Every marketplace needs money to operate. Even if you’re not doing it for a profit, you still need some cash flow to maintain and develop your website. There are many different business models and combinations that you can pick for your marketplace, but choosing the right model and making sure it scales in the long run is the tricky part. For the most part, it depends on your target audience, your marketplace offering, and your overall growth strategy.
Here are some common revenue streams for online marketplaces:
Commissions or transaction fees
The best known marketplaces, including Airbnb, eBay, Uber, and Etsy, all charge a commission from each transaction that takes place on their platform, either in the form of a percentage or a flat fee. This model is especially appealing for the suppliers or providers, as they only have to pay the marketplace operators if they sell something. It therefore encourages more suppliers to list their products or services and improves supply liquidity.
The commission model builds on the network effect — a phenomenon whereby a good or service becomes more valuable when more people use it. The more suppliers there are, the more likely buyers will find something useful and conduct transactions on the marketplace, increasing marketplace revenue. Additionally, the commission model scales nicely and is usually the most lucrative for the marketplace operator.
If this model is so lucrative, then why don’t all marketplaces use it?
Not all marketplaces support monetary transactions. Think about dating sites or barter marketplaces — you can’t charge a commission when there’s no money involved.
It depends on the size of the typical transaction and the nature of your offerings. When long-term relationships or large amounts of money are involved, it’s difficult to justify the commission. This could cause disintermediation and prevent the marketplace from collecting a transaction fee.
B2B invoices often have complicated invoicing processes that the marketplace cannot facilitate.
It’s common for classified ad platforms such as Craigslist to charge a fee for new listings. This model is effective when the users benefit from the number of listings and when the sales are mostly a one-off. Listing fees can be a form of quality control too, so your marketplace is less likely to be flooded with low quality products and poorly written listings. In Craiglist’s case, most new listings are free, but those in job and apartment categories may not be.
Photo credit: Hubspot.net
This model may not scale well as your marketplace grows, though. It doesn’t guarantee that your providers can make a sale, and you may only be getting a small portion of the transactions made. The upfront fee will also discourage some suppliers from joining.
If you’re confident that your marketplace will provide great value and warrant repeat transactions, you can charge a membership or subscription fee. You could use the membership fee to create a sense of exclusivity or to charge providers in a B2C marketplace. This model is especially useful when facilitating payments for each transaction is challenging.
The chicken and egg problem — the “which comes first, the suppliers or customers?” problem — becomes more apparent with this model, as mandatory fees can discourage users from signing up. But one way you can build an initial user base is to let early adopters sign up for free.
Another issue with membership fees is that chances are your customers will stop subscribing at some point, once they’ve found what they’re looking for. This pricing model requires you to closely monitor the churn rate — the amount of customers or subscribers who cut ties with your service or company during a given time period — and take up rate of membership in order to remain profitable.
Freemiums are popular not only with mobile games, but also marketplaces. The marketplace can be free to use, but premium features comes at an additional cost. Even with games, only around 2% of the total users ever pay for the premium offerings, but they may spend enough to make the venture profitable. The value-added services your marketplace offers need to provide enough value and be interesting enough for a wide audience, and coming up with the right mix can be difficult.
A similar strategy allowed Linkedin to amass a large user base. While the free version works like a professional social networking site, they offer talent solutions for businesses/recruiters and premium subscriptions for job seekers.
In all cases, your marketplace has to be able to present a good enough value proposition for the users in order for them to continue using it. You may be able to provide them with the convenience of different payment methods and a more secure transaction — options which may not be available if the user contacts the seller directly.
A sustainable business model for your marketplace may be a combination of two or three of these basic monetisation models for greater revenue stream. Many startups stick with one model at first, but sometimes the most sustainable way is to pivot to a more scalable option.
Next, we’ll be looking at combining these models, as well as the option of monetising your marketplace through advertising.