How online marketplaces can squeeze more profits from third-party sales

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From Amazon to Alibaba, the world’s top online marketplaces sell about $2 trillion in third-party products a year, generating sizeable profits just by opening their websites to other vendors.

But many marketplace-style websites may be leaving cash on the table because of how they’re charging vendors to sell their goods online.

Research from Duke University’s Fuqua School of Business published in the INFORMS journal Marketing Science offers a specific strategy for making the most profits from third-party sales. In the case of a Korean marketplace for handmade goods, The Nuvo, researchers showed how the website could nearly triple its profits by using their model.

“The new platform economy is continuing to expand and the growth specifically in online marketplaces is explosive,” said Carl Mela, a Fuqua marketing professor and co-author of the paper, “Monetizing Online Marketplaces.” “Amazon’s third-party sales are now reaching $32 billion, the market cap for Alibaba is over $500 billion, and yet there’s almost no consensus on the best way to make money from these websites.”

Marketplaces make money by charging sellers when someone views, clicks on, or purchases their item, or any combination of these actions, Mela said. Marketplaces must also consider the order in which products should appear in search results, which involves balancing financial gain and the shopper’s experience. For example, a website wouldn’t want to offer the cheapest item first, because they generate less revenue; however, listing high-priced items first could frustrate shopper scrolling through results to find the most economical option.

Large companies such as Amazon have been honing their third-party sales strategy for years, but haven’t publicly discussed their methods.

“We found that a hybrid strategy provides the highest revenues while balancing the needs of sellers and customers,” said Mela, who collaborated with Hana Choi of the University of Rochester.

This means creating an auction in which sellers bid against each other to be ranked in the top five search results for products like theirs, then charging the seller each time a shopper clicks their item. Below the top five search results, the website should list items from highest to lowest based on how much it would make from a sale.

“Companies like Amazon have been deliberating about monetization for years. We detail the different ways an online marketplace can improve its revenues and create a rigorous approach to achieve this,” Mela said. “This approach can balance the needs of all parties, so vendors are selling their products, consumers are finding what they want and the website is making the most profit it can. It’s a win-win-win.”