Marketplace vs inventory model

The marketplace vs inventory model is the choice between two ways of running a shop, online or offline: owning the goods it sells, or letting other sellers sell their goods through it. In the inventory model, a retailer buys goods from their makers, owns them, stores them and sells them at a price it sets. In the marketplace model, the business owns no goods. It lets other sellers list theirs, brings buyers to them, and keeps a share of each sale, called a commission.

Here is how each model works in general. The retailer pays the maker first, and then sells the goods for more. It earns the margin: the difference between what it paid and what it charges. If the goods do not sell, the retailer is left with them, and must cut the price or write them off. The marketplace does not take this risk. Each seller sets its own price and keeps its own unsold stock. The marketplace earns a commission on every sale, and often fees for advertising, storage and delivery too. In return, it must build what makes strangers trust each other: search, ratings, a safe payment, and rules for refunds and returns. When a buyer pays, the money usually reaches the marketplace first. The marketplace later pays each seller for the products that seller sold, minus its commission, through split payments.

The model is not limited to goods. Any business that brings buyers and providers together and takes a commission, without owning what is sold, is a marketplace. In India, the choice is also a legal one. Foreign-owned e-commerce companies may run only the marketplace model. They may not own the stock that they sell to shoppers online.

Take, for example, an online marketplace for shopping. Thousands of sellers list phones and shoes on it, and the marketplace earns from each order without owning a single phone.

Consider an online travel agency. It sells hotel rooms that it does not own, and the hotel pays it a commission for each night booked.

Say a student wants help with physics before an exam. An online tutoring marketplace matches the student with a tutor and keeps part of the fee, but the tutor is usually not its employee.

How is the marketplace model different from a listings site? A real estate portal also shows other people's goods. But the buyer and the owner meet and pay each other directly, and the portal earns mainly from listing fees and advertisements, not from each sale. A marketplace handles the order and the payment itself. At the other end, an omnichannel retailer follows the inventory model: it owns the goods on its shelves and in its app.