In an online marketplace, like any business, revenue is the lifeblood of the organization.
Money comes in from sales of products or services and keeps the lights on and the doors open!
Data from Coresight Research and Juniper Research predicted that revenue from online marketplaces globally would double from $18.7 billion in 2017 to $40.1 billion in 2022.
So what online marketplace model is right for you?
Online marketplaces might choose from a variety of different business models to generate income.
Let’s take a closer look at these online marketplace revenue models and how they work.
Commission Model for Online Marketplaces
The commission model is the most common revenue model used by online marketplaces and companies to make money.
This revenue model takes a percentage of sales.
This payment could be charged to the seller, the buyer, or sometimes both.
Commissions could either be a fixed percentage or a flat fee.
The commission revenue model has been around for a long time and has been proven successful in many cases.
The most significant advantage is that sellers and buyers don’t have to pay before they get value from the marketplace.
It provides an easy starting point for buyers and sellers to get started.
Another benefit to using this revenue model is that it’s scalable.
The pricing structure is flexible enough for small and large transactions.
One might think that 3% of $10 is a small amount, although, in a $3,000 transaction, 3% is $900.
There are definitely challenges thought that a marketplace must overcome challenges in a commission-based model.
Online marketplaces must provide enough value for sellers and buyers to continue using their platforms.
Without it, buyers and sellers try to circumvent the middleman or, in this case, the marketplace.
One other factor is figuring out a balance between charging a commission amount that’s attractive for buyers and sellers and good enough to sustain a profit for the marketplace.
Some online marketplaces that use a commission model are Airbnb, Fiverr, Amazon, Uber, Etsy, and eBay.
Subscription Models in an Online Marketplace
Subscription models aren't new!
This revenue stream first emerged in the 1600s as a way for authors to sell geographies, atlases, and works of literature.
The subscription model has come a long way since then in modern times, from meal kits to makeup and skincare, catering to every lifestyle, age, and budget.
Subscriptions helped companies thrive as a way for companies to generate recurring revenue.
A subscription model is a revenue model based on the periodic billing of customers for access to a service or product.
Subscription payments are usually renewed and activated automatically with a credit card or checking account.
The charge could fall into two types: monthly plans that can be canceled at any time or subscriptions based on contracts.
Several benefits come with a subscription revenue stream.
For one thing, it allows for a more predictable stream of revenue.
Data from Paysafe revealed that almost 69 percent of Americans have multiple subscriptions.
Second, it gives companies a better way to track customer behavior and understand their needs.
This knowledge allows a marketplace to upsell and cross-sell to its customers.
For customers, the subscription model offers convenience and value.
Customers benefit from lowered costs and automatically receive products without having to actively do anything after the first sign-up process.
Popular companies that use this revenue model include Netflix, Amazon Prime, Ipsy, Hellofresh, and Winc.
Despite the many benefits of the subscription business model, it does come with a few challenges.
An extensive market analysis is vital to get the pricing right before launching your business under a subscription model.
Second, retaining customers can be challenging without proof of the continuous value the products are providing to customers.
Freemium Model for Online Marketplaces
As the name implies, the freemium revenue model is a hybrid of the traditional free and premium models.
Jarid Lukin created the term in 2006 after venture capitalist Fred Wilson came up with the idea.
In this model, a company offers a free basic version of its product or service, with the option to upgrade to a paid premium version to access additional features, functionality, or content.
The freemium model is often used in the software industry, where companies offer a basic version of their software for free, with the option to upgrade to a paid “pro” version with more features.
However, this can also be used in other industries, such as education, where companies offer a basic course for free, with the option to upgrade to a paid “premium” course with more features.
This revenue stream has been successful for many companies, including Dropbox, Grammarly, Calendly, Avast, Evernote, and Spotify.
The key to the freemium model's success is attracting many users to the free version of the product or service.
Once a critical mass of users is reached, a small percentage are willing to pay for the premium version.
Implementing this model for your business has several advantages, including the fact that it allows one to reach a wider audience and generate leads for paid products or services.
The free features also have the potential to be a marketing tool without your marketplace having to have bloated marketing budgets.
However, freemium can also have disadvantages, such as the difficulty of converting free users into paid customers.
Listing Fee Model for Online Marketplaces
The listing model is a transaction-based revenue stream in which a company charges a fee for listing products or services on its platform.
Listing business models are common revenue models for companies in the real estate industry and are also used for e-commerce platforms and classifieds websites.
It is a popular choice for companies that operate in industries with low barriers to entry and high competition.
Listing fees depend on the value of the products sellers post on the marketplace.
Typically, the higher the value, the higher the listing fee is.
An example of a company that uses this revenue stream is Craigslist.
While posting a listing on the website is free, Craigslist charges a posting fee for specific categories.
In some cases, listing fees are combined with another revenue stream, such as Etsy's case.
The platform has a flat rate of $0.20 per listing and a 6.5 percent charge of the total order amount.
The listing model has several advantages.
One is that the marketplace can often ensure a higher quality of products since sellers have to be selective about the products they feature.
Another good thing about the revenue stream can be is that the marketplace will still make money whether or not a product’s successfully sold (as in commission).
However, it also has disadvantages, such as fees can’t guarantee value, so they can’t be too high.
Another challenge to this revenue stream is the pricing; like in the commission model, listing fees need a balance between value and an amount reasonable to sellers and the marketplace.
Featured Ad Placement in Online Marketplaces
A featured ad placement, also known as sponsored content, is a type of online advertising that allows businesses to pay for their products to have better visibility in an online marketplace or app.
This involves featuring products on specific high-traffic pages or the homepage of an online marketplace, such as Zillow's case.
This type of advertising is a combination of the traditional and pay-per-click models.
Under the featured ad placement model, businesses and sellers only pay when their ad is featured on a website or app.
This business model aims to generate more traffic and interest in their products or services.
The most popular types of featured ad placement are:
- Sponsored content
- In-content ads
- Display ads
The benefits of this type of advertising are that businesses only pay for ads that are actually seen by users and that it is a more cost-effective way to reach potential customers.
One major challenge in using this model is that the marketplace needs a significant number of users for the seller to generate as much return on investment as possible.
Getting sellers interested in featuring their listings can also be problematic.
If this is the sole business model used in the marketplace, there is a high chance that free ones will outnumber paid features.
Moreover, having too many ads in the marketplace can turn off potential buyers, so a balance needs to be present.
Summary
In summary, there are about five business models to choose from when building an online marketplace; each has its advantages and disadvantages.
One can develop a strategy for success with the help of proper market research and analysis.
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