The Best Business Model For Your Marketplace

The Best Business Model For Your Marketplace

The Best Business Model For Your Marketplace

An online marketplace business is a great way to invest money.

The modern eCommerce market offers tons of opportunities, and each of them requires a special approach, specific skills and of course a lot of time and interest.

Another significant aspect is picking the right business model. Your future success depends completely on the choice that may not seem all that important at the beginning. And, of course, you cannot make the right decision unless you are aware of the types of business models that suit your needs the best.

Let us dive into the depth of marketplace business and the best business models you can opt for.

Top 6 Business Models for an Online Marketplace

What does your online marketplace mean to you? Is it a thing you practice your development skills on? Or is it the main source of your revenue? In most cases, it is all about profit. This is the key purpose of starting any business: even if you are running a non-profit project, you need some budget to grow and improve it. Even if it is just a hobby, sooner or later you may want to start earning some money from that.

The business model you opt for has to meet the needs and requirements of the marketplace. We defined top 6 business models for marketplace business and analyzed their specifics to help you with the decision.

Commission-Based Business Model

This is one of the most common business models for online business. Its essence is to charge a commission for each transaction. The customers pay the price for the service or the product to the provider, and the marketplace gets a profit from that. There are 2 ways to get a commission:

  • a percentage of the price;
  • a flat fee.

Also, it is up to you to choose who would be charged for the transaction.

The main advantages of this model:

  • Win-win strategy

The customers or service providers only pay fees when they have already got the value from the marketplace.

  • Transparent revenue

The marketplace owner has a clear vision of how much money passes through the platform.

We can define 2 key disadvantages as well:

  • Lack of value

The marketplace owner must prove the value of the services. If the users do not consider the platform useful enough, they will not pay you.

  • The size of the commission

How big is the revenue you would like to get? Should the fee be the same for all users? There are lots of questions to answer. Also, if you are only just starting your business, the commission should probably be a bit lower. The point is to attract as many users as possible by offering reasonable prices.

The commission-based business model is used by many successful online platforms: eBay, Etsy, Airbnb, etc.

However, there are several cases where the commission model will not work:

  • Processing huge transactions

If you typically work with real estate objects or other expensive items it would be difficult to define a percentage fee.

  • Marketplace purpose

If the online platform you own is devoted to dating, recruiting, bartering, or other services where monetary transactions are not involved, you cannot charge a commission and should consider an alternative.

Business Model Based on Subscription Fee

Another way to get some revenue is to charge a membership or subscription fee. The providers are charged, as the marketplace helps them to find new customers and clients. This is a good choice if several transactions may take place but charging a commission is a challenge. Also, a good choice is to start with the membership fee and switch to a commission-based model in the future.

The main advantage of the model is its great convenience. It is really easy to implement. The principle is quite understandable and transparent, so your efforts are minimized.

However, there are some challenges as well. Let’s call it the chicken and egg problem. How do you find providers without customers? How do you engage customers without having something to offer? It is crucial to have enough users on your platform to be able to set a fee for using it. Your existing and potential users need to see real profit from your services to get ready to pay you.

Who uses this business model? Both B2C and B2B marketplaces may find it useful. For example, HomeExchange,OkCupid, Linkedin, etc.

Do not pick this business model in the following cases:

  • You are a newcomer

We believe in your success as much as you do. But if you have just launched the marketplace and the number of users is small, better forget about charging a fee.

  • The value is not obvious

Even if you have enough active users at your marketplace, don’t forget about the need to attract new customers. If random visitors cannot see your advantages, they will not join your platform and pay the fee.

Listing Fee Model

Ecommerce Future Marketplace

The next option to take a look at is a listing fee. It is a common case when service providers get value based on the number of listings they post. This business model is commonly used for classified ads. So if your platform deals with advertising, this model would be a nice choice.

What are the advantages of the model?

