How Online Retailers Make Money

Retailers have been transformed by the online world. Thanks to e-commerce, virtual try-on services, and online marketplaces, buying clothing and accessories has become much easier. And for consumers, it’s made it much more convenient to find what they want, when they want it – whether that’s clothing, accessories, shoes, or household items.

While in the past retail stores were the primary way we purchased clothes and accessories, today we’re seeing an evolution in how people want to shop. Whether we prefer to spend our time shopping for clothing and accessories or looking for groceries, flights, and vacations – we have all the information we need, and we can do so from the comfort of our homes.

The Rise In Online Shopping

We’ve all heard of the impact of the pandemic on retail. With so many people working from home and afraid to leave the house, spending time in shops wasn’t possible. So sales fell by 23%, and more than 1 million stores filed for bankruptcy. In 2022, COVID-19 reappeared as a commercial traveler’s illness, with more cases and fatalities than were initially expected. The health and economic impacts of the pandemic continue as more and more people are unable to work and consume as usual.

It was the combination of the pandemic and the rise of online marketplaces that gave birth to a retail rebirth. E-commerce and online marketplaces, such as Shopbop, Amazon, and others, enabled consumers to purchase what they want, when they want it, without ever having to leave the comfort of their homes.

The Importance Of Online Marketplaces For Retail

Thanks to online marketplaces, consumers can have access to a massive number of products. This is a significant advantage for those who may have limited options or alternatives when it comes to buying certain goods. Online marketplaces provide a safe and secure way for consumers to explore a massive range of products they might not even have seen in person – if at all.

It’s not only about finding what you want, it’s about finding the best price possible. With so much competition, online marketplaces utilize algorithms and data to ensure the best possible prices. This, in turn, benefits the buyer. Not only does it allow you to find the best possible deal, but it also means the retailer doesn’t have to mark up the price as much.

How Online Marketplaces Make Money

There are four ways online marketplaces make money – from sales, commission, advertising, and cross-selling.

First, they collect a commission when an order is placed. This is a fee that the retailer receives when a purchase is made through their platform. It can range from a few percent to 15% or more. Typically, the lower the price, the higher the commission.

Second, they display advertisements alongside products for sale. This is how they generate revenue from advertising. Typically, online marketplaces will earn a commission when an ad is clicked on or when a purchase is made through an ad. Advertising on these platforms can be quite lucrative, but maintaining a flawless reputation while avoiding fraud is challenging. You’ll need to review and maintain compliance with the various advertising regulations and ensure your ads are legitimate and unobtrusive.

Third, cross-selling is the act of offering additional products and services to a customer who’s made a purchase. This is beneficial to the retailer, providing them with more income from the same customer base. When a customer makes a purchase on one site, they’re often encouraged to make additional purchases on other sites within the same network – whether that’s an online marketplace, social media platform, or mobile app.

The final and most important way online marketplaces make money is through sales. When a consumer chooses to purchase an item from an online marketplace, they’re effectively making a purchase from that point onwards. Every item sold on an online marketplace generates revenue – from the purse strings of the customer to the digital wallet of the platform.

Why Do Consumers Use Online Marketplaces?

Thanks to the pandemic, many people are looking for ways to save money. Many have stopped going to the mall and instead shop online. Even those who still need to go to the retail store might choose to do so via an online marketplace – particularly if they want to avoid crowds and maintain a safe distance from other customers. It’s not only about saving money, however. Many consumers are able to find the products they want, and the ability to research and compare products and prices is priceless.

Retail stores will never be able to match the selection and options available through online marketplaces. This is why many people choose to circumvent the traditional way of shopping and enable stores and brands they love to offer the products they want, when they want it – without having to leave the comfort of their homes.

The Growth Of Online Marketplaces

Since the start of 2022, several online marketplaces have emerged as global leaders, capturing a large share of the $16 trillion global retail market.

According to a report by GlobalData, in 2021, the online retail market was valued at US$16 trillion, and it is expected to grow at a CAGR of 19% between now and 2035.

The five biggest online marketplaces in terms of revenue were as follows:

  • Amazon (US$13.1 trillion),
  • Walmart (US$10.9 trillion),
  • New York Times (US$2.3 trillion),
  • QVC (US$2.2 trillion), and
  • Hootsuite (US$1.9 trillion)

The five biggest online marketplaces in terms of daily average revenue were as follows:

  • Amazon (US$450 million),
  • Walmart (US$325 million),
  • New York Times (US$240 million),
  • QVC (US$220 million), and
  • Hootsuite (US$180 million)

Many consider Walmart to be the gold standard among retail giants, and for good reason. The company was one of the first to successfully implement online marketplaces, having launched its digital store, Walmart Lifestyle, in 2013. Since then, the company has expanded their e-commerce footprint to over 20 countries and continues to innovate within the space, launching new stores and platforms every year.

In 2021 alone, Walmart’s digital stores saw sales of over $16 trillion, and the company’s overall market share increased by 0.5% to 10.9% in terms of e-commerce sales.

As digital stores have grown in popularity and evolved to include more than just physical goods, Walmart has continued to innovate and expand their offering. In 2022 alone, the company launched 23 brands and 25 new stores, bringing their total store count to over 13,000 worldwide. Not only does this make them the largest retail store owner in the world, but it also means they’re always looking for new ways to grow and improve their business.

Other retail giants have also seen the value in online marketplaces and have followed suit. In 2021, Amazon bought Whole Foods for US$13.7 billion – creating the world’s largest online-physical-retail hybrid. The acquisition gave Amazon a strong foothold in the United States, with nearly half of all grocery trips now taking place in online stores.

Similarly, the New York Times Group – parent company of the New York Times, the Wall Street Journal, and others – launched its own digital store, NYT Now, in December 2021, enabling visitors to browse content while also purchasing physical goods. The Times also announced plans to add delivery fees to online purchases in an effort to increase revenue. This is to be expected, given that 43% of Americans already live in a city where delivery is accessible and affordable. According to a recent report from the American Institute for Economic Research, an estimated 80% of the country will soon be online shoppers, and the trend isn’t even close to slowing down.

As these major companies continue to invest in the retail industry, more and more brands and stores will be forced to follow suit or risk being left behind. The future of retail – and how we’ll all buy and shop – is in large part thanks to the coronavirus pandemic and the ongoing transition to a digital world.