With successful marketplaces such as AirBnB, Etsy and Tokopedia making headlines, the marketplace business model has been put in the spotlight. The emergence of online marketplaces have certainly disrupted the way trade is conventionally carried out. Serving as an alternative, the marketplace enables consumers and businesses to shop for competitive prices by avoiding hefty middleman fees as incurred through traditional supply chains. As online marketplaces continue to rise in popularity, the question arises - how then can a marketplace profit while keeping platform usage fees reasonable?
The value of the marketplace stems from its ability to generate traffic on the platform through viewing, clicking and purchasing products and services on the marketplace. To monetise the platform value, there are several techniques in the market, each with its pros and cons. It is quintessential for entrepreneurs to select an appropriate monetisation strategy commensurate with the marketplace’s pace of growth.
To guide the decision making process, we have provided an analysis of various monetisation strategies for marketplaces.
Overview of Strategies
Most commonly employed across marketplaces, the commission model has proven to be a popular choice. Simply put, a fee is charged to the merchant for every successful transaction on the marketplace. Depending on the administrator, the commission fee charged can either be a flat fee or a variable fee. As for variable fees, the amount may differ according to the value of the transaction or the product category. AirBnB is one marketplace that has leveraged on the commission model.
For new entrants, the commission-based model may be a great way to monetise the marketplace since there are no fees charged prior to a successful transaction. Such a model may entice merchants who are keen to digitalise their business but may be skeptical of the platform’s value. This would encourage the onboarding of vendors and create supply, tackling the chicken and egg problem faced by new marketplaces.
Furthermore, this model serves as a lucrative and sustainable model as it entitles the marketplace administrator to an allotment of the profits from each transaction on the marketplace. As the marketplace gains traction over time, the commission model remains as a scalable monetisation technique since profits are directly related to the frequency of successful transactions on the marketplace.
There is a possibility that transactions could happen offline after the platform has successfully connected the buyers and the sellers. Marketplaces need to take precautionary measures to minimise incidences of platform leakage in order to protect their share of profits.
To tackle this issue, marketplaces need to assure buyers and sellers of the benefits from transacting through the platform. For one, the platform can instill a sense of security in users by offering insurance or by collecting an upfront deposit. Alternatively, the platform can engage escrow services to ensure that payment is only disbursed to the seller when the agreed conditions have been fulfilled. Through such measures, the platform would be able to minimise platform leakage and protect its revenue stream by offering a secure environment for buyers and sellers to transact.
2. Subscription Model
Once a marketplace has garnered sufficient traffic on the platform, they may begin to consider other forms of monetisation such as by charging subscription fees. By imposing a subscription fee, users would have to pay in order to access the marketplace. While the exclusivity of the marketplace may attract users, there has to be sufficient value-add for both the demand and supply sides in order to justify the payment. UK-based OnBuy is an example of a marketplace that relies on the subscription model.
With the subscription model in place, marketplace revenue would flow in at an earlier stage as opposed to the commission model. Particularly for new marketplaces, the collection of revenue upfront can enable the marketplace to enhance its capabilities to better meet the needs of its users. On top of that, the recurring subscription fee brings in a steady source of income for the marketplace, allowing it to enjoy financial stability over a longer horizon.
Yet, the monetisation model may drive away potential clients who are keen to try out the marketplace but are not ready to commit to a huge upfront fee. Should merchants and users be unhappy with the marketplace, they will have to bear the subscription cost for the stated period. This may be a risk that many are unwilling to take, particularly if there is a lack of trustworthy platform reviews.
Moreover, the monetisation technique may not be applicable to new marketplaces. If the fee is too high, this could drive up user expectations. Should the marketplace capabilities fail to meet the expectations of paying subscribers, this may take a toll on the marketplace’s reputation and cause site traffic to dip instead.
3. Listing Fee Model
For marketplaces that primarily offer big ticket items such as cars or properties, a listing fee may be a more appropriate way to monetise the marketplace since the frequency of transactions on the marketplace tends to be lower. In a listing fee model, a fee is borne by the merchant for every listing uploaded on the marketplace. For instance, Craigslist charges a listing fee for certain categories of products on its marketplace.
