Curious about establishing trust in modern marketplaces? Let’s take a few lessons from history

Airbnb, Alibaba, Etsy, Lending Club and Uber are all well-known online marketplaces of our time. What’s common character among marketplaces is how trust between buyers and sellers is essential to success. This is true and will remain true regardless of the era we live in.

How do online marketplaces generate that trust between the two parties? We can actually take a few lessons from history, particularly how marketplaces from ancient to modern times have worked.

This is done primarily through three time-proven ways:

1. Quality: Ratings and vetting vs. merchant marks

Most modern marketplaces have a ratings and reviews system in which buyers rate sellers, and even vice versa. For instance, the new Singapore-based matchmaking platform Tutoroo vets its language teachers for the appropriate qualification, and the teachers are eventually rated by their students. This is important for the credibility of both the tutors and the platform and serves a strong tool for students to pick a good language tutor. The platform shows hundreds of active native language tutors in cities such as Singapore and Hong Kong.

Another important application of the vetting process comes from crowdfunding platforms. One of their core competencies is borrower vetting, and ratings are set in terms of interest rates. Investors typically trust the platform to do a quality job in rating the borrowers for them to earn a profit on a net basis despite the default risks involved. To what extent should we rely on reviews and profile ratings? Recent TV series like Black Mirror show the power and the limits of personal ratings.

Also Read: We are in the ‘Black Mirror’, living in a world where social media is taking us on a nosedive

So how do people rate each other before, in the earlier times? Merchant marks were symbols of reputation and reliability. Only merchants who belonged to a certain guild were allowed to display these marks. Before they could join, they had to take an oath of honesty and demonstrate their competency. The guild would also enforce certain standards of quality upon their members.

Will personal reviews be able to replace these credentials forever? Are we entering a new era?

2. Dispute resolution: Escrow accounts vs. punishment

Information asymmetry is a key problem between buyers and sellers. In ancient times, wool sellers were known to stretch their wool before it was woven to make it go further. It would later shrink after your purchase. Today, sellers can skimp on packaging, which increases the chance of goods being broken, as it is often transported over long distances.

Because clients feedback on that problem, Alibaba solved it by keeping their money in escrow. The money will only be released after the buyer has confirmed the successful delivery of the product. If you experience a dispute with your seller, Alibaba may refund you in full. This provides assurance for the seller as he knows that you have the money to pay him upon completion. Alibaba and other similar marketplaces also provide a formal dispute resolution process between both sides.

Before the rise of the World Wide Web, marketplaces were not conducted over vast distances. You would always transact at a designated marketplace with its own rules of conduct. If buyers had received defective goods, they would have complained to the borough court to resolve their dispute. The seller could not just run away, given his luggage of goods. If found guilty, the seller would be pilloried literally, and other buyers would either shun or pay him less for future transactions.

3. Marketing: Location taxes vs. advertising

Professor Steinfield made a valid objection against online marketplaces in 1999. Among the thousands of websites, why would you take notice of any particular e-commerce site? For Amazon, they spent US$2.8 billion in advertising in 2015 to get your attention, out of which 91 per cent went to search advertising. Indeed, one of the key value propositions of any marketplace is its ability to draw in buyers. Otherwise, why would users bother to list their goods or their services there?

Also Read: 5 challenges to overcome in developing a B2B marketplace

Let’s take a journey back in time to get some perspective. Harvard Business School conducted a comprehensive review of the origins of the earliest marketplace. The study showed that location would always be the key criteria to their success. The earliest marketplaces were located next to major law and religion centres. Many more formed along major roads and rivers. These were places where people would congregate naturally and where the centre occupants were major consumers themselves.

This is how towns would eventually be naturally formed. Towns would have to pay fixed annual fees to the Crown to protect its trading privileges. For online marketplaces, the 2017 equivalent of such taxes is effective advertising. Online marketplaces are not located physically so their revenues and their performance depend on their marketing strategy and their attractiveness.

Conclusion

Online marketplaces went against conventional wisdom to thrive today, because they managed to solve the twin problems of trust and visibility. Online marketplace are the evolution of traditional marketplace, brought about by technology. Many successful tech startups in 2016 were online marketplaces.

Also Read: Outlier rounds aside, SEA startups saw US$2.2 billion funding dip in 2016: e27 data

Building marketplaces might be difficult at the start, but once they reach a critical mass of users, it becomes easier to manage and to grow them. Ebay has been around for over 19 years but it continues to dominate because buyers and sellers have come to trust the platform. To paraphrase French journalist, Jean-Baptiste Alphonse Karr: The more marketplaces change, the more they stay the same. We shall see how these marketplaces evolve 20 years from now!

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The views expressed here are of the author’s, and e27 may not necessarily subscribe to them. e27 invites members from Asia’s tech industry and startup community to share their honest opinions and expert knowledge with our readers. If you are interested in sharing your point of view, submit your post here.

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