In our last week’s essay, we discussed marketplaces in detail. We further went on to describe how managed marketplaces are emerging. We can think of current marketplaces as digital infrastructures in the metaverse. The products created by the marketplaces are the services in the ecosystem to create value on the supply and demand side.
If you missed out on the previous essay, I strongly recommend reading it here before progressing.
Value Addition By Marketplace
Zalando is a great example of such a digital ecosystem marketplace. Zalando connects fashion merchants to consumers. The now giant was started in 2008 and has built numerous services inside the digital infrastructure which it calls partner services:
Zalando Marketing Services: The 360-degree marketing unit of the fashion marketplace. It helps brands reach the audience through media, insights and creativity. ZMS is an innovative approach for Zalando to leverage the marketplace itself by creating value for supply without affecting their trust with the customers.
Zalando Fulfilment Solutions: A logistics value addition is very common among marketplaces. However, European fashion marketplaces return and exchange services are not as smooth as in Asia. In this case, ZFS would ensure that.
Zalando Connected Retail: The most innovative of all the value-added services. Connected retail is a way for offline retailers to list their inventory online on the Zalando platform. An order placed by a customer would be packed and shipped by the retailer instead of a warehouse.
It improves turnaround for retailers and helps increase coverage beyond the storefront facade. It improves delivery speed for customers. It could also in future be used for faster return and exchange service.
Zalando is an essay in itself which we will cover in future. It was important to understand briefly before we move towards today’s essay topic. It is meaningful to leverage the marketplace and build layers of services but how can a whole marketplace be built by leveraging feedback?
Today, we are going to talk about a fascinating company that threw “leveraging data” in the face of capital requirements.
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Problem Statement
Let’s get started with an imagination bubble:
We plan to start a second-hand furniture marketplace(I love furniture startups). The goal is to start a business to consumer(B2C) marketplace connecting vintage furniture merchants and consumers. We worked really hard and built the supply while demand started arising. The first problem arises with the 6th order, the customer receives a product that is faulty. The problem starts to repeat itself. What’s the first instinct? Let’s raise funds and build a refurbishing unit.
Once we do that, five things might happen which we won’t appreciate:
We have used a lot of capital to build a world-class refurbishing unit that could have been put to better use.
We have limited our scalability because we would have to build one in every city we plan on expanding to or pay exorbitant amounts in shipping(Brexit ain’t helping).
The refurbishing unit is an added cost to our P&L. It pushes our prices up because vintage furniture doesn’t already cost a fortune.
The entire supply chain is disrupted and has to go through our refurbishing unit.
The entire business model shift would significantly delay breakeven.
Okay, I am exaggerating a bit, it won’t be that bad, but at least two out of the above five things will happen.
The above-mentioned problem is quite common in the circular economy. How do we solve this?
Business Model Evolution of Second Hand Products
Instead of building a tangible unit in between supply and demand, how can the efficiency of marketplaces be improved?
In order to understand this, we have to go back in time and refer to the work of Economist and Nobel Laureate George Akerlof. He explored the example of the market for used cars.
The condition of used cars came in a variety of qualities. On the spectrum from worst to best. The worst was referred to as lemons and best as plums. Only sellers knew the real condition of the cars, i.e if it was a lemon or a plum. The buyer had no idea about the exact condition of the car before buying it. The model where sellers have more information than buyers is referred to as asymmetric information.
As the buyers cannot predict the quality of the car, they are only willing to pay the average price of the car. This prompts the sellers of the highest quality car not to sell as the price is less than what they would be willing to sell for. As the plums exit the market, the average price of the car falls further. As the average price falls means the buyers are willing to pay even less. As this continues, the next highest quality car’s seller exits the market.
In the end, the market collapses and the buyer is not ready to buy a second-hand car. You can watch the visual explainer here.
The time we are referring to is decades ago. The model has been perfected over years because of which the used car market is a thriving business. In fact, used cars now sell more than new cars in terms of volume.
Asymmetric information is dealt with by offering certifications, car checks and inspections. The programs like these offer buyers guarantees of the quality of the cars they are buying.
It sure has been working very well in the car market but how can this age-old model be improved?
Side Note: Writing helps me learn and publishes helps me in creating value in reader’s life. For instance, Asymmetric information was a whole new concept for me, if it did add value to you, consider subscribing?
Introduction to Back Market
Back Market is the largest refurbished marketplace for electronics in Europe. The company is sustainable and circular at its core.
The company was founded in 2014 by Hug de Larauze, Quentin Le Brouster, and Vianney Vaute. Back Market is a marketplace connecting refurbished electronics merchants to consumers. The company uses rigorous checks, data analysis and feedback mechanisms to solve the problems we discussed above to maintain the quality of products.
I have tried to explain how Back Market works through the below diagram.
Merchants go through a rigorous process of selection based on various parameters before they are allowed to join the BM marketplace. According to the company’s website, only 1 in 3 make it. In turn, end customers interact with the best merchants. It is similar to the “used-car model” we discussed above. The difference here is that the “lemons'' are discarded and only “plums” are permitted to enter the marketplace.
