The marketplace business model has changed the way of trade and retail business. Whether it is e-commerce platforms such as Amazon, service marketplaces such as TaskRabbit or specific industry specific platforms, marketplaces are an effective way of uniting product and service sellers and buyers. However, not all the marketplace models are the same; each of them posits certain characteristics which pose an impact on the revenue, scalability and user experience.
If you are planning to develop a platform with an online marketplace development company then it is important to select the right model. The model you select determines how transactions are handled, how revenue is generated and whether the business is sustainable in the long run. This guide will define what a marketplace business model is, describe the most basic types of models with their real-life examples and help you to identify which model is most suitable for your platform.
What Is a Marketplace Business Model?
A marketplace business model determines how a platform enables and supports market transactions between buyers and sellers and how it generates revenue. This is unlike traditional e-commerce stores where the company own and manage the inventory of products or services that they sell.
This model can be adopted in any industry including retail and rentals, digital products and services or goods. It is therefore important to have the right marketplace model when developing a platform that is profitable, sustainable and meets the needs of the users.
Types of Marketplace Business Models
There is no one size fit all when it comes to online marketplace monetization. Following are the most common ones and their advantages and possible issues.
Commission-Based Marketplace
The most common type of online marketplace business model is the commission model. The platform charges sellers a percentage of each sale. It is efficient for instance because sellers only pay when they get a return, which is convenient for them.
Examples:
- Amazon takes a percentage of each product sold by third party vendors.
- Airbnb takes a cut from both the hosts and the guests for every booking.
Pros:
- Scalable revenue model
- Encourages vendors to join as there are no upfront costs
- Applicable to a wide range of sectors
Cons:
- It can be unprofitable for the company if it does not have a large number of transactions
- Can lead to vendor frustration if the commission rates are too high
Ideal for: E-commerce marketplaces, rental platforms, and service-based platforms.
Subscription-Based Marketplace
This model works on the basis of charging users a recurring fee to use the marketplace features whether it is for posting products, getting enhanced visibility or accessing the buyer or seller network.
Examples:
- LinkedIn Premium offers better search criteria and more options to send messages for job seekers and recruiters.
- Shutterstock offers subscription plans to businesses that require image downloads on a regular basis.
Pros:
- Stable source of income
- Less dependent on the number of transactions
- Improves platform usage rate in the long run
Cons:
- It can be difficult to justify the recurring fees without strong value propositions
- It can be difficult to acquire new customers if they are not willing to commit to a subscription model
Ideal for: Professional networking sites, job boards, and digital content platforms.
Listing Fee Marketplace
Some marketplaces implement this model, which requires the payment of a fee for the products or services to be posted. This approach is used in classifieds and B2B sites.
Examples:
- Etsy charges sellers a small fee for each product listed.
- Craigslist has formatting charges for job postings and real estate postings in certain categories.
Pros:
- Earn money even when there are no sales
- Reduces the possibility of having low quality and unserious sellers
Cons:
- It is difficult to attract sellers as they have to pay before they can make a sale
- It is not appropriate for marketplaces with low frequency of trading
Ideal for: Classified marketplaces, specialized marketplaces with expensive products or services.
Lead Fee Marketplace
Instead of charging sellers a commission or listing fee, the platform charges sellers to get potential customers. This is particularly relevant in service marketplaces where professionals contend for the business of the customer.
Examples:
- Thumbtack makes service providers pay to get clients.
- HomeAdvisor links home services contractors with homeowners in need of repair and maintenance services.
Pros:
- The potential of generating high revenue from service providers
- Applicable in industries where clients want to get quotations from several suppliers
Cons:
- The sellers may not be able to convert the leads received into sales and, thus, may not consider the cost worthwhile
- It needs a good user base to be able to work
Ideal for: Service marketplaces, B2B platforms, home improvement networks.
Advertising-Based Marketplace
This model works by marketing traffic through the sale of advertising space or the promotion of listings on the platform. It is most effective for marketplaces with high levels of engagement.
Examples:
- Facebook Marketplace allows businesses to pay for promoting their products.
- Yelp generates revenue from featured business listings and advertised ads.
Pros:
- Does not involve direct billing of users
- It is possible to combine this model with other revenue strategies
Cons:
- It needs a big audience and users’ engagement
- If not well managed, ads can be annoying to the users
Ideal for: Marketplaces with high levels of traffic and user interaction.
Choosing the Right Marketplace Model
The following are some of the factors that will help you determine the right marketplace business model for your platform:
- User base: What are your users most likely to pay for, per transaction, per listing, or a monthly fee?
- Market competition: What do your competitors charge, do they ask for commission or offer the service for free?
- Scalability: Is it possible to maintain the model with increasing size without changing the prices?
- User behavior: Does the seller require frequent leads or does the seller depend on a single listing?
Hybrid Models: Combining Strategies for Greater Profitability
Some of the most successful marketplace business model examples are based on a hybrid approach that combines several strategies.
Examples:
- Upwork has a model that charges freelancers a commission on every project but also offers paid membership with additional benefits.
- Etsy has a combination of charges for listing products and a commission on each sale.
This flexibility allows platforms to meet the needs of different sellers while also maximizing their revenue.
Final Thoughts
It is important to know what a marketplace business model is and which one is appropriate for your platform in order to develop a successful and sustainable platform. There is no one size fits all when it comes to choosing a business model whether it is through commissions, subscriptions or a mix of the two – the important thing is to make sure that the approach you are taking is one that the user expects and is familiar with in the industry.
If you are in search of a marketplace development company that can help turn your ideas into reality, then it is imperative to work with a professional team. Experts from Clockwise.Software can build you a marketplace that is not only scalable but also high performing to ensure that your business model is well implemented from the first day of launching your business.
