What exactly is the measurement of a marketplace success? A number of users or amount of invested money?
Nope, it is your marketplace revenue. And one of the important things that can lead you to a great income is the right online marketplace business model.
In order to make the right choice, you should know about all the pros and challenges that each marketplace business model has and which marketplace revenue model each marketplace giant uses and why.
TOP 7 Online Marketplace Revenue Models in 2020
The majority of online marketplaces operate with one of the three basic strategies: commission, subscription and listing fees. But actually there are many more revenue models on the market. Each of them has its own benefits and difficulties in implementation.
1. Commission Revenue Model
The commission model is a revenue model where a user is charged a fee for each transaction. It is by far the most popular online marketplace business model. When the customer pays the supplier, the marketplace charges a percentage or a fixed fee for its services.
The platform may charge either the seller or the buyer. Another scenario is taking a commission from both of them.
This marketplace revenue model is the most common since the fee is justified. The parties may operate for free and pay only when they get some value from using the platform. At the same time, the marketplace gets the revenue from each conversion as well.
Pros of the Commission Model
Attracts More Suppliers
This marketplace business model is so popular since it allows online marketplaces to simplify solving the chicken-or-the-egg problem, and to attract the vendors. Since users pay only when their items are sold, they do not risk any money by placing their business on this platform.
With Each Transaction, You Monetize
The commission model is a very effective marketplace revenue model. The marketplace monetizes every time a user pays for a service or product.
Challenges of the Commission Model
Providing Enough Value
The main challenge for the commission-based online marketplaces is providing enough value for both parties.
If your platform doesn’t offer enough value, then the marketplace leakage can happen. This means that the users will try to find a way to communicate with suppliers directly rather than use your platform.
NB: How to offer enough value?
For example, you may offer them the protection of the deal, insurance, or automate some routine work for the vendors.
Another challenge of this marketplace business model is setting the prices for services.
To charge a percentage of each transaction or a fixed fee? Should you charge only one party or both?
How much to charge to get revenue and still not discourage your customers?
There is no right answer to this question. The method of charging money should be chosen according to your marketplace revenue model.
For example, the pricing model will depend on whether your marketplace is a seller- or buyer-oriented.
Marketplaces Using Commission Model
One of the biggest online marketplaces operating with the commission model is Airbnb. Airbnb is a C2C marketplace that connects hosts with people who want to rent a house or a room during traveling for a short period of time.
It charges fees both from the hosts and the travelers. The property owners pay a 10% commission from the received amount of money. The guests pay only 3%.
Related: How to Build a Website Like Airbnb
Amazon is a B2C marketplace that sells items from different vendors on one platform.
It charges a fixed $0.99 fee to sellers who offer less than 40 items.
TaskRabbit is a C2C marketplace that connects local handymen with those who need help.
In terms of the commission model, it charges 15% of the total price paid for the task.
Fiverr is a freelance marketplace that connects freelancers that offer digital services with customers.
It charges the customers $1 for orders up to $20. And 5% if the service buying is more than $20. Fiverr charges the service suppliers 20% from every job done.
Find out: How to Build a Freelance Marketplace like Fiverr
2. Subscription Revenue Model
The subscription model is a marketplace revenue model where a user is charged a regular fee for access to the platform.
The value proposition of the online marketplaces that use a subscription model is helping the suppliers to find new clients, or getting access to the database of potential clients or partners.
Generally, online marketplaces that charge subscription fees do not participate in the transactions between the users. The parties can pay directly, for example, with a credit card.
Another case is when the relationships between the parties do not involve money at all, for example, dating or Couchsurfing-like sites .
The subscription model is best for those online marketplaces that do not have the resources to facilitate the transactions between the users, or whose business logic does not imply them at all.
Pros of the Subscription Model
The subscription revenue model allows you to predict your monthly revenue on a regular basis. It’s a great revenue model for the marketplace if you already have a community of trusted clients that will be willing to pay for the services provided on your marketplace regularly.
Attracts More Clients
This particular online marketplace revenue model is compelling to users since they pay a relatively small amount for the services each month instead of paying one big all at once.
Challenges of the Subscription Model
Providing Enough Value
The main challenge of the subscription model is providing enough value so that the users understand the benefits of buying a membership. Meaning finding the customers or partners, saving money, getting new experience, etc.
Another challenge is that the subscription model makes it even more difficult to solve a chicken-and-an-egg problem of an online marketplace.