Here’s the cherry: the Back Market engine constantly collects feedback from the end-customers about the products(merchants). A consistent poor performance record would force the merchant out of the platform. It pushes the merchants to maintain performance, thus significantly improving the end-user experience.
The Back Market engine works on rigorous checks of the merchants further fuelled by constant feedback from the end-users. The entire marketplace thrives on feedback.
A Step Further
Back Market went a step further and built value-adding services on the supply and demand side.
Back Repair
Back Market connects refurbished product merchants with consumers. The merchants give a 6 month to one year warranty on the same. However, like new electronic products, refurbished electronic products have a tendency to break or need repairs. Back Market built the Back Repair service to deal with this problem.
Instead of consumers sending the product back to merchants (who are certified refurbishers) for repairs, they can simply send it to repair shops which are partners of Back Market. The bill is footed by the merchant if the product is in warranty. Back Repair provides value on the demand side.
In this case, the feedback accrued helps Back Market to target which merchant to help and how to help them, ultimately improving the end-user experience. Let’s discuss how that works.
Back Repair connects seamlessly with the existing business model. Customers who need repairs can connect with the service and get the products repaired. The advantages of Back Repair are multiple folds:
Time-Saving: The service saves customers time as the cycle of sending back to merchants and receiving the products takes time.
Feedback into BM Engine: The data collected by the Back Repair services such as product defect type, spare part defects and time it took for the defect to occur could be directly referred back to the merchant.
For instance, if 4 out of 10 products sold by merchant ABC are repeatedly recording faulty motherboard issues, Back Market can help the merchant solve that issue by helping them source better. It not only solves the problem of the merchant but also helps in improving the end-user experience as Merchant ABC would ship out better products.
This is where “Mana” comes into play. We will discuss it in the next section.Extension: Back Repair can be extended to a series of agile repair shops.
a. The current understanding is that they cater to products in warranty. An extension to cater to out of warranty devices could elevate the end-user experience.
b. The extension could also source partners of spare parts for merchants. We will discuss it below with Mana.
Mana
We saw that the Back Repair service provides value on the demand side of the flywheel. Mana on the other hand provides value on the supply side while ultimately improving the end-user experience.
Supply is the backbone of marketplace business. In the refurbished electronics business, it is not as simple. Why?
Recycling electronics is not easy and often most of the spare parts are not in a healthy condition to be refurbished.
Consumers exchanging their old electronics is not incentivized enough to propagate the behaviour. It causes a scarce supply of products for refurbishing.
Recycling electronics for spare parts with the follow up of refurbishing pushes up the price of the end-product.
The biggest challenge for a circular economy is maintaining a constant supply. Mana is the attempt by Back Market to solve this problem.
Mana is a platform for businesses to sell their current electronics and entire IT fleet.
Supply: It enriches the supply of electronics to merchants which can be refurbished and resold to end-users of the Back Market marketplace.
Ecosystem Match: Mana also fits perfectly with the ecosystem of Back Repair. The unfair advantage of Mana is that the Back Repair service can be used for analysing and estimating requisites of each merchant to improve their efficiency which can be leveraged by Mana.
C2B Model: The platform also allows end-users to sell their current electronic devices on the platform building a C2B model as shown in the diagram below.
The flow of old products from customers and businesses replenishes the supply and completes the circular economy loop. A near perfect circular economy fit!
Why near?
Competition: The highest priority in reselling devices is price. The market offers the best trade-in price wins, hands down. A quick benchmarking between Apple trade-in and Back Market trade-in for Apple iPhone 12 max showed that Apple offers 33.95% better price.
The Complete Loop: The users trading in their device definitely help in enriching the supply of Back Market but are they buying a refurbished device? At this point, it does not matter if customer A trades in and customer B buys a refurbished device. In terms of the circular economy fit, it is imperative that the same end-user trades in and also buys refurbished. It is too optimistic at this stage but essential in the long run.
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Unlocking the third side of the Marketplace
One of the reasons why I love writing about businesses is because more often than not while writing, I stumble across unexpected surprises. The “Mana” service does more for Back Market than sourcing spare parts for merchants.
It unlocks the third side of the marketplace and has the potential to build Back Market into a three-sided marketplace. The service builds a flywheel between merchants and customers who want to sell their used devices. It creates value for customers by incentivizing them through a fair price. The value for merchants is a constant supply of devices that they can refurbish and sell.
Final Note
Every day we see companies emerging with innovative ways of doing business, Back Market is definitely part of that exclusive club. Back Market raised $335 million series D which values the company at $3.2 bn. The company boasts of 5 million users worldwide and is currently present in Europe and United States.
The model teaches us a lot about building sustainable businesses leveraging technology without exorbitant capital. It takes customer feedback to a new level where it dictates the governing of the marketplace.
There are numerous businesses with incredible business models and strategies to explore and we will keep learning from them. I hope today’s essay added value to you.
I’m always looking forward to your feedback and exploring ways to add more value to your life.
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