What Marketplace Business Model Should You Choose?

Choosing the right online marketplace business model needn’t be confusing. Neither should it be hard to understand what marketplace business models are.

Here is how we can understand what a marketplace business model is in three sentences. A business marketplace is a meeting ground for sellers and buyers without stacking the goods. It offers payment and shipping assistance. And to function well, it often ties up with financial and logistic players.

To most of us, marketplaces translate themselves in terms of products and the services they offer. However, the mystery is how do these long term initiatives financially sustain themselves? Behind strict targets and an elaborate plan to outwit the competitors is the most important piece of this jigsaw puzzle which answers the question - an effective business model.

There are many existing models to monetise a marketplace business. You can also get creative and build an entirely new one and optimize it for your marketplace. Or mix the most prevalent ones in the online world and create a breed. Whatever the case, the rule is to find a model that can ensure long-term sustainability for your business marketplace.

However, before you get creative, let’s introduce you to the 5 most reliable business models that are serving business marketplace enterprises from Airbnb and Amazon to Dropbox.

1. Commission

Charge a commission for every transaction on your business marketplace. That ought to be the most commonly applied business model for online marketplaces.

The platform can have a fixed fee, or a certain percentage of the sale for every transaction irrespective of the type of transaction or the buyer.

There is also the option of an adjustable-fee, which is usually charged based on a multivariate analysis of a purchase. Typically, it is based on the product category, the loyalty of the client and the sum of the order.

Commission based online marketplaces are attractive to everyone. The seller and buyers only pay when they sell or buy. And the marketplace receives money for every activity passing through their website.

Still, the question remains - whom should you charge, or charge more?

The answer will depend on if your business requires more buyers or sellers. For the former, charge the sellers. In the case of the latter, charge the buyers.

Giant platforms like Upwork and Uber utilise a commission-based approach.

2. Subscription

A recurring monthly or annual membership fee for using the service or the product from all or specific highly engaged users is roughly how we can define a subscription-based business marketplace model.

Going for this business marketplace model is a soft claim that you have a high-quality product or service for users. Apart from the value, you also believe that users will return for several transactions.

Subscriptions could be tricky. Since mandatory membership discourages many users, the challenge seems to be in knowing how far down the line it’s fine to charge a client.

The bigger challenge however lies in making the platform lucrative for both providers and customers. Heavy discounts for early adopters or even giving it out for free until the initial user base is built seems to solve the problem.

Charging a membership fee proves to be a good initial model. Especially for business to consumer marketplaces, which often switch to a commission-based approach in their late stages. It also works well for some wholesale B2B marketplace models.

There is no shortage of examples. Dating platforms, like Tinder, are profitable consumer-to-consumer market places with this model. The multibillion-dollar meditation app Calm on the other hand is a business to customer market with this same model.

3. Listing Fee

Listing Fee is a famous business marketplace model of classified websites that charge clients a small fee in return for visibility.

The value of the marketplace is typically decided by the number of listings they have on their site and their potential value. Usually, the marketplaces with this business model try to facilitate the transaction, but that isn’t a rule.

Classified sites like OLX and Quikr are well-known examples in this category.

These marketplaces encourage people to post listings about the goods of their choice, which could be products, services, jobs, or anything else.

They often offer free listings unless the users want to access a specific premium feature. This enables them to reach the masses.

Also, the premium listings require sellers to pay for each advertisement. This proportionally increases the quality of each listing by forcing sellers to invest time on each listing instead of posting a ton.

However, the sites based on this model don’t get to charge much for listings. Going against it would discourage the sellers. And there won’t be buyers without sellers.

It’s a tricky model to nail. That could be the reason why it is often used as a secondary business model.

4. Lead Fee

The lead fee model requires suppliers to pay the marketplace to redirect a potential buyer to their business. It works only if the leads are of high quality.

Since the marketplace is connected to trusting buyers, this revenue model often creates a very sustainable ecosystem.

In theory, this model seems more effective for users compared to the listing model, where it is always a sort of gamble to get their potential clients.

This business model has a leakage problem. Due to which the marketplace may get reluctant to charge a higher fee. A higher fee could mean that service providers are going to want to work with buyers directly. To avoid this situation, the platforms usually set the charges extremely affordable.

We hardly ever see a C2C marketplace with this model. Usually, the sites that prefer this model are the ones where each new lead promises a long-lasting relationship with multiple transactions, such as wholesale B2B marketplaces.

Various service finders opt for this model. Like Urban Company, which provides on-demand home services, is a good example of a brand that has profitably applied this business model.

5. Freemium

The Freemium model offers a product or service for free, with a set of optional paid features. On the surface, this business model could seem bizarre in terms of its ability to make profits. How can you expect to monetise a marketplace where the exchange of items is happening for free. And how does one pay for the staff and resources required to manage the freemium services?

Usually, the businesses rely on extra revenue streams to compensate for the free services. The logic is that the essential product on offer is free, which strives to get the initial users hooked to the platform. After you have a user base, it is safe to offer paid value-adding features.

However, the challenge is that this model works only if the business has tempting additional features or services. Paid add-ons are often hard to scale. And often, no more than 1 per cent of the user base buys the premium features. It’s quite a hurdle to overcome but many businesses have perfectly nailed this model. Dropbox, the popular cloud storage service works on the same model. The email marketing software platform, MailChimp is another successful example.

The business lies at the heart of modern civilisation, as a central and essential human activity. Marketplaces are means through which one venture to help others and finds a way to sustain itself. There isn’t a one-size-fits-all solution here. Perhaps this is also the most common reason why the marketplaces fail to scale, opting for a wrong model.

With a few trials and errors, often a business finds the right model or a mix of models. The task becomes easier if the people in charge care deeply about how they can improve their customers' lives.

As a piece of more practical advice, try to find a single revenue model that works and stick to it. As your business marketplace grows, try combining multiple revenue models to account for every service and product on your site along the way. Once a marketplace business figures out how to properly improve the life of its user base, making a profit seems to get naturally aligned with its intentions.

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FAQs

Q. Which is the most profitable revenue model?

Ans. In general, the commission-based model seems to be the most scalable approach. Since it charges a fee on every transaction, it’s quite difficult to compete with it in terms of profitability. However, if that model doesn’t make sense in your case, it is often a mix of various models that does the trick.

Q. How to pick the right business model for a new marketplace business?

Ans. First, get familiar with all the popular marketplace business models. The 5 mentioned in this article is a great place to start. Then use the information to see what fits your case. Pick one model, or experiment with the revenue model combinations. Listen to your user base and improve on it based on their feedback.