Marketplaces are systems, not sales accounts

When a marketplace becomes material, the board should stop treating it as a sales account and start treating it as part of the company’s operating system. Amazon can affect pricing, inventory placement, advertising, distributor behavior, customer acquisition and wholesale relationships at the same time.

That interdependence is why marketplace problems frequently persist despite capable people working hard inside individual functions.

The Marketplace Governance Maturity Model

I think about marketplace governance in four stages: reactive, managed, governed and diligence-ready.

Reactive

Problems are handled individually. A Buy Box issue goes to ecommerce. A pricing issue goes to sales. Excess inventory goes to operations. No one owns the combined economics.

Managed

The company has clear functional owners, reporting and standard operating procedures. This is better, but functions can still optimize locally.

Governed

Channel decisions use shared economic objectives. The company understands seller authorization, distribution, pricing, marketplace assortment, inventory and advertising as one connected system.

Diligence-ready

The company can explain and document the system to a sophisticated buyer. Rights are clear. Data is accessible. Account ownership is controlled. Channel economics reconcile to financial reporting. Key-person dependencies are limited.

Questions for the board

• Who owns marketplace economics across functions?
• Does the company know all material sellers of its products?
• Are distributor incentives consistent with marketplace objectives?
• Can management quantify the economic effect of unauthorized sellers or pricing leakage?
• How dependent is the investment thesis on marketplace growth?
• Would a buyer view the company’s marketplace operations as a controlled asset or an operating risk?

The governance objective

The objective is not to eliminate every marketplace problem. That is unrealistic. The objective is to make sure decisions are coherent, risks are visible and management is not rewarded for solving one channel’s problem by creating another channel’s problem.

I work with PE sponsors, CEOs and boards where ecommerce, marketplaces or channel complexity can materially affect enterprise value. If that is a capability gap on your board, I am always interested in comparing notes.

James Thomson – former Amazon executive, four successful exits, board member/investor, and author of two books on marketplace governance and brand strategy.