pride ourselves on being completely free of selling or hidden fees. We encourage you to sign up and take advantage of our excellent website. Though we are just beginning, there is an advantage to being one of the first sellers. This is because you get a leg up on the competition by gathering more reviews and feedback before them. Thus will lead to increased sales down the line. This is called the first-mover advantage.

How do buyers and sellers find out about an e-commerce marketplace? How do they get popular?

E-commerce marketplaces use marketing to get the word out about their marketplaces. Once they have become somewhat popular, they begin to grow organically through word of mouth or featured on the news.

There are many different marketing strategies which they may use, such as:

Direct mail. Some online marketplaces will make use of direct mail. This is where they send information letters to people and encourage them to use the platform because of a range of benefits. In recent times this has morphed into the email. Companies will also use free perks to gather someone’s email and then send them periodic informational emails to encourage use.
Word of mouth. Once e-commerce websites get to a specific size, they will attract buyers and sellers through word of mouth. This is where people will talk about the website in passing due to the excellent experience they have.
Social media. Many online marketplaces will use social media platforms such as Facebook. They will create a business account for the website and post relevant and helpful content that gets liked and shared.
Online marketing. These methods include pay per click advertising and search engine optimization (SEO). This enables them to get in front of more people and supplements their other efforts.

What does online marketplace mean?

An Online marketplace is a website where users can create an account and list items for sale. These same users can also make purchases from other people on the same website.

In a real-world sense, a market is a gathering of stores where various products are sold, like your local farmers market. People drive there and set up a stall, where they sell their vegetables and fruit. Because of its notoriety, people travel there to take advantage of all the stores being in one place.

An online marketplace is a website that lets people set up a stall and list their products without physically having to drive there. This helps out buyers and sellers in the following ways:

Saves time to both buyer and seller as there is no transportation time to view items.
Buyers being able to view what inventory is in stock at any given time.
Purchasing the item from the comfort of your home.
This helps sellers increment their sales year-round.

There are some advantages to see and feel the item in person, such as more substantial items and more expensive items, where they can be inspected before purchasing.

Online marketplace sellers, in some cases, also have a physical store or showroom. Though people can go there and make purchases, they often have computers set up for customers to purchase via the website. This way, they get positive metrics such as feedback and likes on their store, which helps their credibility and increases sales.

Learn more about the advantages of online marketplaces: Advantages of online marketplaces vs. classified sites.

Conclusion

An online marketplace works by allowing users to set up an account on their website. Once a person has an account, they can list items to sell or purchase items from other users. Most users set up their listings under a store name.

An online marketplace becomes popular by marketing such as direct mail, word of mouth, social media, and online marketing.

Marketplaces are incentivized to create such websites because they charge a small fee. This way, sellers can take advantage of the many people who come to the website to increase sales of their products.

Although Sheepbuy is the only marketplace that does not charge a selling fee or any hidden fees, start posting for free with our basic tier.

Click here if you’d like to learn more about how Sheepbuy works.