Having covered some of the more conventional methods of monetising your marketplace business in the previous chapter, it is time to explore more unique business models. These models are not as widely-used as the previous ones, but they are still able to balance profit and long-term sustainability for your business.
In order to understand lead fees, you need to be clear about the listing fee and commission models. As explained in the previous chapter, listing fees are similar to classified ads where they charge merchants when they post a new listing on the marketplace. The commission model charges a fee for transactions between the consumer and the merchant.
Lead fees are a combination of both the listing fee and commission models. The way it works is similar to an auction: a customer posts a request for a product or service on the marketplace, and providers will then pay in order to make a bid for the customer. This helps marketplace owners to provide a stronger value proposition for their providers as they only have to pay when they connect with a potential customer.
The lead fee business model works best with marketplaces that have high-value leads. Often, these refer to B2B or B2C companies that provide services, as businesses are able to build long-lasting relationship with their customers, leading to repeated purchases.
HomeAdvisor, a platform that connects people to service professionals (photographers, plumbers, etc.), lets professionals post the type of work they do and the geography they serve. Then, HomeAdvisor provides new customer leads that match these requests and service professionals pay a fee for each lead they receive. This enabled HomeAdvisor to provide the service free of charge for consumers while still maintaining a sustainable business model.
However, as with any business model, there are some drawbacks with the lead fee model. Once a provider is connected to a customer, they are no longer reliant on the marketplace. Both parties are free to build their relationship outside the platform, and the lead is lost. Thus, it may be good for marketplaces using the lead fee model to explore other avenues of monetisation that add value for the providers.
Advertisements & featured listings
Another way to monetise your marketplace would be to offer “premium” web real estate for advertisements or featured listings. Advertisements allow marketplaces to fully utilise their web real estate, filling blank spaces with banner advertisements that are targeted for their audiences. Marketplaces have a trove of data regarding their users’ preferences when shopping, thus they are able to curate advertisements that target the intended audience with great accuracy.
Amazon utilises sponsored advertisements of related items placed next to actual product listings.
Featured listings offers providers greater visibility for their products in exchange for a small fee, or via an auction system like Expedia’s. Normal listings on the marketplace is usually free of charge, but providers can pay to have their listing featured more prominently, such as on the homepage or at the top of its product category.
The downside with advertisements and featured listings is that both models require a large number of users to generate significant revenue. Furthermore, users hate advertisements. The estimated cost of ad-blocking globally is expected to be over $41 billion in 2016.
Providing good customer experience and utilising an advertising business model do not exactly go hand-in-hand. One way to mitigate this would be to offer advertisements that are specially targeted at your niche market. For example, an advertisement on Etsy could feature hand-crafting classes that its customers might be interested in, making it less obtrusive and annoying.
Combining revenue streams
The two marketplace business models explored in this chapter are unique and may not appeal to some marketplace owners or their providers and customers. However, it is important to explore multiple options in order to find the optimal model for your marketplace.
In the beginning, it is key to have only one revenue stream in order to avoid diverting your attention. As you scale, it is possible that combining several revenue streams to craft a unique business model that works for your marketplace. Offering featured listings could help drive promotion for retailers, which combined with transaction fees, can generate larger profits for your marketplace.
Next let’s figure out how to get people to keep using your platform, first by building a community that’s passionate about your marketplace and your vision!