You’ve come up with a great marketplace idea, you’ve done your research to validate your marketplace, now what? You’ll want your marketplace to have longevity and that means finding a marketplace revenue model that will finance its operations, thereby enabling you to build something successful and sustainable.
With the exception of projects that are for charity, or just for fun, which can be funded by yourself, or through donations, you’re going to need the funding to come from the users of your marketplace platform.
It’s worth noting here that marketplaces that can’t be scaled to ensure long term success are the ones that usually fail. Most online marketplaces use one of the following six marketplace pricing models:
It’s time to work out which marketplace business model is best suited to you and your idea so let’s look at each one in more detail.
Marketplace Business Models
1. Membership or subscription fee
A membership fee (or subscription fee) model is one where all users of your marketplace would be charged a recurring fee in return for access. Usually this is used when the platform vendors are gaining access to help them find new customers. Customers will want access in return for savings on goods or services, or to find something unique they couldn’t get elsewhere.
This marketplace business model works well if your platform provides a high value offering and/or if users will want to make several transactions. A good example of this is skillshare.com and other online learning marketplaces. Their proposition makes users feel exclusive which is what justifies a membership fee.
This marketplace business plan can be a good choice to begin with, and you can always transition to a commission model once things are more established. The challenge is finding vendors before you have customers, and customers without vendors, and still convincing them a membership fee is worth it. You need enough of both to make it a worthwhile proposition as a fixed fee can discourage people from signing up. You can get round this by either letting early adopters join for free so you build your initial base, or making it heavily discounted to start with.
2. Commission
This is the most popular marketplace revenue model. Every time a customer pays a vendor, you charge either a flat fee or a percentage of the sale and the platform facilitates the transaction. This is a good way of running your marketplace as you won’t put off potential customers in the way that a membership may, and you won’t put off vendors as they aren’t charged anything unless they are making a sale.
What’s more, this model is usually the most lucrative for the marketplace owner, every single transaction means you make something. Most of the well-known existing marketplaces use this model – Etsy, Airbnb, eBay etc.
The challenge to bear in mind is that customers and vendors could always deal with each other directly, so you need to be offering something additional to make both parties want to deal through your platform.
You’ll want to be sure of your figures and how much the commission should be. Do you charge both the customer and the vendor or just one of those? Is the commission the same regardless of the sale value? Should you start low to generate interest and increase it at a later date?
While the marketplace commission model is a great choice for your revenue stream, there are cases where it’s not feasible. For example, if the typical transaction is a really large amount – such as property. Or if the platform isn’t based around traditional sales, for example, dating sites, there is no transaction so commission is impossible and a membership fee makes more sense.
3. Listing fee
This works in the way that classified ads used to, where a fee is charged when a vendor posts a listing. This marketplace pricing model is better than membership in circumstances where vendors don’t want a continuous subscription, and only want to sell particular items. It is often used in cases where vendors get value linked to the number of listings they have and where each listing has a potential high value.
The benefit is that the platform guarantees lots of visibility for its listings simply due to the huge volumes it can generate. However, there is no guarantee that a listing will be successful, and to create the sort of volume needed the fee cannot be too high. As a result, only a relatively small portion of the value being generated by the site is being captured by the platform.
For this model to be profitable the platform needs a huge volume of listings but because paying the fee doesn’t automatically mean the vendor will make a sale, it’s quite hard to demonstrate the added value you are providing so vendors may be tempted to go elsewhere.
4. Lead fee
This is a bit of a halfway house between the commission and listing fee model. Customers will post requests on the platform and to enable them to bid for these customers, vendors will pay a fee. The benefit this has over the listing fee model is that you only pay when you are put in contact with a potential customer.
This pricing strategy doesn’t tend to be used for consumer to customer (C2C) sites, but with business to customer (B2C) or business to business (B2B) where the value of the lead is high.
It’s worth bearing in mind though that there is nothing stopping the buyers and sellers then taking the relationship entirely off-site, negating the need for your platform and therefore not generating any additional income after the first introduction.
5. Freemium
If your marketplace largely deals in low-value items you need to think of a way to generate income. You can do this by offering premium services. The idea behind the freemium model is that the core offering is, indeed, free, but once you get more vendors and customers you can offer them extra features which they do pay for. The additional features need to be good enough to attract a big enough proportion of users to make this sort of platform profitable. It’s probably not going to work if the majority of visitors only use the free element.
Premium services might include things like guaranteed delivery, promotion of listings, inclusion of postage etc.
6. Featured listings and ads
Many vendors want to maximise the profile of their listings by increasing their visibility on a site so potential customers see them first. This can be done by paying for a featured listing. When using this marketplace model, general listings are usually free but a charge is made for being featured, usually on the homepage, or by being placed at the top of a relevant category. For example, the classified ads site Gumtree uses this model.
As with the listing fee model, for decent revenue to be generated there needs to be a substantial amount of users on the platform. In addition, ads can prove irritating to users so if you want to provide a service that users will be nothing other than delighted with, this may not be an ideal route for you.
Where ad based models come into their own is when you have a niche market so commercial vendors can really tailor their ads making them relevant, and useful, to the existing audience. For example, on a free-to-use site selling art, revenue is generated through allowing ads from framers, exhibition venues, paint suppliers etc. These sorts of ads are no longer an inconvenience but useful, because they are relevant.
Conclusion
Choosing which one of these marketplace business models is right for you and your business may be obvious. Or it may be that you start with one and once up and running plan to move to another. You can even combine them if you can make that work for you.
Currently the most scalable and lucrative model for the majority of marketplaces is charging a commission on all purchases. But, there are, of course, exceptions to this so it’s worth reviewing them all, and possibly even trying them all until you find the best fit.