The retailer-to-marketplace trap
Why retailers shouldn't build marketplaces - and what they should do instead
A common misunderstanding about platforms and marketplaces is that their power comes from controlling distribution. This view stems from the idea that the ability to control a channel to consumers is the central strategic advantage.
This misunderstanding, in turn, leads to a common trap: any company - particularly retailers but also banks and telcos - that has customer relationships believes that it has the ability to set up a marketplace and invite third parties who seek to serve those customers.
The logic goes that Amazon did something similar - it used the internet to build distribution and then opened out a marketplace around control of that distribution.
This is the retailer-to-marketplace trap - where conventional (and consultant) wisdom suggests that retailers - who have been battered by Amazon’s dominance - should apply Amazon’s apparent secret sauce to their own benefit. That they should become a marketplace like Amazon.
In fact, since the early 2010s, an entire cottage industry of sorts has developed around supplying tools to retailers so that they can open out marketplaces.
But there’s a problem with that logic!
The fallacy
In reality, the internet has commoditized distribution. Nearly everyone has access to the same distribution channels, whether they’re small businesses or large platforms.
The real control point for marketplaces is not distribution—it’s decision support. Marketplaces become powerful by helping consumers make decisions, often through proprietary decision-support systems, and by embedding trust into transactions.
Distribution itself is commoditized.
As distribution becomes commoditized, value no longer lies in owning proprietary channels, but in controlling the ability to inform and influence customer decisions.
Over the past decade, I’ve worked extensively with retailers and served on the statutory committee of the leading grocery retailer in Latin America - Grupo Pao De Acucar.
The retailers that managed this transition well rarely relied on distribution advantages, instead they looked to exploit digital disadvantages - factors that worked in their favour and against the digital players.
So how do retailers create advantage when their greatest asset - the store footprint - becomes a liability?
Rethinking retailer strategy - the story behind the story
BestBuy is a poster child of sorts of retailer turnaround.
Best Buy’s story is well known. Back in 2012, it was reeling from the onslaught of e-commerce.
Amazon had steadily eaten into Best Buy’s electronics business, using its vast product range and competitive pricing. Even big-box stores like Walmart ate into Best Buy’s market share by selling high-demand, commodity electronics items in bulk. Then there was the threat of “showrooming,” where shoppers would browse products in-store but make their actual purchases online.
You’ve probably heard the turnaround story as well.
BestBuy turned the threat into an opportunity and figured out a way to create value out of ‘showrooming’ by establishing a store-within-a-store concept where consumers could experience a brand’s products.
That’s the story. It doesn’t quite explain, though, the many strategic choices Best Buy made that led to its success.
What’s important, though, is that Best Buy didn’t fall into the retailer-to-marketplace trap; it simply reimagined its role given its advantages and disadvantages.
Choice #1: Migrate to the non-commoditized
Best Buy started with looking at the playing field of consumer electronics commerce.
As new technologies emerge, certain parts of the customer journey become standardized and commoditized.
For example, the emergence of online marketplaces standardized product listings - and to the extent that listing information supported and informed consumer decisions, these standardized listings commodified decision support.
However, standardized listings were more useful with supporting low-complexity decisions, like buying simple electronics. Digital channels thrive here because standardization favors efficiency and scale.
Offline retailers couldn’t easily compete with online players for the sale of low value, undifferentiated consumer electronic goods. However, Best Buy noted an opportunity in high value consumer electronics, where consumers needed to evaluate and understand products before making the purchase and were already engaging in ‘showrooming’.
Best Buy’s first important choice was to abandon the bottom-left quadrant and focus on the top-right quadrant.
It positioned its store as a hub for decision support where consumers could evaluate and experience high value consumer electronics.
This also worked well with store economics which were more amenable to high margin products.
Choice #2: Engage in strategic price parity
The problem with misinterpreting the importance of channel/distribution had thrown most retailers into a common trap - competing with online players on price.
Offline retailers were naturally wired to lose price wars - they had limited shelf space and high storefront costs. Online players could host seemingly infinite catalogues without incurring associated costs.
Most retailers playing in the bottom left quadrant were also caught in a price war they couldn’t win.
Best Buy had already captured the right to support consumer decisions in the top right quadrant. But consumers could still decide offline and buy online. In order to ensure consumers bought in-store, Best Buy started guaranteeing price parity.
