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Choosing the Business Model for Your Marketplace: 6 Options to Consider

Posted on Posted in Business

You can’t just snap your fingers, launch your marketplace and start earning profit right away – and you already know this, right? You need to think through a lot of things before that solemn moment when you open your online marketplace to customers and vendors. You need to determine your target audience, unique selling points, marketing strategy, and so on and so forth.

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One of such things worth your full and undivided attention is the business model of your future marketplace. Why does it matter so much? Well, the business model is basically the way you are going to make a profit. So, if you make a mistake when choosing it, you risk making your business unprofitable.

6 Most Common Marketplace Business Models (and How to Choose One)

Even though you can come up with your own business model, all the best ways to make a profit have already been designed by someone else. Some of them are old as the world, some are relatively new. Each of them has its pros and challenges, so you need to analyze which one will be the most suitable in your particular case. So, let’s take a look at top six business models for marketplaces.

Commission Fee Model

What do eBay, Etsy, and Airbnb have in common? They use the commission-based business model. In this case, you charge a commission fee per every transaction taking place on your marketplace. There are several approaches to implementing it:

  • you decide whether to charge the vendor or the customer (or both);
  • you choose whether to charge a flat fee or a percentage.

There are two main pros to this business model:

  • it’s a win-win situation – customers and/or vendors pay only when they gained value from using the marketplace, not beforehand;
  • transparency – you can track the number of transactions and the amount of money, especially if you decide to charge the percentage.

No business model is without challenges. Below you can find the two main ones:

  • you need to prove to users that your marketplace is worth buying or selling on it – otherwise, they will leave it without making any transactions and bringing you any profit;
  • setting the fee can be tricky – if you set it too high, users will leave the platform; besides, you should consider setting different fees for different categories of users (for instance, you can set a lower fee for customers and a higher one for vendors).

More often than not, it is hard to tell what types of marketplaces this model suits. However, we can pinpoint two clear signs this model will not work in your case:

  • your marketplace is for expensive goods or services – defining the fee would be very difficult in this case;
  • your marketplace is not for trading purposes – if the platform doesn’t include financial transactions for products and services (e.g., a recruiting or dating platform), obviously, you can’t charge a fee.

Subscription Fee Model

Both B2B and B2C businesses may find this business model the most suitable one. It’s being used by HomeExchange, OkCupid, LinkedIn, to name a few. Basically, in this case, vendors have to pay a one-time or regular fee to sign up and be able to sell on the marketplace. Why vendors and not customers? Well, vendors are the ones who will be making a profit from using the platform.

There is one key pro to this model – it’s convenient and easy to implement for you as the marketplace owner. Besides, this model is a great choice for such cases when charging a commission fee is not an option (as it may be with dating platforms).

As for the challenges, the main one is the riddle about the chicken and the egg. Who should appear first on your marketplace – the vendors or the customers? Vendors won’t join if they see there aren’t so many customers. In their turn, customers won’t sign up if the choice of sellers and products/services isn’t that big either. The bottom line is, you need to show the value of your marketplace to potential users to prove it is worth paying for.

Now, let’s see in what cases this model is a no-no solution for your marketplace:

  • you don’t have a lot of users – this is typical for newcomers, but it means that vendors will not be willing to pay for gaining access to such a small audience;
  • it’s hard to pinpoint what value it brings to the vendors – if it’s so, you won’t be able to attract new users and your profit will not grow.

Listing Fee Model

This model is already being used by Craigslist, Mascus, Etsy, and other marketplaces. This is how it works: vendors pay a fee for each listing of their product or service. The fee may vary depending on the category of the listing. This model is quite common for ad-based platforms.

This model has two most significant pros:

  • you can use it to be more flexible – if your marketplace includes various types of listings, you can charge a listing fee only for some of them, and this will attract more users to your platform without you risking to be left without any profit (for example, Craigslist charges a listing fee only for jobs, real estate, and some other ads);
  • you can combine it with other models – you can charge a listing fee and another fee without the risk of seeming too greedy (for instance, Etsy charges a commission fee as well as a listing fee).