In the case of the commission model, the users pay only when they get money with the help of the marketplace. For example, when they have an opportunity to see the benefits themselves. So, they are not risking anything.
The necessity to pay in advance may discourage potential clients from using the platform. You may overcome this difficulty by offering a free trial or discounts to the new adopters of your product.
You may also create different subscription plans (such as free, basic, and premium). Plus, you can offer different rights to the users of each group.
Marketplaces Using Subscription Model
A typical representative of the subscription model is CouchSurfing, where local people can accept travelers from all over the world.
Upon registration, new users get 10 free requests per week – messages that can be sent to a host. In order to get an unlimited number of requests, the users have to pay $60 per year to verify their accounts.
In order to verify their account for free, the user has to get a review from a traveler he hosted, or a host he visited. Upon getting the mutual review, the user gets 3 months of unlimited requests. When this period expires, they must either pay $60 per year to verify their account or get new mutual reviews.
OkCupid is a dating website that connects people who want to date together.
It has two paid subscription models. The first model – A-List charges $19.95 for one month or $9.95 per month when a user signs up for six months. The second model, A-List Premium charges $34.90 for one month or $24.90 per month when a user signs up for six months.
Discover: How to Create a Dating App: Business and Technical Tips
3. Listing Fee Revenue Model
The listing fee model is an online marketplace revenue model when a marketplace charges clients for posting ads on the platform.
While the commission-based online marketplaces charge a fee only when the item is sold, they may miss the revenue from the less popular merchandise. The listing fee model allows tackling this problem and getting profit from each and every ad on the platform.
Pros of the Listing Fee Model
The listing fee model has an undeniable advantage over the previously considered ones.
The listing fees are generally small and are much cheaper than the price of a subscription.
The sellers pay for each advertisement and they want to get as much revenue as possible from each one. This makes them work on the quality of each item, instead of creating tons of ads hoping that they will be sold somehow.
Challenges of the Listing Fee Model
Like the subscription model, listing fees can also make solving the chicken-or-the-egg problem more difficult. The clients pay before they get profit from the marketplace and risk their money. This may discourage them from using the platform.
In order to overcome this challenge, you may provide the new users with several free listings or, for example, an unlimited number of listings during a free trial period.
Difficult to Get Enough Revenue
Usually, marketplaces don’t charge a lot for listings. So it’s harder for platforms to get enough revenue to be in the black. That’s why the listing fee model is usually used as a secondary monetization model.
Marketplaces Using Listing Fee Model
When Etsy had just launched, it offered a promotion – a month of free listings for each of their clients.
When the trial period ended, it started charging $0.20 for each listing. This decreased the number of items listed per day but increased the efficiency of the existing ads. Paying the listing fees allows the user to post this ad for 4 months.
4. Freemium Revenue Model
Freemium is a revenue model where a marketplace has both free and premium features. This model is a bit tricky to work with since your marketplace needs to offer very alluring premium features for users.
Pros of the Freemium Model
Fast Lead Generation
“Free” is what grabs users’ attention the most at first. Thus while using freemium you will have more chances to:
- build a customer base
- gain trust, and only then offer premium features.
No Limitations in Using
With the freemium model, users can easily access your platform, post a listing or communicate with each other.
Cases when users need to pay:
- When they want to advertise their posting
- When they want to post more than a limited number of listings.
Challenges of the Freemium Model
From Free to Paid
The biggest challenge is converting free users into paying ones. It’s likely that while wasting your money on supporting and attracting more free users, you won’t get much-paid ones. It takes some time. Thus, the freemium model is used as a supplementary online marketplace revenue model.
The freemium model is similar to the listing fee model, they both need to offer enough value so users would want to pay for additional services.
Marketplaces Using Freemium Model
Craigslist is a classified ad website that was created in the 1990s. With time it became one of the biggest classified marketplaces around the world.
Generally, posting a listing on Craigslist is free. However, there are some categories like real estate where Craigslist charges some fees.
5. Featured Listings and Ads
The featured listings and ads model is an online marketplace revenue model where sellers buy advertising privileges to enhance visibility on the platform.
Sellers or service providers pay to have a featured listing higher than others or be at the top of a certain category provided that all other listings are free to post.
Pros of Featured Listings and Ads
Additional Revenue Stream
The featured listings and ads model can only be used as an addition to the main model. It is a great revenue model for the marketplace when you want to introduce a new flow of revenue. But be aware of not overloading your marketplace with ads.
