For the last ten years, the marketplaces have been booming. Many startups are launching marketplaces targeting niche markets. If you also want to create a marketplace, you will have to define a business model adapted to your project. The question of this choice can also arise in the case where your marketplace is already launched and operational. In this article we will present 7 types of business models adapted to marketplaces.
1) Commission system: the common system
The commission system is undoubtedly the most used on the platforms of connection. Among the most famous marketplaces that apply commissions, we can mention Amazon, Vinted, Airbnb… Actually, it is the most natural when you put two parties in contact with each other, whatever the type of transaction (purchase, rental, service provision, etc.). The commission can be a percentage of the amount of the transaction between the two parties or a fixed amount.
Marketplaces earn a commission (usually a percentage) on the final selling price of each item sold on their platform. This incentivizes them to create a user-friendly and secure environment that facilitates successful transactions between buyers and sellers. The commission rate can vary depending on the marketplace, product category, or even the total sales volume of a seller.
The beauty of the commission system lies in its alignment of interests. Marketplaces have a vested interest in fostering a vibrant ecosystem with a wide range of products and a high volume of transactions. Sellers, on the other hand, are motivated to list their products and promote them effectively to a large audience in order to maximize their sales and minimize the impact of the commission fee on their profits. This creates a win-win scenario where both the marketplace and its sellers benefit from a thriving platform.
While transaction fees are central to the commission system, some marketplaces explore additional revenue streams. They might offer premium listing options for increased product visibility, subscription plans for sellers with advanced features, or advertising opportunities to reach a wider audience within the platform. These additional revenue streams can further support the marketplace’s growth and development.
2) Beyond Commissions: Exploring the Subscription Model in Marketplaces
While the commission system reigns supreme in many marketplaces, a compelling alternative is emerging: the subscription model. This approach offers a recurring revenue stream and fosters a deeper connection between the platform and its users. Here’s how it works:
- Recurring Revenue: Unlike the commission system, which relies on individual transactions, the subscription model offers predictable and recurring revenue for marketplaces. This allows for more stable financial planning and investment in platform development, ultimately creating a more robust and feature-rich experience for both buyers and sellers.
- Added Value for Subscribers: To incentivize users to subscribe, marketplaces need to offer added value. This could include exclusive benefits like free shipping, discounts on products or services, early access to sales and promotions, or access to curated collections or premium content. By tailoring subscriptions to specific user needs, marketplaces can create a loyal customer base that benefits from ongoing value and convenience.
- Catering to Different Needs: The beauty of the subscription model lies in its flexibility. Marketplaces can offer tiered subscriptions with varying levels of benefits, catering to different user types. For casual buyers, a basic subscription offering free shipping or discounts might suffice. For more frequent buyers or professional sellers, higher-tier subscriptions could provide access to advanced features, bulk discounts, or dedicated customer support. This caters to diverse user needs and creates a personalized experience that enhances overall satisfaction.
The subscription model offers a powerful alternative for marketplaces, providing a stable revenue stream and fostering lasting relationships with users. By offering added value and flexible subscription options, marketplaces can ensure a loyal customer base and a thriving online ecosystem.
3) Paying to Play: The Listing Fee Model in Marketplaces
Another marketplace business model approach is the listing fee model. This is the case of the website eBay which enables every type of seller to list a minimum of 200 products on its online marketplace platform free of cost. Once the limit is exhausted, eBay charges a listing fee (or insertion fee) of $0.35 for each listing.. Unlike the commission system where fees are contingent on sales, the listing fee model requires sellers to pay a fee upfront to list their products on the platform. This fee can be a fixed price per item, a tiered structure based on product category or value, or even a combination of both. This upfront cost can be advantageous for marketplaces as it guarantees a revenue stream regardless of sales volume.
Also, the listing fee model is often suitable for marketplaces catering to high-value items, niche products, or sellers with a limited number of listings. For instance, a marketplace specializing in luxury cars might find listing fees more effective than commissions, as the high price point of the items ensures a significant revenue stream even with fewer sales. Similarly, sellers with a small inventory of handcrafted goods might benefit from a listing fee, as they wouldn’t be penalized for lower sales volume compared to the commission system.
By the way, for the listing fee model to be successful, marketplaces need to strike a balance between generating revenue and attracting sellers. This means offering valuable services and functionalities in exchange for the listing fee. This could include high-quality product listings with detailed descriptions and multiple images, targeted advertising opportunities within the platform, or analytics tools to track product performance. By providing value that justifies the upfront cost, marketplaces can attract sellers and create a thriving ecosystem.
4) The lead fee : the payments from vendors
The leading fee model offers a unique approach that prioritizes seller visibility over immediate transaction fees. This strategy presents advantages for both sellers and the marketplace itself.
