Marketplace Business Model (Essential Guide)
Have you considered becoming a marketplace entrepreneur? 47% of digital purchases across the globe are taking place through online marketplace platforms. You can capitalize on the demand for niche services by launching an online marketplace.
Once you have successfully attracted enough buyers and sellers to your marketplace website, there will be no shortage of ways to monetize your online marketplace business. Start by considering your monetization options. Once you know where you’re going, you can optimize growth around this revenue model and embark on a cohesive go-to-market strategy.
In this guide, we are going to break down several marketplace business models for you to consider. An online marketplace can connect buyers and sellers on a proprietary platform. To sustainably grow an online marketplace business, you should monetize the way users are exchanging value on the platform by doubling down on a single revenue model.
No business model is universally applicable to all marketplaces. Choosing the best way to monetize your online marketplace can be challenging. While your revenue model will likely evolve as the marketplace community grows, it’s important to get off on the right foot. Let’s break down 5 marketplace business models that you could potentially pursue.
Marketplace Business Models (5 Revenue Streams)
Charging a commission for each transaction is the most popular marketplace business model. When a client is required to pay the freelancer or contractor, the marketplace facilitates the payment and takes either a flat fee or a percentage of the total transaction. When money is being made on your platform, this model is an easy way to get a meaningful slice of the pie.
The greatest benefit of this business model is that service providers are not charged anything before they start to earn money from the platform. This can help to increase the monthly active users (MAU) on the marketplace by incentivizing freelancers and contractors to use it as a free tool for generating new work. It’s only when they gain value that they are charged a small fee.
Every time money passes through the marketplace, you’re able to get in on the action. Many of the most established online marketplaces in the world – like Airbnb, eBay, Etsy, and Fiverr – all operate with commission-based revenue models. If you choose to adopt this model, you must ensure the platform is providing enough value for both the customer and the service provider.
The key is finding the right percentage to charge. Ideally, you want the commission fees to be relatively small in relation to each transaction. This is why you cannot take a one-size-fits-all approach to commission fee percentages across all online marketplaces. You need to think about your average transaction size and consider a percentage that seems reasonable.
If there are marginal costs to serve on digital services being provided by sellers, these should be considered when you’re setting a percentage. To ensure sellers are willing to continue using your marketplace, you must offer competitive commission fees to keep hold of their talent. You should research other marketplaces in your niche to arrive at a ballpark percentage.
Airbnb is a great example of an online marketplace with a business model built on commission revenue. Airbnb collects commissions from two sources upon each booking, from both hosts and guests. For each booking, Airbnb charges the guest 6-12% on the booking fee. They also charge the host 3% for every successful transaction on the platform.
With commission fees for both buyers and sellers, Airbnb spreads the burden of taking fees while ensuring that the hosts get a good deal. In 2021, the CEO expressed concern about a shortage of sellers on the platform. The low commission fee (3%) for Airbnb sellers has likely been designed to further incentivize homeowners to join the platform and meet buyer demand.
Membership fee or subscription fee
A membership fee (or subscription fee) is a revenue model that gets users to pay a recurring fee for access to the platform. For this model to be successful, the marketplace must offer a strong value proposition for service providers to pay a monthly recurring fee. Adopting this revenue model only makes sense if users typically engage in multiple transactions.
If the monthly membership fee is often costing the user more than they’re making on the platform, this will result in high churn. To make this revenue model work, you must have a blooming community of users. You would also need to consider the ratio of freelancers and contractors to potential customers on the platform. Balancing the ratio would be challenging.
Ultimately, for a recurring fee model to work, you will need to have enough users on the platform to make it valuable for all parties. If these recurring payments are preventing users from signing up to the online marketplace, you may wish to offer a discount for early adopters. You could lift the fee entirely for the first few months to build the user base and increase the value proposition.
HomeExchange turned its commission-based business model into a subscription-based one. The guests now no longer have to pay per night to stay in someone else’s house. Instead, on the platform, users can sign up for a $150 HomeExchange annual subscription that enables them to schedule an unlimited number of property exchanges over 12 months.
