Online Marketplace Business Model: How to Choose and Win?
Building a marketplace is a lucrative idea. We can prove this fact with figures. Michael Keenan’s research report says that in 2019, 17.8% of purchases were made online and the share of online purchases is expected to run at 21%. The US online marketplaces have fetched 67.7 billion in revenue and are forewarned to obtain $1,329.7 in 2025. Creating a marketplace alone won’t bring you large sums but an accurately specified monetization model will help.
To answer the question “what is a marketplace business model”, it’s possible to say, it’s a tactic applied to an eCommerce product to spawn earnings.
Picking an unerring business model determines how well your marketplace will get off the ground. When it comes to money, it’s always a tricky point. As a marketplace proprietor, your goal is to design a business model that will be favorable to clients and rewarding for you.
The algorithm works easily: you select the best business model, online marketplace pays you off. Sounds good, but what business model to choose? We have written up this article to help you to get through the burden of preference.
The Most Common Marketplace Business Models
There are six online marketplace business models that are mostly applied to a modern marketplace. They have positive sides and they may give you hard times. Let’s talk about each of them so you can get prepared for pitfalls and not get into hot water.
The commission is the widely used online marketplace revenue model. It involves deducting a fixed amount or percentage from every purchase sum. What kind of commission to pick is up to a platform type and the values it proposes. For instance, the sum cut from the service transaction is more increased than the one from the product transaction.
This BM is attractive for both user types vendors and customers as they don’t have to pay until a value is exchanged. So, to make this work, the value should be offered first.
Even though it’s lucrative for marketplace participants, you - as a marketplace proprietor - may encounter some challenges:
The first challenge is bringing significant value. The value drives the marketplace. If there’s no value, the users start searching for ways to get commission around.
The second challenge is pricing. The commission shouldn’t be too pricey. Gigantic commissions turn down the transactions, motivate users to bypass paying, or participants shift to another platform.
Well-known commission-based marketplaces are eBay, Airbnb, Uber, and Fiverr.
Also, the commission-based business model, may not work with some marketplaces types:
- Multiple-purpose marketplaces. As was mentioned, the commissions' size contrasts leaning on the value provided. If a marketplace provides a wide range of values, setting a commission that suits everything is complicated.
- B2B or some B2C where a certain type of invoicing is required.
- Non-financial ones where value is traded for value. No money is included. Examples: dating, and hiring marketplaces.
Membership (subscription) fees involve paying for a membership that allows the pass to exclusive features over some period like a year, a month, or a week. This BM is more appealing because it provides a steady income.
Normally, marketplaces present various levels of membership. Each level grants access to a different feature set and varies in cost. The cheapest level offers a narrow batch of features while the most expensive one makes available all features.
Membership is a promising model for B2Cs or C2Cs.
Marketplaces that offer paid membership: Tinder, OkCupid, and Linkedin.
The subscription fee may seem sweeter, but still, you may face spanners in the works. Chicken and egg problem or who comes first: vendors or customers.
Read our article on the two-sided marketplace to latch on to the problem-resolving ways.
A listing fee is an option of revenue model for an online marketplace for non-monetary value exchanges.
It looks inviting as it gathers a massive number of listings and ensures visibility. But if your platform has little traffic and a narrow client base, this marketplace business pricing model won’t work.
Another variant is to make the first listing free and charge a fee for two or more listed items. This option requires a large network, too. If a customer sees the first listed good or service is sold well, this will motivate them to pay and place more value.
Usually, this model is operated for multi-purpose marketplaces where a provider can list any item: services, goods, jobs, rentals, etc. Craigslist includes paying fees for listings placed on the website.
This business path may not be preferable for vendors as there’s no warranty of client acquisition. Instead, it makes a killing for you because the fee is paid regardless of transaction occurrence.
We recommend using this model in conjunction with another one because it results in low revenue. The low revenue is because the listing fee shouldn’t be high as the marketplace doesn’t pledge for an item to be sold.
