An online marketplace is a long-term business that needs significant finance for its maintenance and should also bring profit to the business owner. One of the key points of building a successful marketplace is choosing the right business model.
In this article, we will consider the most common online marketplace monetization strategies: commission, subscription, listing fees and mixed models. We will describe the way they work work, and consider the benefits and challenges of implementing each of them. Also, we will offer some tips for overcoming the difficulties of each model.
We will also consider how the monetization strategies have been implemented by the biggest online marketplaces of the modern world, such as Amazon, Airbnb, Ebay and Etsy. The examples of these giants will probably help you to choose the right revenue model for your online marketplace business.
Primary marketplace business models
The majority of online marketplaces operate with one of the three basic strategies: commission, subscription and listing fees. Each of them has its own benefits and difficulties in implementation, and now we will consider them. You will also find out how these online marketplace monetization models were introduced by the biggest platforms in the world.
Charging a fee for each transaction is the most popular online marketplace business model. When the demander pays the supplier, the marketplace charges a percentage or a fixed fee for its services. The platform may charge either the seller or the buyer, or take commission from both of them.
This revenue model is the most common since the fee is justified: the parties may operate for free and pay only when they get some value from using the platform. At the same time, the marketplace gets the revenue from each conversion as well.
Benefits and challenges
This model is the most popular since it allows online marketplaces to simplify solving the chicken-or-the-egg problem, and to attract the vendors. Since they pay only when their items are sold, they do not risk any money by placing their business on this platform.
The main challenge of the commission-based online marketplace is providing enough value for both parties – otherwise, they will find a way to circumvent the rules of the platform. For example, you may offer them the protection of the deal, insurance, or automate some routine work for the vendors.
Another challenge of this business model is the way to set the price of the online marketplace services. Will it be a percentage of the transaction or a fixed fee? Will you charge only one party or both? What amount of commission should you choose in order to bring revenue to your business and at the same time not discourage your customers?
There is no right answer to this question, and the charging method should be chosen according to your business model. For example, the pricing model will depend on whether your marketplace is seller- or buyer-oriented. Let’s see how the biggest market players use the commission model to gain revenue.
Сommission model use cases
One of the biggest online marketplaces operating with the commission model is Airbnb. They charge fees both from the hosts and the travelers: the property owners pay 10% commission from the received amount of money, and the guests pay only 3%.
Amazon charges a fixed $0.99 fee to sellers who offer less than 40 items (we will consider Amazon’s monetization model a bit later).
This monetization model can be characterized by charging a regular fee for the user’s access to the platform. The value proposition of these online marketplaces is helping the suppliers to find new clients, or getting access to the database of potential clients or partners.
Generally, online marketplaces that charge subscription fees do not participate in the transactions between the users. The parties either pay directly (for example, with a credit card), or the relationships between the parties do not involve money at all (for example, dating or couchsurfing sites).
Benefits and challenges
The subscription model is best for those online marketplaces that do not have the resources to facilitate the transactions between the users, or whose business logic does not imply them at all.
The main challenge of the subscription model is providing enough value so that the users understand the benefits of buying a membership: finding the customers or partners, saving money, getting a new experience, etc.
Another challenge is that the subscription model makes it even more difficult to solve the chicken-or-the-egg problem of an online marketplace. In the case of the commission model, the users pay only when they get money with the help of the marketplace, i.e. when they have an opportunity to see the benefits themselves. So, they are not risking anything.
The necessity to pay in advance may discourage potential clients from using the platform. You may overcome this difficulty by offering a free trial or discounts to the new adopters of your product. You may also create different subscription plans (such as free, basic and premium) and offer different rights to the users of each group.
Subscription model use cases
A typical representative of the subscription model is CouchSurfing, where local people can accept travelers from all over the world. Upon registration, the new users get 10 free requests per week – messages that can be sent to a host. In order to get an unlimited number of requests, the users have to pay $60 per year to verify their account.
In order to verify their account for free, the user has to get a review from a traveller he hosted, or a host he visited. Upon getting the mutual review, the user gets 3 months of unlimited requests. When this period expires, they must either pay $60 per year to verify their account, or get new mutual reviews.
Listing fees imply charging the client for posting an ad on the platform. While the commission-based online marketplaces charge a fee only when the item is sold, they may miss the revenue from the less popular merchandise. This model allows tackling this problem and getting profit from each and every ad on the platform.
Benefits and challenges
Like the subscription model, listing fees can also make solving the chicken-or-the-egg problem more difficult. The clients pay before they get profit from the marketplace and risk their money – this may discourage them from using the platform.
In order to overcome this challenge, you may provide the new users with several free listings or, for example, an unlimited number of listings during a free trial period. Yet, the listing fees are generally small and are much cheaper than the price of a subscription.
The listing fees model has an undeniable advantage over the previously considered ones. The sellers pay for each advertisement and they want to get as much revenue as possible from each one. This makes them work on the quality of each item, but not create tons of ads hoping that they will be sold somehow. They also have to consider the least efficient ads, and if they do not bring the desired result, they will not want to pay the fee anymore and stop the listing.
Example of usage
Etsy is a classic example of the listing fees model. When they had just launched, they offered a promotion – a month of free listings for each of their clients. When the trial period ended, they started charging $0.20 for each listing. This decreased the number of items listed per day, but increased the efficiency of the existing ads. Paying the listing fees allows the user to post this ad for 4 months.
When selecting a revenue model for an online marketplace, it is not necessary to choose only one of them. The major players of the online marketplace business successfully combine several models and have several revenue sources.
One of the examples of the successful combination of several models is Amazon. They have different seller groups with different commission models: individual sellers and pro merchants. The individual sellers are those who offer less than 40 goods and pay a fixed $0.99 fee for each item sold. The pro merchants pay a fixed monthly fee of $39.99. As we can see, they unite the commission and the subscription model.
In addition to the listing fee, Etsy also charges 5% commission for each transaction between the buyer and the seller. This helps them to get revenue from each ad, and also gives them additional income from the sellers’ successes.
In this article, we have described the benefits and challenges of the basic online marketplace business models, and considered how they have been implemented by the major players of the market. The basic monetization strategies are:
- Commission model – the online marketplace takes a fee from each transaction between the buyer and the seller. It may be a fixed sum or a percentage of the amount of the transaction. This is the most common model since the users pay only after they make a profit from the marketplace.
- Subscription model – the online marketplace takes a regular fee for the access to the platform itself, or to some particular parts of it (for example, with the premium pricing plan). Usually, the clients are billed monthly or annually, and there may be different subscription options with different rights.
- Listing fees – the marketplace takes a fee for posting an ad. This helps the platform not to depend on the sellers’ performance and to get the benefit even from the least popular items. At the same time, the clients do not want to pay for unsuccessful ads, which prevents the marketplace from being flooded.
There is no necessity to limit yourself to a particular monetization model. The major companies of the market successfully combine two and even more strategies. For example, Amazon successfully uses the commission and subscription models, and Etsy takes a listing fee and a percentage from the transaction.
Hopefully, our material and the examples of the giants will help you to come up with the right idea of how to monetize your online marketplace. Should you have any questions – we are always here to help you.