What business model for your marketplace?

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 different types of business models adapted to marketplaces.

The commission system

The commission system is undoubtedly the most used on the platforms of connection. 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.

Among the most famous marketplaces that apply commissions, we can mention Amazon, Etsy, Airbnb… The amount of the commission can be taken from the buyer, the seller or both. For example, Just Eat has decided to make the use of its site free for buyers but paying for sellers. You can take a commission when the transaction is completed (as in the case of ecommerce marketplaces or on the principle of business referral) but it is also possible to take a commission only when the relationship is established, whether or not it leads to an actual transaction between the parties (this is referred to as a lead fee, described below).

If you opt for this model, you must be able to adjust the commissions of your marketplace according to several criteria, especially in relation to the margins of the sellers, because depending on the type of product, the seller will not have a sufficiently interesting margin to work on your marketplace. A too high commission and the sellers will go to the competition, a too low commission and you risk not being profitable.

The subscription

It can be difficult to find the ideal commission to apply for. An optimal commission that attracts and retains sellers and ensures a good income. Subscription can be added to the commission or it can be enough as a business model. Several types of subscriptions with different rates are possible by varying the features available for each of them for example. This system is intended for buyers or sellers. Even if it seems more intuitive to make the sellers pay, some marketplaces prefer to make the buyer pay. And this method can be efficient like the American Costco which chooses to charge the entrance to its stores to the buyers but decreases in exchange its margins which presents an interest for a faithful consumer.

We can also mention online marketplaces such as Amazon with its Prime subscription which offers various advantages such as accelerated delivery or priority access to flash sales. The advantage of the subscription is that it will allow you to have regular income but if it concerns the sellers, you will have to convince them to stay on your platform by bringing them new customers regularly.

The listing fee

It is possible to charge sellers when they create an ad. This is called the listing fee. The criteria for establishing these fees are mainly the price of the items, the duration of the listing and possibly the prominence. This is the case of the website Leboncoin which has a free service for buyers but charges insertion fees to professionals and allows them to make their ads more visible.This method can be interesting for sellers because it allows them to pay only once when they put their ads online and not to have any additional fees afterwards.Unlike the subscription you will not have recurring income with the listing fee. To get a profitable market you will have to play on the volume of products and services. To ensure retention of the sellers you will have to ensure a good average conversion rate on their products/advertisements.

The lead fee

This model is rather used in BtoB or BtoC. The principle is that a professional pays the service but only when a relationship with a prospect is established. You should initially focus on creating a network of professionals. They will pay proportionally to the number of leads they put in contact. Once you have obtained a sufficient number of professionals who can cover the needs of the prospects, it is then a question of focusing all your efforts on recruiting them so that this strategy is viable (no prospect, no contact, therefore no income).

It would be wrong to believe that it is easy to attract these prospects on your marketplace under the pretext that the service is free for them. As previously stated, we can charge the professional only if the contact leads to a conversion of the prospect into an effective customer. You can mix the two models (cost for the connection and cost if conversion). This can be a fixed cost or an amount that depends (proportional or by step) on the turnover achieved. If you charge a cost for the acquisition it will be necessary to ensure a good conversion rate to your professionals. If you charge a cost per conversion, make sure that the amount is reasonable in relation to the turnover generated.

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.

Advertising

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 advertisement is not necessarily presented in the form of a classic banner but can be more subtle and appear at different moments of the user path (search, checkout, payment confirmation, newsletter…). Highlights to promote users’ ads can also be part of this model as they can be considered as a form of advertising.

The Freemium model

The principle of the freemium model is to give the customer access to your marketplace but to limit its use with a limited access to the features. This limitation can be done in the number of features you make available for free or in the quantity of use of a given feature (limit the number of free ads or the number of images in a product, restriction on the categories accessible…).

In front of a freemium account, there is always a premium account that has no restrictions on the platform’s features. The goal here is to catch the user’s interest to encourage him to switch to the paid service with more complete features. Some platforms are paid with advertising and use the freemium model to offer a paid service without advertising. This is the case of Spotify or Youtube. By choosing the free version, consumers will be able to listen to music or watch a video but may be cut off by ads between each song or in the middle of a video. The only way to remove the ads is to choose the paid version. This is often a subscription rather than a fixed payment.

The Free Trial model

This model is mostly used for SAAS platforms but it is applicable to some extent to marketplaces. 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.

The typical example is Amazon which does not have a high margin but makes profit from the volume generated, so the difficulty lies in finding the right balance between the volume of transactions or paying users and the profit margin. In the case of advertising revenue, we will also try to find the right balance between the quantity of ads and the traffic of the site (too many ads can drive users away). 

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