Moving from marketplace to reseller to optimize the seller experience – ThredUp

An interesting case study of the tradeoffs between being a marketplace or a reseller is provided by ThredUp, which IPO-ed two and a half months ago.

The company was initially launched in 2009 as a peer-to-peer online marketplace for swapping men’s dress shirts, more specifically “men’s long sleeve button-down shirts in the $70-$90 range”. It didn’t take ThredUp long to figure out that this was not the best clothing item to build a marketplace around. Within a year the company pivoted to a peer-to-peer marketplace for children’s clothing, where sellers were selling directly to buyers. This was a much better market opportunity given the obvious issue with children’s clothes: they are durable but children grow out of them quickly. ThredUp raised venture funding on this marketplace concept and achieved decent traction with it.

However, in 2012 ThredUp went back and raised another venture round in order to execute a more drastic pivot. It turned itself from a marketplace into something close to a reseller. Specifically, it built a warehouse and switched to acquiring the children’s clothes from sellers (on consignment), inspecting them, and then selling them to buyers. And in 2013 ThredUp expanded to women’s clothing, also under the consignment reseller model.

Our focus in this post is ThredUp’s marketplace-to-reseller pivot. This looks similar to Zappos’ early pivot (which we discussed in our previous post), but the fundamental driver was different. Zappos’ shift was about maximizing the quality of the experience for buyers. ThredUp did it in order to enhance the experience for sellers. In particular, ThredUp seized upon an important arbitrage opportunity: sellers of used clothes were never going to become “power sellers” trying to make a business out of that (like eBay or even Poshmark sellers). More than anything, ThredUp’s sellers were looking for an easy way to dispose of used clothes and hopefully make some money out of them. Convenience is what mattered most for these sellers and ThredUp figured out this was better achieved under its reseller model than under the marketplace model.

To be precise, ThredUp’s current model is close to the reseller end of the marketplace-reseller spectrum, but it is not 100% of the way there. Indeed, consignment means sellers do have some amount of control over how their items get sold to buyers. Specifically, ThredUp sends sellers a bag (or allows them to print a label to be used on any box), which sellers fill with the clothes they wish to sell to ThredUp. The company inspects the clothes, determines which items are eligible to sell (based on their quality and condition), and then sells them to buyers. The prices are set by ThredUp, but sellers do have the option to adjust those prices. Sellers get paid when their eligible items are sold. Sellers also have the option to have their unlisted items (those which are not eligible to sell) returned, in exchange for a fee. Otherwise, ThredUp disposes of them.

To illustrate the difference between the pre-pivot marketplace and post-pivot reseller business model in this context, it is instructive to look at the following table. These numbers are purely hypothetical.

The brilliance of ThredUp’s 2012 pivot was realizing that in return for the higher convenience of the reseller model, sellers were willing to accept a much lower but certain price ($50 in the example above), instead of the hypothetical price they might have hoped to obtain on the pre-pivot marketplace ($100), where they would have had to do the listing, selling and shipping themselves. That arbitrage opportunity had to offset the much higher operational costs associated with the reseller mode ($25 in the example above), as well as the fixed capital investment costs (building a warehouse), which of course become easier to cover at scale.

In the example above, the price to buyers is kept constant for simplicity ($100), but it is likely that in the reseller model ThredUp can also extract a bit more from buyers due to the superior experience, pricing knowledge and the possibility of mixing and matching clothes from multiple sellers. This makes the reseller mode even more attractive relative to the marketplace mode. However, it is important to emphasize that the biggest share of the gain comes from the price-convenience arbitrage on the seller side.

Concluding thoughts

The arbitrage logic illustrated by ThredUp is that when sellers are more interested in speed and convenience than in extracting the highest possible price for their items, it makes sense to be closer to the reseller end of the marketplace-reseller spectrum (all other things equal). This is analogous to services in a few other markets:

• Pawn shops

• Carmax for used cars

• Opendoor for houses

• Trade-in services for used smart phones and other electronics, such as Gazelle, Decluttr, Backflip

However, not all sellers in a given market are the same. This is one reason why the reseller mode can coexist with the marketplace mode in the same market. For instance, in the market for women’s fashion, consignment resellers like The RealReal and ThredUp can appeal to sellers who value convenience more than financial return or who do not have much expertise in selling. Meanwhile, marketplaces like depop and Poshmark can appeal to sellers who don’t mind spending time listing and selling their items, or who are professionals. And Vestiaire Collective offers both options. This is similar to the co-existence of Cars.com (marketplace) and Carvana (reseller) in the market for used cars, which we noted in our last post.

Finally, it is interesting to ask whether it ever makes sense to intentionally follow ThredUp’s (or Zappos’) path of starting as a marketplace and then switching to be a reseller. We suspect that their path and the pivots they made were not part of a masterplan when they first launched. If they knew what they know now, they would have probably chosen to start as resellers instead. This overcomes the chicken-and-egg problem associated with launching a new marketplace and delivers a consistently high-quality buyer and seller experience from the get-go. Of course, in practice, firms must sometimes experiment in order to figure out which model works best in their market (and indeed whether there is a viable model at all). It may make sense to start as a marketplace in order to find out at low cost which products or services are in highest demand, and then move towards the reseller mode in order to optimize the buyer and/or seller experience. This avoids the higher upfront capital expenditures associated with the reseller mode, which may make it harder to convince investors to fund the business at first.