In the world of online sales, not all business models are created equally. Two of the most popular across the Internet today are the e-commerce model versus marketplaces. In an e-commerce situation, you have a site like Amazon - a company that purchases products from companies and then sells them directly to users through its website. An example of a marketplace would be a site like Etsy - the brand itself doesn't buy or sell anything, it simply provides an avenue for its own users to do so.

While it's true that Amazon does have a third party marketplace component, for the sake of discussion let’s only focus on the e-commerce channel.

To put it another way - while a marketplace may be an e-commerce website, not all ecommerce websites are marketplaces. While it may initially sound confusing, there are a number of clear differences between the two business models that will help clear things up.

The Major Differences Between the Models

One of the most significant differences involved in starting an online e-commerce business versus creating a marketplace has to do with the larger initial investment that the former requires. In order to succeed with an e-commerce business model, you need to offer significant value to clients - this often means a much larger initial inventory, an initial capital investment, etc. With a marketplace, this isn't necessarily required as sellers are responsible for all of their own stock - you're just creating the channel they use to get it into the hands of their own target audience.

From the perspective of the website, the two processes will be very similar in terms of actual execution. You still need to spend money creating a site, building the platform, designing the user experience, etc. Even though the actual framework of an e-commerce website will be much more complex than that of a marketplace, these are still your major priorities.

Volume: It's a Numbers Game

Another major difference between an e-commerce model and a marketplace has to do with volume. When you set up a marketplace, you are primarily earning all of your revenue thanks to the commissions generated from each sale. A vendor sells a proud for $X and you get a pre-negotiated percentage of that. While this does have its advantages, it also requires a marketplace to deal with a much heavier volume of sales in order to be successful.

If you were at the forefront of an e-commerce website, you would get every dollar from every sale. Because margins for each sale are significantly lower in a marketplace model, sales need to be more frequent in order to make the same amount of money.

The Economy of Scale

For business professionals with major long-term goals, the importance of understanding the scalability differences between these two models cannot be overstated enough. When you set up and invest in an e-commerce website, you're forced to constantly add new items to your inventory and purchase larger numbers of products - all of which may or may not sell.

With a marketplace, you're not buying anything - and you're taking fewer financial risks as a result. Because of this, it is much easier for marketplaces to scale up to expand their audience WITHOUT investing huge sums of money at the same time.

If you want to add products to your ecommerce website you need to find them, buy them, pay to store them, etc. with the marketplace model.

The Two-Way Street

Finally, the major difference between these two options comes down to the relationship a company has with its customers. In an e-commerce channel, a brand is in direct contact with its audience. You purchase a product that you then turn around and sell directly to someone else. With a marketplace, on the other hand, you're simply acting as a middle man. You're a destination online that a vendor and a customer can both come to in order to find each other more easily. If you look at it from a certain perspective, both vendors AND end users are your customers in a marketplace relationship.