  • Possibility to work with numerous listings

Your marketplace may collect information on various topics. Let it be products, services, apartments for rent, etc. You can run a free marketplace but charge a fee for specific listings. Thus, you will still have the possibility to attract new users,and at the same time, you will be gaining profit from selected categories of services.

  • It could be an element of a larger business model

Etsy uses this model, but you may remember that they use the commission model as well. So the listing fee model can be organically combined with other models to form a great solution.

The disadvantages to be aware of:

  • Small fee

This model does not guarantee any profit for providers. So, you cannot ask for too much money to post the listing.

  • Lower profit

This is the consequence of the previous point. You need to have a great number of users to succeed with this model.

What websites charge a listing fee? Craigslist, Mascus, Etsy, etc.

It’s better to avoid the listing fee model if you expect immediate income. Also, it is definitely not for you if you have troubles with proving that you provide actual value for the users.

Lead Fee Model

This is a combination of the listing fee and commission models. How does it work? The customers post requests at the marketplace, and the providers bid for every request. In fact, this is a struggle for the customers where the main weapon is money.

The key advantage of this model is great value offering. The providers pay your marketplace only when relations with the potential customers have been built.

Unfortunately, the model also has a significant disadvantage. There are risks that the providers will take their collaboration with the customers outside your marketplace, and you will get no profit for that. Also, do not apply this model if the value of the lead is too high.

One of the most famous companies that have implemented this model is Thumbtack.

The lead fee is not commonly used in C2C marketplaces, but B2C and B2B marketplaces prefer it. The long-term relations are the top priority here, so the model is suitable.

Freemium Business Model

What if you plan to run a marketplace where people share low-value items? Well, this is a tricky question. In this case, your steps should be the following:
 

  • offer one service for free,
  • extend your opportunities with additional services or features and set a fee for using them.

The freemium model has many advantages, so let us take a look at some of them:

  • Attractive conditions for the users

It is up to your marketplace users to decide whether they need to access the paid features. If not, they still have the opportunity to enjoy the free functionality.

  • New opportunities for the business owners

If the users enjoy your website, you have no chance to fail. With the freemium business model, you get the opportunity to multiply the number of users and increase the profit.

The key challenges here are:

  • The quality of the services

You need to develop really useful features in order to get money from the users. Only by providing real value the profit will come.

  • This is a commonly used practice

Yes, many online marketplaces opt for this model as the most profitable one. So, you have to be unique to win the attention of customers. You should think carefully about the prices and the paid features to become a front-runner.

Where can you meet this model? Visit the following websites: Peerby, Mascus, Vayable, etc.

This business model is not the best choice if you do not have enough time to think over the strategy. It requires too much attention and effort to be better than the competitors.

Featured Listing and Ads

How does this model look like? Well, just google a certain product and take a look at the search results page. What you see at the top of the results are the websites that have paid for being shown first. You can implement the same practice on the pages of your marketplace. No matter what products or services you work with, you can charge the providers for being featured on the homepage or at the top of the search results.

The main advantage here is that this model is really close to pure advertising. And if marketing is one of your key skills, consider this a great choice for your online business.

But at the same time, we have to emphasize some disadvantages.

  • The number of users

To get real meaningful revenue you need to work with many users. Let us analyze it: if you are selling some valuable products, there is a possibility you could earn much more working on the commission model.

  • Conflict of interests:

On the one hand, you would like to get a profit. On the other hand, there is always the risk to promote low-quality products. Generally, customers feel more comfortable with no advertising at all.

Which websites use this model? Gumtree, Zillow, Freecycle, etc.

Pick this option if you work within a specific niche. It will be the best fit if you have service providers who are interested in tailoring their offering for your specific audience.

Final Thoughts

Market research tells us that that the variety of business models employed by online marketplaces is huge. Each of the models has its own pros and cons; each of the solutions fits some specific needs.

Define your needs and study the market. Try different approaches, test them and decide on the most profitable ones. Keep your hand on the pulse and make your marketplace work for you!

Posted by Vadim Romah

Vadim Romah

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