The listing fee model is more appropriate for marketplaces offering expensive goods and services. These goods are not purchased regularly and thus, the incidence of such transactions remains low. In order for marketplaces to maintain a steady stream of revenue, it may make more financial sense to impose a listing fee model over others such as the commission fee model.
Yet, the mere listing of products does not generate any additional commercial value to merchants if customers on the platform do not end up purchasing any products. In order to convince merchants of the marketplace’s inherent value to facilitate trade, the marketplace must amass a loyal user base and generate sufficient activity on the site.
4. Advertising Fee Model
Since a marketplace may house as many merchants as they prefer, merchants may start to think of ways to stand out from the crowd. To grasp the short-spanned attention of consumers, some merchants may be willing to pay more in exchange for visibility on the platform. Featured listings would translate into a higher page view, raising the likelihood of a successful sales conversion. Marketplaces with such models include Etsy and Gumtree, where featured listings are bumped to the top of the page.
Once the marketplace has gained traction, advertising can serve as a lucrative source of income. There are several advertising models that can be utilised - pay per view, cost per period and cost per post amongst others.
With native advertising offered, marketplace merchants can have this option to enhance their visibility on the site and to boost sales. The scalability of the advertising fee model also enables the marketplace to reap greater profits as the marketplace continues to grow.
In spite of the profitability, marketplaces must not neglect the user experience of its customers. Excessive advertising on the platform may degrade the platform experience of users, in turn forsaking customer satisfaction. If the advertisements are too intrusive, it may discourage consumers from utilising the site completely. This may erode marketplace value in the long term.
Furthermore, the advertising fee model is usually only appropriate when there is high traffic on the marketplace. Otherwise, marketplaces may not be able to substantiate the advertising fees charged to merchants.
5. Lead Fee Model
Pertaining to service-based marketplaces where transactions tend to conclude off the platform, a lead fee model may be a more suitable way to monetise the marketplace. Lead fees come in two forms, either by charging the merchant to access an individual lead or to impose a charge only after a successful transaction. In some cases, a bidding process may be involved if there are multiple merchants eyeing the same lead. Marketplaces that have implemented the lead fee model include Upwork, a talent marketplace.
For this monetisation technique, the marketplace only imposes a fee when a merchant has come into contact with a client. In essence, merchants are only liable to pay when there is a good opportunity to close a deal. This is in contrast to the subscription model or the listing model, where the merchant already bears a fee when he has not come into direct contact with any consumer.
Such monetisation strategies are more commonly witnessed in B2B or B2C marketplaces where leads are highly valued. In such cases, a potential lead carries the opportunity for long-term business collaboration. Hence, the value of a lead is higher as opposed to a one-off transaction.
However, there may be a high incidence of platform leakage for the lead fee model. After the platform has connected the buyer and seller in the first few meetings, it is likely that the buyer and seller may collaborate to conduct transactions offline in order to avoid the platform fees. Platform leakages pose problems to marketplaces who rely on the lead fee model as this revenue stream may not be sustainable in the long run.
In closing, there are plenty of monetisation techniques available in the market that can be employed to profit from a marketplace. Every strategy encompasses a trade-off between its unique pros and cons as discussed earlier. With so many factors in mind, marketplaces face a conundrum, forced to juggle between marketplace profitability and user satisfaction. Taking it further, the dilemma complicates as the interests of the two user groups, buyers and sellers, may coincide with different strategies.
In order to sustain a stable source of income and to ensure marketplace growth in the long run, it is crucial for marketplaces to make a full assessment of each strategy while factoring in the various concerns raised. Given that there is no one size fits all, marketplaces can use one or a combination of monetisation techniques best tailored to their marketplace. Moving forward, marketplace owners should keep abreast with new marketplace trends and tweak their monetisation methods accordingly in order to remain relevant and competitive.
Anthea Yeo is with the Business Development team at Arcadier, a SaaS company that powers next generation marketplace ideas. You can follow Arcadier on Twitter, Facebook and LinkedIn for more news and updates.