This involved slashing prices but this wasn’t a price war. While the economics of a price war favoured online channels, the economics of price parity favoured Best Buy as it was converting footfalls into transactions. While online retailers had to incur a customer acquisition cost to get to the transaction, Best Buy didn’t have to incur any additional cost once the consumer had already entered the store to experience a product. The economics of price parity worked better for offline retail.
Further, while a price on low margin commoditized products was untenable, price parity on high value products was still a viable approach.
Choice #3: Develop cross-merchant integration advantage
Best Buy saw a second opportunity emerging - the rise of the Internet of Things (IoT) and the growing need for connected product systems.
As devices came fitted with sensors, customers were moving from buying individual devices to creating connected home automation systems - connecting across thermostats, security systems, lighting, and more.
Yet, no single player had yet emerged to act as a smart home hub and create a plug-and-play experience for consumers to simply connect these devices with.
This further strengthened Best Buy’s position as a hub for decision support - it positioned its stores as hubs of system integration, where customers could not only buy products but also learn how to connect them into a unified system.
This created an entirely new value proposition, one based on integrating complex systems rather than just distributing products. Best Buy had set up an additional control point.
What’s more - it had also ensured that it created new value on top of the brands that sold through it.
Choice #4: Extend integration advantage to capture more categories
Positioning itself as a system integrator for the smart home had additional unexpected benefits.
Customers who trusted Best Buy with helping them configure their smart home set up, now trusted them for the entire configuration, which included both complex and simpler products. This meant that for these integrations, Best Buy could extend into even those categories where online channels had a natural advantage and customers didn’t need decision support. But once a customer was in-store and getting a system set up, they would purchase accessories and connectors as part of the same purchase.
If smart home connectivity standards had evolved to a point where devices could instantly connect and operate, human assistance would have been irrelevant. In the absence of that, integration presented an opportunity.
As parts of the customer journey get standardized and commoditized, activities where high custom integration or high decision support is required remain relatively immune to capture by digital players.
Choice #5: See value where others see deadweight
Leading up to Best Buy’s transformation, many other consumer electronics retailers like Circuit City and RadioShack had fallen by the wayside and filed for bankruptcy. All of them had gone down that path following a predictable death loop:
Every retailer was seeing in-store staff as a cost to be cut in the online commerce price war.
Best Buy, instead, focused on getting well-trained staff in-store to position the store as a place to evaluate and decide.
What’s more - this created a positive flywheel in favour of Best Buy where merchants seeing the value of in-store assistance jumped in to train staff and subsidize their costs.
These are the relatively ‘insignificant’ trade-offs and decisions that kickstart flywheels both in positive and negative directions.
Choice #6: Become a platform - but not in the way everyone wants you to
Best Buy had achieved two important things that every platform needs:
It had set up two important control points on the demand side, one of which was cross-merchant, making its position stronger as an intermediary
By setting up these control points over demand, Best Buy was now in a position to create standards and set terms for merchants. And most importantly, align their interests with its own operational goals.
Merchants could reach customers more efficiently, benefiting from foot traffic without the overhead of standalone stores. Best Buy, in turn, created a differentiated in-store experience that competitors couldn’t easily replicate. All this while improving its margins.
Look for the digital disadvantage
One key lesson from Best Buy’s journey is understanding how technology shifts influence competition.
Every new tech wave—whether mobile or AI or augmented reality—brings new layers of standardization and commoditization. Digital players are well positioned to exploit these advantages, non-digital players are not.
As an incumbent, one way to think creatively about your strategy is to look for the digital disadvantage. Instead of trying to fight digital players in areas where they already have a digital advantage, try to look for areas which might be a digital disadvantage.
Understanding and anticipating which parts of the customer journey are immune to standardization - and leveraging that to your advantage - is crucial to staying competitive.
The unseen incumbent advantage
If you’re a retailer, the answer, most likely, isn’t to build an online marketplace. It is, in fact, to turn away and build advantage in the opposite direction.
Best Buy’s biggest lesson is an important lesson in platform strategy - don’t look for silver bullets like ‘open out to third parties as a marketplace’. Instead, look for the digital disadvantage and build your platform strategy by using it to your advantage.
one of the breakdowns of a retail business iv read in a while! Great job 👏
As always, insightful and makes one think.