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What are the Challenges in a Commission-Based Revenue Model?

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A revenue model is the basic framework of any business that dictates how your business will make money. A well-thought-out revenue model helps companies determine which revenue source to prioritise, how to price the products, and helps in understanding the target market. The majority of online markets operate with a basic strategy such as commission-based business models, subscription-based models, and listing fee-based models.

Over the last 10-15 years, the internet has stimulated viable revenue models such as freemium models, commission-based business models, and much more. As it is fundamental human nature to be confused when presented with many options, choosing the suitable revenue model for your SaaS business is not easy. The choice of revenue model determines the future of your company. It will dictate the sales strategy, the amount of investment, and the community you will form with the stakeholders.

Factors to consider while selecting a suitable revenue model:

  • Customer’s needs: The model you choose must align with the target customers’ needs and expectations.
  • Customer behaviour (how the customers buy): Analysing and understanding customer behaviour is a must; where your customers spend their money the most, how receptive they are to your marketing, and many other questions.
  • Market potential and competition: Spend time to analyse your competitor’s model. If they are successful and in the business for a while, their revenue model may be worth learning from.
  • Value proposition: What makes your company stand out from the rest?
  • Revenue streams: Experiment with multiple revenue streams until you find one that aligns with your business and adapts it into your business model.

After considering these factors, most businesses opt for a commission-based revenue model as it is, by far, the most popular online business revenue model. In commission-based revenue models, a middleman charges a fee for each transaction it handles between the provider and user. Let us read about the challenges of a commission-based revenue model.

Challenges Of A commission-based Model

The challenges of a commission-based revenue model are as follows:

1. Providing enough value

One of the main challenges for any commission-based revenue model is providing enough value to the users and the providers. Suppose your platform does not necessarily provide value to both parties or solve a specific problem. In that case, the parties will eventually find a way to communicate directly and cut the middleman to save on commissions.

The question then arises as to how to provide more value to the users. A company can automate some processes for the vendors, provide insurance, and protect the deal to the parties. Take a look at Airbnb; they provide a safe mode of payment, a sound redressal system, and quality assurances, which makes it worthwhile for the travellers and hosts to keep them as a middleman in their deal as it benefits both.

2. Setting the prices

Another major challenge of this revenue model is setting a fair price or rate of commission. If you charge more than the reasonable rate, you lose users; if you charge less, your business incurs losses. This is a common dilemma in this marketplace revenue model.

Should you charge a percentage of each transaction or a fixed rate? If percentage, then how much? There is no perfect answer to finding a sweet spot where you don’t lose money and discourage people from using your platform. The method of charging money and the rate should be based on your competition and research based on customer behaviour.

Moreover, the method you choose will determine what kind of marketplace your platform is. For example, sites like Fiverr or freelance.com charge the creators more and are more buyer-oriented.

3. Scaling the business

Achieving economies of scale is what every startup or even an established company goes after as it enables making higher profits. In such revenue models, scaling gross revenue means increasing the total transaction volume, for which you need more users.

A company can exploit small but high-value channels like business networks, social circles, and word-of-mouth references. But to really scale the business, you will need paid media like Facebook, Google, and social media, which incurs huge costs.

4. Retaining the suppliers

This is one of the significant challenges. As your commission-based platform grows, so do the suppliers. What is stopping them from opting out and scoring clients on their own? For a commission-based business model to thrive, the suppliers need to be locked into the marketplace; they need to stick to your platform even after tasting success.

Retaining these service suppliers is a challenge; if not maintained, the revenue drops, followed by profit margins. Suppliers are locked into Airbnb as there is little or no repeat business to rely on even after you have been renting out your apartment successfully through Airbnb for a year. In that case, marketing directly to tourists would be very costly, thus, leading you to be locked in.

5. Team dynamics

commission-based models affect the team dynamics in the organisation. The more commission you earn, the more it triggers the negative emotions of a workplace. It creates emotions like envy and resentment in the workplace. It is one of the major challenges that many companies face and opt for a blended approach. It allows employees to work on a base salary as job security and get a commission as an initiative for improvement.

1. Airbnb

Airbnb is one of the best commission-based businesses globally. It is a C2C marketplace connecting travellers with the hosts of properties they want to rent during their travels. Airbnb charges a fee from both parties for their services, a 10% commission from the hosts, and 3% from the travellers.

2. Amazon

Amazon is arguably the most prominent online marketplace connecting vendors and customers. Amazon charges a minimal amount from sellers who sell less than 40 items. Amazon adopts a combination of commission-based business model and subscription models. The product and market should always be kept in mind while adopting and settling on one revenue model. Once you overcome the challenges and refine the model as per your specific business needs, bringing in money will become much easier.

3. Fiverr

Fiverr is a popular platform that connects freelancers offering their digital services with a business that needs such services. Fiverr charges up to 20% from the content creators, which discourages many digital creators from using the platform and provides a gap for competitors to fill with lower commissions.

A commission-based business model is beneficial for a business. The commission-based business opportunities and revenue models can attract more vendors and users since they pay up the commission only when the services are available. This element makes this model risk-free for the users and attracts more crowds. Moreover, since the commission is charged on each transaction, it enables the business to capture a higher commission per user. As a single user does multiple transactions, revenue is generated from each transaction.

Conclusion

In conclusion, commission-based business opportunities and revenue models are easy to adopt and applicable to various niches and industries. However, the challenges of a commission-based revenue model may hinder the growth of some companies. Therefore, just like adopting any revenue model, adapting to this method takes a considerable amount of planning.

Also read:

1) What are some commission-based business ideas?
2) How to Make Good Money with Online Commission Sales?
3) Where Do the Best Business Ideas Come From?
4) What online business can I do to make money? Here are the top-6 ideas for you.
5) OkCredit: All you need to know about OkCredit & how it works.

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FAQs

Q. What are the different types of revenue models?

Ans. There are many types of revenue models. The most popular revenue models are as follows:

  • Ad-based Revenue Model
  • Affiliate Revenue Model
  • Transactional Revenue Model
  • Subscription Revenue Model
  • Web Sales
  • Direct Sales
  • Channel Sales
  • Freemium Model

Q. How to create a revenue model?

Ans. The steps to create a revenue model are as follows:

  • Choose a model that works for your company and defines the goals of the business
  • Create a list of long-term revenue sources
  • Make projections
  • Review, assess, and adjust the model as per the requirements
  • Identify and mitigate variables

Q. What is the difference between a revenue model and a business model?

Ans. The revenue model determines how to generate revenue from the value it has already created for its audience. However, the business model depicts how to generate value for the company.