For sellers, the leading fee provides an opportunity to gain an edge over competitors by securing prominent product placement within the marketplace. This can take various forms, such as featured listings in specific categories, inclusion in curated collections, or prominent placement on search result pages. By paying a leading fee, sellers gain increased buyer attention, potentially leading to higher sales volume and brand awareness – especially for new entrants or those offering niche products.
The leading fee model isn’t just beneficial for sellers. Marketplaces can leverage this approach to attract a wider range of products and create a more diverse shopping experience for buyers. Increased seller traffic on the platform, driven by enhanced visibility through leading fees, translates to more opportunities for buyer engagement and potential conversion. This fosters trust within the marketplace ecosystem, as a successful leading fee model demonstrates the platform’s commitment to connecting buyers with a wider variety of sellers and products.
In essence, this marketplace business model creates a win-win scenario. Sellers gain valuable exposure, marketplaces attract a broader product base, and buyers benefit from a more diverse shopping experience. This approach can be particularly effective for new sellers, niche products, and marketplaces seeking to expand their offerings and cultivate a dynamic shopping environment.
We can quote the Winbids platform which connects companies with consultants from innovation consulting firms. The latter will pay for the connection. This is also the way Companeo works, which aims to make it easier for entrepreneurs to find the right supplier for their needs.
5) Advertising: business model for large audience marketplace
The revenue model based on advertising allows a free connection between suppliers and buyers. Therefore, the remuneration will come from the advertising which will depend on the audience of the site. The difficulty here lies in having a marketplace with a large audience. Nevertheless, because it is free, this model favors the acquisition of users on both sides of the platform (supply and demand). The objective is to create a virtuous circle between the site’s traffic and the advertisers’ revenues: the more traffic there is, the more advertisers are willing to pay for their advertising.
The traditional image of marketplace advertising might be a static banner ad. However, a more nuanced and potentially more impactful approach is emerging: user-generated advertising. This model extends beyond classic banner ads and incorporates subtle promotional messages that appear throughout the user journey. These placements can strategically target various touchpoints within the user experience, including search results, checkout pages, payment confirmations, and even email newsletters.
Furthermore, highlighting user-generated content, such as positive reviews or popular sellers, can also be considered a form of advertising within this model. By strategically showcasing user-generated content, marketplaces can leverage the power of social proof to promote trust and encourage user engagement with specific products or sellers.
This user-generated advertising model offers several advantages. It can be more subtle and less intrusive than traditional banner ads, potentially leading to higher engagement rates. Additionally, it allows sellers to organically promote their products within the platform, fostering a sense of community and authenticity like Etsy.
6) The Freemium model: A Taste Before You Buy
The freemium model entices users by granting them basic access to the marketplace functionalities for free. However, this access comes with limitations designed to encourage users to upgrade to a premium plan. These limitations can take various forms:
- Feature Restrictions: The freemium model might limit access to certain features entirely in the free version. These could include advanced search filters, detailed analytics tools, or the ability to run targeted advertising campaigns.
- Usage Quotas: Freemium plans might impose usage limits on specific features. For example, a marketplace could limit the number of free product listings, the number of images allowed per listing, or the number of free ad credits a seller can use. Restrictions could also apply on the categories sellers can list products in within the free plan.
By strategically limiting functionalities in the free version, marketplaces entice users to experience the platform’s value but ultimately incentivize them to upgrade to unlock full functionality and achieve their full selling potential. This approach allows users to try the platform before committing, while still generating revenue from those who require the full suite of features offered by the premium plans.
7) The Free Trial for your marketplace business model ?
It consists of giving the user free access to features in a complete but time-limited manner. After a trial period, the user has to pay if he wants to continue using these features.
If it is difficult to convert a user to your paying offer, it is better not to apply a trial period on the basic use of the marketplace (ad creation, search…) but rather on one of the non-essential “bonus” features. If you opt for this business model, you will certainly have to mix it with other sources of income. Of course, if you are sure that the user will not be able to do without your platform to pay you can extend the free trial to more features or even to the basic use of the site. This way you create a kind of VIP marketplace with restricted access.
Conclusion
We have covered most of the possible business models for a marketplace. If you have imagination you can certainly find other sources of income (a website can sell other “things” like data, backlinks…) but the most important thing is not to settle on one business model. You can not only mix several different business models but you can also test several configurations until you find what optimizes your profits.
To find the best business model, you should not only look at the turnover and the profit per transaction but you should look for the business model that will generate the most profit by optimizing both your margins and the number of transactions. For example if you have high commissions or subscriptions you earn more per user/transaction but you might be able to generate more transactions or get more users if your fees were lower so potentially more profit in the end.
