Marketplace Business Models To Generate Revenue

Marketplace Business Models To Generate Revenue

1.Quick read

Starting an online marketplace with no sales model is not the way to start a profitable marketplace venture. One of the most important reasons why startups fail is that they choose a business model that does not scale to ensure long-term viability. To make the best decision, you should be aware of both the benefits and drawbacks of each marketplace business model, as well as which marketplace revenue model you should choose. Many online marketplace companies use one of seven different models.

2. Commission revenue model

The commission model is a business model in which a fee is charged on each purchase. It is by far the most common business model for online marketplaces. The marketplace charges a percentage or a flat rate for its product when the buyer pays the seller. Either the seller or the buyer will be charged by the platform. Another choice is to earn a commission from both of them.
This marketplace revenue model is the most popular since the fee is justified. The parties can work for free and pay only when they receive a benefit from using the platform. At the same time, the marketplace receives income from each conversion.

Benefits of the Commission Model

Increases the number of suppliers: This marketplace business model is so successful because it enables online marketplaces to solve the chicken-or-the-egg challenge while still attracting vendors. Sellers do not lose any revenue by putting their products on this platform and they only pay when their products are delivered.
You Earn Money For Every Transaction: The commission model is a highly efficient method of generating income in the marketplace. Every time a customer spends on a service or good, the marketplace profits.

Drawbacks of the Commission Model

Providing Enough Value: The biggest obstacle for commission-based online marketplaces is to have sufficient value for all parties.
If your platform does not provide enough value, marketplace leakage can occur. This suggests that consumers would want to find a way to deal directly with vendors rather than using the platform.

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Pricing: Setting rates for services is another problem for this marketplace business model.
Is it better to charge a portion of each sale or a flat fee? Can you bill either one of both parties? How much do you charge to generate sales while not alienating your customers?
This question has no correct answer. The way of collecting money should be determined by your marketplace revenue model.
The pricing model, for example, would be determined by whether your marketplace is a seller- or buyer-oriented.

3. Subscription revenue model

The subscription model is a marketplace business model in which a person pays a monthly fee to access the platform.
The value proposition of subscription-based online marketplaces is assisting vendors in finding prospective customers or gaining access to a pool of future clients or collaborators.
Subscription-based online marketplaces do not often partake in consumer purchases. The parties may pay individually, for example, with a credit card.
Another example is where the parties’ relationships do not require money at all, such as on dating or Couchsurfing-like pages.
The subscription model is ideally suited for online marketplaces that lack the infrastructure to support consumer purchases or whose business logic does not need them at all.

Benefits of the Subscription Model

Long-term viability: The subscription business model enables you to forecast your monthly sales on a consistent basis. If you already have a group of trusted customers who are able to pay for the services offered on your marketplace on a regular basis, this is a perfect business model for the marketplace.
Increases the number of clients: This unique online marketplace revenue model appeals to consumers because they pay a comparatively small price for the services per month rather than a large sum all at once.

Drawbacks of the Subscription Model

Adding Enough Value: The biggest task of the subscription model is to have enough value so that people appreciate the advantages of purchasing a membership. That is, attracting new clients or partners, saving money, gaining new experience, and so on.
Chicken-and-egg dilemma: Another issue is that the subscription model makes it much more difficult to address an online marketplace’s chicken-and-egg dilemma.
In the case of the commission model, consumers pay only when they get revenue from the marketplace. For eg, when they are able to see the gains for themselves. As a result, they are not taking any chances.
The need to pay in advance may deter future users from using the platform. You can overcome this challenge by providing a free trial or discounts to new customers who purchase your product.
You may also build various subscription programs (such as free, basic, and premium). Furthermore, you can grant separate privileges to users of each community.

4. Listing fee revenue model

One of the most popular marketplace business models across two-sided marketplace platforms is product listing fees.
When you’re just getting started with your online store, one of the easiest business models to introduce is listing or insertion fees
A listing fee is a fixed or variable amount collected from vendors when their products are listed for sale
A marketplace website can calculate product listing fees in many ways:
  • a set fee, such as $0.35 per product page
  • a market-based number, such as 5% of the product’s listing price
  • Fees are calculated depending on the category, for example, $25 to list a product in the Automotive category
  • calculation based on features, such as +$5 for each additional product segment
  • any variation of the above
Here are some things to think about when using listing fees as a marketplace business model:
  • Make it simple for sellers to pay their fees – particularly if you want them to list a large number of items.
  • provide sellers with a compelling case about why listing on your website is a good idea – statistics, for example.
  • If you use price-based estimates and deal with pricey goods, keep overall fee limits in mind.

Benefits of the Listing fee Model

The listing fee model has an undeniable benefit over the alternatives discussed previously.
Sponsored listings scale well as the marketplace expands: the more exposure you offer, the higher the price your vendors are willing to pay.
Promotions are a flexible monetization technique: the more placements you can plan, the more combinations you can sell your vendors.
The expense: Listing costs are usually minimal and much less expensive than the cost of a subscription.
The caliber of listings: Each commercial is paid for by the vendor, and they want to make as much money as possible off it. This forces them to focus on the content of each object rather than making a slew of commercials in the hope that one of them would sell.

Drawbacks of the Listing fee Model

It’s Difficult to Generate Enough Revenue: Often, marketplaces do not demand a lot of money for listings. As a result, it is more difficult for platforms to generate enough sales to remain profitable. As a result, listing fees are typically used as a secondary monetization model will not be as successful in the early stages because the platform is still gaining momentumIf your system does not support featured listings, custom development might be needed.