The company saw greater upside in the subscription-based model than the commission-based model. The CEO admitted this was partly a financial decision, while also differentiating their online marketplace offering. By encouraging users to impulsively subscribe based on a high value proposition, HomeExchange does not need to worry about the value of transactions.
There are some marketplaces charging a fee when users post new listings. This model is only effective when users are getting value from the listings on the marketplace. If those in need of services attract attention from service providers, the listings are worth their money. You would also need the potential value per listing to be relatively large for this model to work.
For instance, if a marketplace user needs a task to be completed by a service provider for £20, a listing fee of £10 may be unreasonable. To avoid these issues, listing fees should always be a relative percentage of the total compensation for the task. If a marketplace user posts a listing for a task with compensation of £100, the platform could take a 5% listing fee for a total of £5.
As an online marketplace business model, listing fees only work when you have a sufficient number of monthly active users on the platform. If your marketplace model is to charge listing fees, ensuring their needs are met by service providers on the platform is essential. Rather than charging listing fees from the outset, you must build up a large user base of service providers.
Source: Hanna Lisa Haferkamp
Etsy successfully leverages listing fees to generate revenue. The listing fee on the platform can be as low as $0.20 – and expires after 4 months. With 81.9 million active buyers on Etsy, there’s a clear value proposition for sellers. Less established online marketplaces with fewer active buyers and a weaker value proposition may struggle to justify a listing fee revenue model.
Alongside the listing fee, Etsy also charges sellers a commission for each sale. This fee has been fixed at 5% of the sale. Etsy can utilize both the listing fee and commission fee because their value proposition is so strong. If you don’t have the same number of monthly active users as Etsy and haven’t niched down, charging two sets of fees may alienate potential sellers.
A freemium model is ideal for marketplaces where users share low-value items. For instance, if customers are giving less than £20 to service providers for the completion of a task, setting up a listing fee revenue model wouldn’t be worth the time and effort. Instead, you can monetize the online marketplace website by charging for additional features to enhance the user experience.
While the basic experience is free for all users on the platform, there may be ways to increase the value proposition for either the customer or the service provider. As an example, you could charge customers for their listings to appear in your weekly email newsletter, increasing the exposure of their listings to service providers actively using the platform.
If you have a clearly defined niche, it shouldn’t be too challenging to encourage commercial providers to advertise on your platform. Ultimately, it all comes down to the number of users these commercial providers will reach on your platform. Ad-based models are only successful when you have a consistent number of monthly active users navigating the platform.
Amazon has even started to experiment with offering advertising placements. In many ways, when it comes to opportunities for monetisation, online marketplaces are quite similar to social media platforms. The more eyeballs you have on your website, the easier it is to monetise. If you have a significant number of monthly active users, you should offer advertising placements.
Should you charge on the demand side?
While marketplace fees are typically applied to the sellers, it can in some cases make sense to explore the opposite strategy. Does the buyer or the seller have the money? The answer to this question will dictate the best revenue model to pursue. Ultimately, it’s going to vary depending on the industry. Uber Eats charges consumers (on the demand side) delivery fees.
Source: The Verge
The vast majority of online marketplaces prefer to push the costs of payment onto the suppliers. Uber Eats is an example of an online marketplace that takes the opposite approach. It seems that consumers are willing to pay extra for the convenience of ordering food online. The delivery fees vary based on your location and your proximity to the restaurant or takeaway.
If you’re thinking about building an online marketplace that takes a cut on both sides, you should conduct user interviews to see how this might be perceived. If you’re in a situation where buyers are not happy with additional platform fees being attached to the service offering, this could have a negative impact on user satisfaction and retention rates. Understanding your users is critical.
How To Build An Online Marketplace
Have you been thinking about how to build an online marketplace? It’s never been easier to get your online marketplace business off the ground. All you need is access to the right solution. The tools you use to build an online marketplace can make or break the project’s success. TalentPools has developed a no-code whitelabel platform to launch your online marketplace.
How To Create A Marketplace Website
Rather than waiting six months to build your own marketplace and spending thousands in the process, you can leverage TalentPools to create a marketplace website in a single day. With the freedom to customize the platform design and build the features you need, this is a no-brainer for entrepreneurs that lack technical knowledge but have an urgent desire to launch a platform.
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