Challenges of Featured Listings and Ads
Hard to Monetize
With this model, it is difficult to get enough users interested in paying for featuring their listings. Moreover, it is even harder to have a balance between free and paying users. Usually, free users will outnumber the paying users.
Keeping Users on the Platform
Too much advertising is never good for the business. Since it may discourage your users from using your platform.
Marketplaces Using Featured Listings and Ads
Listings and Ads online marketplace revenue model is especially used with real estate marketplaces. Zillow is the most popular one.
Zillow charges agents and management companies for advertising their listings on a platform.
Related: How to Build a Real Estate Website [7 Must-have Features]
6. Lead Fee Revenue Model
The lead fee model is an online marketplace revenue model where a user posts a request and suppliers pay the marketplace fee in order to bid for the customer.
Pros of the Lead Fee Model
This revenue model gives users enough value to pay to your marketplace. Since suppliers are connected with potential buyers, there is no risk for them in spending some money compared to the listing fee, where suppliers don’t know if they will ever get their potential buyers.
Challenge of the Lead Fee
If a marketplace charges high lead fees then service providers are going to want to work with customers directly.
This situation can lead to marketplace leakage. In order to avoid this situation, try to set middle to low prices on your marketplace fees.
Marketplaces Using the Lead Fee Model
Thumbtack is an online marketplace that connects customers with local professionals.
At Thumbtack there are 2 types of leads: exact and partial leads. With exact leads, service providers pay automatically for leads that match their preferences, no matter if they reply or not. With partial leads, service providers pay only if they accept the job.
7. Mixed Revenue Model
When selecting an online marketplace revenue model for your platform, it is not necessary to choose only one of them.
The major players of the online marketplace business successfully combine several models and have several revenue sources.
Pro of the Mixed Model
Several Revenue Streams
As previously mentioned there are marketplace revenue models that are used as a main source of income. And there are those that come as an addition to the main one. It is normal to have several monetization channels on your marketplace. Just choose two that suit your marketplace the most.
Challenge of the Mixed Model
Balance Between Charging Both Parties
If your marketplace has online revenue models that only involve charging either a supplier or a customer, the paying side is likely to abandon your platform real soon. Instead of focusing on one side of your marketplace, introduce such models that will involve both customers and suppliers.
Marketplaces Using the Mixed Model
One of the examples of the successful combination of several models is Amazon.
They have different seller groups with different commission models: individual sellers and pro merchants.
The individual sellers are those who offer less than 40 goods and pay a fixed $0.99 fee for each item sold. The pro merchants pay a fixed monthly fee of $39.99. As we can see, they unite the commission and the subscription model.
In addition to the listing fee, Etsy also charges a 5% commission for each transaction between the buyer and the seller. This helps them to get revenue from each ad. It also gives them additional income from the sellers’ successes.
Our Expertise in Developing Online Marketplaces
Sloboda Studio has been developing online marketplaces for over 7 years now. Our team has built more than 10 marketplaces.
Our main areas of expertise in building online marketplaces are:
- home services
- human resources
- media & PR
- translation & education
Cleaning Marketplace is an online managed marketplace that connects customers with cleaners in their local area.
Sloboda Studio has helped our client to digitalize their offline business by building an online marketplace from scratch. Since the platform launch, the client has had significant growth in a number of users. In addition, the client has fundraised some money for future development and growth.
This cleaning marketplace uses a commission-based revenue model where only customers are charged a certain percentage.
B2C Consulting Marketplace
B2C Consulting Marketplace is an online counseling marketplace that connects job consultants with job-seekers. Consultants guide customers in understanding what type of job they might be good at and give job tips.
Sloboda Studio helped the B2C Consulting Marketplace with implementing a video call system. This feature was the most needed feature for online communication on this platform.
In a nutshell, there are 7 core online marketplace revenue models. Every model has its own pros and challenges.
The most popular monetization model for an online marketplace is a commission model. With this model, a user is charged for every transaction.
Besides the main monetization models like commission, subscription, and freemium, there are secondary models that can provide an additional revenue stream.
However, there is no necessity to limit yourself to a particular marketplace business model. The major companies of the market successfully combine two and even more strategies like Amazon or Etsy.
Sloboda Studio has some major experience in building and helping online marketplace come to life. Just drop us a line for a free 30-minute consultation.