Lead Fee Model

This model is typically used by B2C and B2B marketplaces like Thumbtack that function like auctions. On such marketplaces, customers are the ones posting the ads describing what service or product they are looking for. Vendors, in their turn, bid for such requests – basically, they compete for customers. The fee the marketplace charges vendors is often referred to as the bidding fee.

So, why is this model popular among certain marketplaces? The key reason is its great value offering. You earn more from a single ad posted by a customer than in case of other models.

The key challenge you need to deal with is mitigating the risk of the vendor collaborating with the customer outside of your platform. If this happens, you get no fee. There are several ways to address this challenge – you can decide to reveal minimum information about the customer on the ad page and make messaging unavailable until the bidding is over.

This model suits the marketplaces that specialize in non-standardized products or services. This means that customers are looking for custom solutions for their need, and those solutions require a high level of effort and competencies to be done.

Freemium Model

If you want to see how this model works for yourself, just visit Peerby, Mascus, or Vayable. In a nutshell, you provide users with one key service for free and offer them additional functionality that can make their lives easier on a subscription fee basis. This model is often used by marketplaces that are created for selling low-cost items.

Let’s a quick look at the most beneficial pros this model can offer you:

  • it’s up to the user to decide whether to use extra features – so, you provide them with a choice, and most people appreciate it;
  • you allow users to test your platform – so, if they enjoy using it, they are more likely to switch to the premium version.

The main challenge is to maintain the balance between the useful free version and extra features that are worth paying for. Quite often, marketplace owners create an awful free version hoping that it would encourage users to switch to the premium subscription. However, it doesn’t work this way – users just abandon such platforms. On the other hand, you need to make sure that extra features are powerful and useful enough for users to be willing to pay for them.

In what cases should you avoid this model? This option is not for you if you don’t have enough time to think through this balance we’ve mentioned above.

Featured Listings and Ads Model

Take a look at such websites as Gumtree, Zillow, and Freecycle. You can notice that all of them have featured listings and/or ads here and there. It’s because they decided to run on this model.

How does it work? The same way Google’s targeted ads service does, basically. You get paid by vendors for placing ads of their goods/services at the top of the search page results or on the main page.

The key advantage of this model is that it’s very similar to providing regular marketing services – and there is always demand for those among vendors, so you can rest assured you will have a steady source of income.

On the other hand, there are a couple of challenges you need to be prepared for:

  • you need to engage more users to be able to make a good profit from placing ads – and, perhaps, you could be better off using the commission model;
  • you risk promoting low-quality products – and if you do, the customers’ trust will fall;
  • getting involved in promoting certain vendors may lead to a negative customers’ reaction – your marketplace could be perceived as unfair, and too many ads may irritate them.

This model will work well for you if your marketplace is dedicated to a specific niche or, if it’s not the case, you can set targeted ads for a specific user group. If both of this options are no about you, the ads will be inefficient – and vendors don’t want to invest in useless marketing.

In Conclusion

These are only six out of a variety of business models out there. This is a good starting point, especially if you are a beginner in this field. If you know your way around eCommerce, let yourself be creative – who knows, maybe you can come up with a business model that will appear on such lists in a couple of years.

All in all, any business model has its pros and challenges, and you need to find the one that will suit you the best. So, analyze your business needs and see what models your competitors use. Test different approaches to see which one works the best in your particular case.

As for the challenges you should consider, the main one is low profit. You shouldn’t ask for astronomically huge fees in order not to scare away vendors, so the profit is typically quite low and can’t be the main source of income for you (unless, of course, you have hundreds of thousands of vendors on your platform).

So, the bottom line is, don’t expect immediate huge income from this model – and don’t choose it if you need it. Besides, it is obvious that vendors won’t want to pay for a listing if they see you don’t have enough traffic – so, it’s not a good idea for relatively new businesses.