A lead free is a marginal cost that obliges customers to pay for bidding on a contractor’s listing. The difference between listing free and the lead fee is a value proposition. Customer pays only if they are matched with a contractor. When we ensure listing fees, the consumer bears no guarantee of contacting shoppers.
The drawback is to keeping clients on the platform. If the lead fees are too high, it can stipulate the user outflow and collaboration outside your marketplace.
Lead fees are typically accepted in B2Bs and B2Cs but are barely applicable in C2Cs. Thumbtack is one of the prominent marketplaces with lead fees.
Freemium encourages user groups to exchange money for using extra features and services on a free venue. it’s revenue options for the marketplace with free item exchange. The add-ons should have sufficient value so users would be inclined to receive access and pay.
What extra features can be offered:
- Direct checkout
You can use the freemium alongside the other business model and gradually scale it to be a single model applied.
You can encounter Freemium on Uber, Amazon, and Delivery hero.
Featured Listings and Ads
The vendors may want to exchange money for their listings to be placed at the top of a category or on the homepage. Another option is a colored listing.
Zillow and Freecycle benefit from featured listings.
The same with ads, the vendor pays for their ads to be placed on the marketplace. We put these two models together as they function similarly and are aimed to increase visibility.
The hassle is furnishing sufficient user traffic for the model to work effectively.
As an internet user, you know how ads are disturbing and annoying. So, user experience is an A-1 priority in your platform, this business model isn’t an option.
However, the ads integration aid to keep a marketplace free to use. If you decide on using ads, an intuitive and comfortable page layout is a thing to be considered. Also, if ad content resembles the marketplace niche, the ads aren’t as annoying.
When we were talking about some examples of marketplace business models, I mentioned that they can be used in combination with others. Let’s talk about mixing the business models to have multiple revenue streams.
Having multiple earnings origins is definitely a benefit but it goes not without stumbling blocks. The main block is deciding on who is going to be charged. If vendors are the only ones to pay, they’ll vacate. The identical thing is for customers. Setting a business model for modern marketplaces in a way that will be comfortable for both sides and bring gain may be above one’s head.
Amazon, Uber, Etsy, and many other marketplaces prefer mixed models.
However, if you’re starting a marketplace, we recommend selecting one business model and keeping your focus on it. Once the marketplace is scaling, it’s time to introduce an extra digital marketplace business model.
Pros and Cons of the Marketplace Business Models
To sum up everything above, we have made up an online marketplace business model canvas with advantages and disadvantages.
The table gives us a picture of what marketplace platform business model is exemplary for one or another platform. Most marketplace proprietors select from one to three models but one of them is a core one. The core model can be commission, membership, or freemium. The Add-on model may be one of the rest itemized.
How to Choose Your Own Marketplace Business Model
We urge preferring one model as the primary. Once the marketplace is evolved, you can select a secondary approach to increase revenue. Which one to choose is up to you and the product.
At Celadon, when working on developing a marketplace, our marketers consult the clients on which platform marketplace business model will work best for their marketplace. For instance, the service marketplace business model differs from the one applied to a goods e-commerce marketplace business model.
We have developed a number of the marketplace with various business models being applied:
Jewelry Marketplace Development
We have worked on an eCommerce B2C jewelry marketplace development, designed to ensure an easy and smooth buying-selling process. The commission-based business model was selected. A store pays a share per purchase via the marketplace platform.
Residential Housing Marketplace
Construction services marketplace that originated as an MVP and was built with cutting-edge technology and a complicated DevOps approach. The primary goal was to make construction processes easier and ensure full control at each stage of construction. We integrated a freemium business model. As the project has evolved into a full-fledged marketplace, we decided to introduce ads that are allocated in a user-friendly manner.
Celadon is a perfect team for end-to-end marketplace building. We don’t just develop, but we care about our clients’ businesses getting off the ground. Selecting the best revenue model for a marketplace is a part of our web app development services. Whether you own a marketplace or set your mind to building it, drop us a line and we get back to you in no time.