How digital marketplaces can democratize digital for small and mid-sized enterprises

Abstract

Digital marketplaces help democratize the digital world, enabling its benefits to reach all economic segments of society and not limit them to a few elite enterprises. The fact that digital marketplaces are some of the world’s biggest and most profitable companies illustrates just how efficient they are at matching buyers and sellers of products and services.

The benefits of small-, medium- and micro-sized businesses – generally referred to as SMEs –selling their products and services via digital marketplaces allows them to reach a larger market quickly and potentially at little cost. Interactions between buyers and sellers are automated and can take place at any time, from just about anywhere.

Well-run platforms protect all parties: for example, recommendation engines can help customers and sellers make informed choices. On eBay and Airbnb, for example, consumers/buyers are subject to feedback, and any SME could set up a platform this way, helping sellers decide if they want to engage with particular buyers.

Also, a fast and efficient, clearly spelled out and executed dispute-resolution process is critical to give all participants confidence.

Participating in or running a digital marketplace enables all of them to benefit from various types of network effects due to the flexible platform business model. Despite the diverse nature of their businesses, Airbnb, Alphabet (Google’s parent company), Amazon, Apple, Meta (formerly Facebook), Netflix, and Uber are all platform-based digital marketplaces.

At its simplest, network effect means that the more vendors and resellers join a platform, the more potential buyers it attracts because it offers more choices at competitive, comparable prices. The more customers buy, the more vendors join, creating an escalating, virtuous circle.

SMEs punch well above their weight because:

• They make up 99% of all firms in the US (and in the EU) and contribute 43.5% of the US’ GDP, employing vast numbers of people.
• They can help shape innovation as, for instance, they generally have less rigid processes and mindsets than their larger counterparts.
• Some governments regularly offer incentives, including favourable tax treatment and better access to loans, to help keep SMEs in business.

It is important to note that it’s not only these businesses themselves that benefit significantly from the democratization of digital, but the OECD found in its 2021 report ¹ that digitalization of SMEs is fundamental to building inclusive and resilient economies and societies.

In recent years, two global seismic shocks have proved to be catalysts for the democratization of digital marketplaces: The global financial crisis of 2008-2009, which kick-started the so-called gig economy followed by the COVID-19 pandemic.

Introduction – SMEs and the impact of two global crises

There is no universal definition of SMEs except that they are usually defined as being within certain thresholds, such as turnover or number of employees. In addition, some countries set guidelines across industries to define what a small business is within different sectors. For the purposes of this white paper, the Organisation for Economic Cooperation and Development (OECD) definition, which classes micro firms as having one to nine staff, small companies have 10 to 49 employees, and medium-sized enterprises’ workforces have from 50 to 259 workers.

The boom in online labour platforms has been boosted by two global phenomena more than a decade apart. The first driver of the ‘gig’ economy was the worldwide financial crisis of 2007-2008 when many people found themselves unemployed or underemployed, and so sought work or extra work in their own time, using their own resources such as doing laundry or ironing at their own premises, catering, child minding, cleaning, gardening or dog walking.

The timely arrival of apps

The rapid growth of the gig economy was fuelled by the arrival of apps, which became mainstream after the launch of the iPhone in 2007 and Android in 2008. Apps linked those offering services directly with those seeking them via a platform-based digital marketplace, saving both parties time and effort, and giving both more protection (see Section 2) than simply employing a stranger from some sort of directory.

According to the OECD, this trend of individuals offering services via online digital labour platforms at the moment only accounts for a modest share of the overall labour market. However, it also found the share is rising fast. Global gig-economy transactions are forecast to grow by 17% a year to around $455 billion by 2023, according to a report from MasterCard.

These discrete tasks are in addition to more established work patterns of bigger undertakings and projects, or use of assets, from ride-hailing or someone letting out a room in their home or a property they own for short stays.

Business emergency

The second big driver of digital marketplaces for services was lockdowns during the ongoing COVID-19 pandemic. They accelerated digitalization at a previously unimaginable rate. SMEs, along with their larger counterparts, had to digitize their interactions with customers, and fast, when the usual way of serving them, in-person, was not possible, nor was staffing up overnight to handle increased volumes of phone calls.

As research reported in the Journal of Open Innovation, published in 2022, puts it, “The COVID-19 pandemic is not only a medical emergency but also a business emergency that has created the need for organizations to be resilient and versatile in managing the impact of the pandemic on their business operations. At this time, small- and medium-sized enterprises (SMEs) are the most vulnerable to the economic disaster caused by the recent crisis because these companies do not have the necessary resources to absorb losses.”

The research reviewed the impact of digital technologies on SMEs’ resilience during the pandemic, surveying 96 companies in six developing countries. The study found that digital technology has helped SMEs to survive the pandemic and to become more robust, ensuring their survival.

So while SMEs might, in some respects, be more vulnerable than their larger counterparts, they are also often more agile and adaptable. Many were wise enough to understand that the way to succeed was not to try and reinvent the wheel in the middle of a global catastrophe but to adopt proven, readily available, affordable technology that starts to pay for itself almost immediately. In other words, join or create a platform using ready-made, proven tech with support, security, and protection wrapped around it.

We look at some success stories in Section 1 before going onto the ten most important dos and don’ts in Section 2.