It's hard to build an online marketplace when the same products can be found just as easily on Amazon and eBay. But Reverb has found success in fine-tuning the way it handles data and payments.

Reverb sprang forth in 2013 from a website inspired by a Chicago-based music equipment dealership and is now a fast-growing e-commerce operation that's attracted $47 million in investor capital.

David Kalt, founder and CEO of Reverb
“If we don’t lose anything to fraud, I know we’ve gone too far because it means we’re cutting off some prospective sales; there’s a sweet spot where fraud is low but there will always be some, even in a very healthy operation," said David Kalt, founder and CEO of Reverb.

Starting out relatively small with a collection of used guitars and amps, Reverb gained popularity in its niche by aggressively deploying data and digital payment tools to keep transaction costs and fraud low. It also kept a tight focus on customer support and pricing transparency.

Early on, Reverb built its own payment solution called Direct Checkout that now accepts any payment type—including PayPal—with the option to finance purchases via Affirm. This has helped keep sellers' fees at 3.5% of the sale, and transaction fees are among the marketplace industry's lowest, at 2.5% of the transaction plus $0.25.

About 75% of sellers opt for Reverb’s proprietary Direct Checkout option. Alternatively, sellers may opt to directly accept PayPal for 2.9% of the sale plus $0.30.

“We started off relying heavily on PayPal, but it’s hard to grow a marketplace if you don’t control the transaction, so we went all in with our own checkout solution and it keeps evolving,” said Reverb’s founder and CEO David Kalt, a music aficionado and serial entrepreneur.

Reverb’s fees mean its profit margins are thin, leaving little room for fraud losses.

“We have a very sharp fraud team but with thousands of product listings a day we have to be very good at spotting and reacting to fraud,” Kalt said, noting that Reverb uses a combination of third-party fraud solutions and its own internal monitoring.

But there’s a fine line between being too restrictive and too lax on fraud.

“If we don’t lose anything to fraud, I know we’ve gone too far because it means we’re cutting off some prospective sales," Kalt said. "There’s a sweet spot where fraud is low, but there will always be some, even in a very healthy operation."

For Kalt, the opportunity to disrupt the music equipment industry was an obvious one, because he already knew the pain of trying to buy and sell music gear through eBay and other sites. (Kalt previously co-founded the online stock trading site optionsXpress, taking it public in 2005 before its eventual acquisition by Charles Schwab.)

“I figured people would rather buy used gear directly from the source—owners—and I got inspiration from Etsy's model,” Kalt said.

Though Reverb's 10 million monthly visitors are dwarfed by eBay's 167 million users, analysts say smaller operators with a hyper focus on niche merchandise and audiences can pull market share away from bigger e-commerce operators by effective use of payments technology and other tools to emulate the big guys.

Two years ago the company went global, reaching $400 million in new and used music equipment sales last year, and early this year it launched Reverb LP, a sideline that's showing promising growth using the same site tools to sell vintage record albums. Early last year Reverb added the capability for sellers to create their own websites within its platform with a unique URL, while transactions continue flowing through the checkout page Reverb controls.

“With third-party sellers fearing that listing merchandise on Amazon means they could become their lunch someday, the sites-within-a-site offered by Reverb, Shopify and others are becoming more attractive,” said Raymond Pucci, associate director of research at Mercator Advisory Group.

Reverb not long ago switched from using Braintree as its core payments platform to Adyen, which provides advantages for cross-border payments and payouts in local currencies as Reverb expands. Two years ago Reverb made its first hires in Europe, and it now has operations in the U.K., France, Germany, the Netherlands, Australia and Japan.

“With global e-commerce growing, the ability to drive cross-border transactions and use smart routing methods is necessary,” said Mercator's Pucci.

From the start, Reverb has worked to set itself apart from eBay and other marketplace sites by offering broad transparency in pricing gear and tools to help users smoothly negotiate deals.

Using external and internal data from recent transactions, Reverb supports a real-time price guide for gear across nine categories ranging from electric and acoustic guitars to drums and amps. Reverb also offers protection for buyers and sellers by providing live customer support to resolve disputes between buyers and sellers, when necessary.

That process grew naturally from Reverb’s reliance on industry experts to staff the site and run customer service—many of the company’s employees are musicians, Kalt said. Reverb also has built a strong following on social media by leavening its site with proprietary content including news and interviews.

“The goal is to create a community of people who want to be buying and selling stuff fairly, and if there’s a problem, we’ll step in and say, ‘Here’s your money back, send us the guitar, we’re musicians and if we lose a little money we get it back,’ ” Kalt said.

With Reverb's Direct Checkout option, sellers receive funds directly into their bank accounts via ACH, or keep the funds as Reverb Bucks and use them for future credit card purchases on Reverb, earning a 1% discount with the savings deducted at the checkout. Reverb Bucks currently are available only in U.S. dollars, but the company plans to add payouts in other currencies soon.

“International sales are growing for us, because the current disparity in price between equipment made by U.S. guitar manufacturers like Fender and Gibson sold in the U.S. and overseas is huge, and when we add pricing transparency plus low transaction fees and global shipping, it’s really opening up markets,” Kalt said.

Reverb’s next challenge will be translating its model to a broader, wider audience with Reverb LP. Like the core site, records cost nothing to list, and for LPs Reverb takes a 6% selling fee per item with the usual checkout choices.

“It’s only been two months, but it looks like we’ll see strong demand from overseas and millennials, who are fascinated by physical media, which is our specialty,” Kalt said.

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