5. Freemium revenue model

A freemium revenue model is one in which a marketplace offers both free and premium features. This model is a little more difficult to implement because the marketplace must provide very appealing premium services to consumers.

Benefits of the Freemium Model

Fast Lead Generation: At first, consumers are drawn in by the word “free.” As a result, by using freemium, you will have more opportunities to create a client base and win loyalty before offering premium services.
There are no limitations in using: Users can conveniently reach the website, post a listing, and connect with one another using the freemium model.
Cases in which consumers must pay:
When they wish to advertise their postings
When they need to post more than a certain number of listings.

Drawbacks of the Freemium Model

From free to paid services: The most difficult challenge is turning free consumers into paid customers. It’s also likely that if you’re spending money on funding and recruiting more free customers, you won’t see many high-paying ones. It takes a while. As a result, the freemium model is used as a secondary sales model for online marketplaces.
Reasonable Benefit: The freemium model, like the listing fee model, must provide enough value to consumers to choose to pay for premium resources.

6. Featured listings and Ads

After you’ve launched your marketplace website, promoting brands and profiles is a perfect way to give your vendors additional visibility.
It’s a revenue-generating business model used by the majority of famous marketplaces.
Marketplace promotions can take many forms, including:
  • Supported brands appear on other product websites and in groups.
  • items that are advertised in the cart and during the checkout phase
  • on the home page, featured vendor profiles and products
  • blog entries that have been advertised and newsletter mentions
Sponsored brands often perform well in product-focused marketplaces (such as eBay or Amazon, where the product is more relevant than the seller), while featured vendor profiles are an excellent way to reach consumers in vendor-centric marketplaces (where vendors sell unique or handmade products and build relationships with your customers).
When it comes to receiving fees for promotions, you have some options:
  • Vendors should pay for individual product and profile marketing (and set different rates for different promotion periods and locations)
  • Including product deals in a higher-priced subscription scheme.
  • Implement a payment scheme that allows vendors to buy credit in bulk and use it for promotions at their leisure.
  • To target new clients, give free discounts as part of a larger marketing strategy.

Benefits of the Featured listings and Ads

Additional Revenue Stream: The featured listings and advertising model is only available as an add-on to the main model. It is an excellent revenue model for the industry when you try to add a new revenue stream. However, keep in mind that the marketplace should not be overburdened by advertisements.

Drawbacks of the Featured listings and Ads

It is difficult to monetize: For this model, it is impossible to entice enough consumers to pay to have their listings included. Furthermore, striking a balance between free and paid consumers is more difficult. Typically, free users outnumber paid users.
Maintaining User Retention on the Platform: Excessive advertising is no healthy for companies. Since it may deter your users from using your website.

7. Lead fee revenue model

Charging lead fees could be a feasible marketplace business model if you operate a contract-based or service-based marketplace and do not process orders across your site.
Under this situation, the suppliers will be able to search the list of possible clients or offers, but they will have to pay to see the specifics of a specific offer.
You have two alternatives when it comes to charging the lead fee:
The charge for access to each lead
Charge only for good deals
In the first example, the suppliers would have to pay to obtain the particulars of the lead or contract, regardless of whether the result is favorable to them.
For the above alternative, you’ll only bill your vendors if the contract with this specific lead closes – but you’ll need some leverage over the deal flow.

Benefits of the Lead fee Model

Worth: This revenue model provides consumers with enough utility to make them willing to pay for the marketplace. Suppliers have no fear of spending money because they are associated with potential customers, as opposed to the listing fee, where suppliers do not know whether they can actually receive their potential buyers.

Drawbacks of the Lead fee Model

Leakage of the Market: If a marketplace charges high lead rates, service providers may choose to deal directly with consumers.
This condition will result in market leakage. To prevent this condition, aim to put the marketplace fees in the middle to low range.

8. Sign up Fees

Sign-up payments are straightforward – they are a one-time charge received from your vendors when they register to sell on your marketplace website.
One of the most straightforward marketplace business strategies is the collection of a sign-up or registration fee.
You’ve seen it, and you’re well aware of it. Sign-up payments are easy, you don’t need complicated payment gateways, and your sellers pay you upfront.
If you’re bold enough, you can charge sign-up fees long before you have a flourishing two-sided marketplace. (You just need to market your idea to your vendors to persuade them to pay to enter your platform early.)
It’s also a marketing model that makes sense for the vendors – paying a nominal fee to enter a budding marketplace site isn’t a bad deal (if you have a valid business idea and can convince your sellers).
Here are some pointers to help you make the sign-up fee business model work, particularly in the early stages:
  • Be certain that the sign-up price is reasonable and practical for the vendors.
  • Understand the benefits the vendors can achieve from joining the network – and emphasize the advantages!
  • Make an option for early sign-ups – help the vendors want to sign up as soon as possible
  • provide a personalized solution to vendors that sign up – They are, after all, investing in your idea.
Sign-up payments, when applied correctly, can be both a motivator for credible vendors and a deterrent to bogus signups.

Benefits of the Sign-up Fees Model

It is feasible in the early stages of the platform
It is easy to implement

Drawbacks of the Sign-up Fees Model

Does not scale well over time
You’ll have to be very persuasive.

9. Finally, which marketplace business model is best for you?

There is no “one-size-fits-all” solution to marketplace business models.
So, keep the following considerations in mind when developing a business model for your online marketplace platform:
  • your market, as well as your rivals – If no one else is doing what you want, you might be mistaken (or a visionary)
  • your marketplace’s scale and life cycle – Certain market models perform well in the early stages, while others require high sales and traffic volumes.
  • your target market’s complexities, geographical area, and society – What works well in one field might not fit so well in another.

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May 29th, 2021|
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