Online marketplaces are booming and for a good reason.
Online marketplaces remove the friction from shopping online by allowing you to buy from various sellers in one place instead of searching for individual products on a brand's website.
An online marketplace creates a more efficient experience and streamlines and eases the products' buying process online.
An online marketplace can also help you cut costs by reducing the inventory you need to build.
While these benefits sound great, establishing an online marketplace isn't without its challenges.
How do you incentivize your sellers to grow their businesses? How do you reward your top sellers? And how can you get rid of inactive sellers without burning bridges?
We're going to consider a commission model for the online marketplace and whether it might be the way to address some of the above.
What Does a Marketplace Commission Model Look Like?
As online marketplaces continue to grow in popularity, so too does the commission model.
The commission model, whereby the marketplace takes a commission on each sale made through its platform, is now the norm for many online marketplaces.
Many marketplaces prefer commission models as it provides an easy entry point for sellers looking to scale their business.
Commission models are considered the most successful business model for online marketplaces.
How Might a Commission Model Work in an Online Marketplace?
Many businesses use commission models; online marketplaces, advertising agencies, and brick-and-mortar stores.
When it comes to online marketplaces, there are three ways in which an online marketplace owner can earn a commission:
1. Charging the seller
2. Charging the customer
3. Charging both the customer and the seller
Under the first commission model, the seller agrees to pay a percentage the marketplace charges for each sale the seller makes using the platform.
The commission is typically a percentage of the sale price or, in some cases, a fixed amount.
There is a case for a hybrid, where the seller pays a fixed amount plus a commission fee. Hybrid is the case with Rakuten.
An example of the first commission model is eBay.
On average, eBay charges a 12% final value fee (commission) for all sales.
The percentage varies depending on the product category.
Under the second commission model, the commission fee is added on top of the price set by the seller.
E.g., a marketplace might charge a 10% commission fee for each sale.
When a customer buys an item that the seller is listing for $200, the customer pays $220 - the marketplace gets $20, and the seller gets to keep the $200, the price they set for the item sold.
Airbnb is an excellent example of the third commission model mentioned, where Airbnb charges both the host and the guests, calling it a split fee.
In Airbnb's case, they charge their hosts a 3% fee while guests can pay ~14% of the booking total.
Established Online Marketplaces and Their Commission Structures
Here are just three more popular online marketplaces and what they charge.
Amazon's Commission Model
Amazon is arguably one of the most popular and successful online marketplaces, securing an annual revenue of $469.822B for 2021, 21.7% higher than 2020.
Amazon follows a combination of commission and subscription-based revenue models.
An Individual Plan costs $0.99 per unit sold and a commission or referral fee between 8% and 15%, depending on the product category.
Uber's Commission Model
Uber, the popular ride-sharing app, is another online marketplace operating on a commission-based system.
Uber charges their partners a service fee of 25% on all fares made within the platform.
Fiverr's Commission Model
Fiverr, an online platform connecting freelancers to clients looking to buy their services or gigs, also uses a commission model.
In Fiverr's case, Fiverr charge the clients or those purchasing the freelance service a 5.5% fee and freelancers a 20% commission fee.
What Challenges Do You Need to be Aware of When You Implement a Commission Model
Charging the right percentage commission is an important consideration.
You'll need to find a good balance between charging a commission that will cover your operating costs and keeping your online marketplace accessible to sellers starting out.
One place to start is to look at your top competitors to see how much they charge.
Providing enough value to sellers and buyers to continue using your platform or marketplace can be another challenge to overcome.
Without that value, nothing is stopping sellers and buyers from conducting their business directly with each other.
Thereby essentially cutting the middleman that, in this case, is your marketplace.
Some More Benefits and Drawbacks of using a Commission Model
A side benefit is that the commission model incentivizes the marketplace to facilitate connections between buyers and sellers while ensuring that the online marketplace remains profitable.
The cost of doing business is also transparent between the marketplace owner and sellers in a commission model.
This helps align the interests of the marketplace owner and its sellers.
A key benefit of the commission model is that it is scalable, so it can easily work for small and large marketplaces.
While there are many benefits to using a commission model, it' doesn't come without drawbacks.
For example, a profitable commission model is when the primary activity in your online marketplace is monetary.
If the transactions within your platform or marketplace don't involve money - such as dating or bartering websites - then a commission revenue model doesn't work.
As mentioned before, another threat to this model is the possibility of the seller and buyer agreeing to take the transaction off the platform.
Is the Commission Model Right for Your Online Marketplace?
When you're running an online marketplace, one of the most important decisions you'll make is choosing a business model.
A commission-based revenue model can be one of the most lucrative, but that doesn't necessarily mean it will work the best for your platform or marketplace.
Research has found that a classic commission-based model works best for marketplaces that sell products or offer rentals.
A subscription model is more popular for those offering digital goods or running a service such as a dating website.
Another factor is how simple or complicated each transaction's invoice is.
With some B2B and B2C transactions, the invoicing process could be far too complicated.
You might need extensive documentation, which makes it difficult to charge a straightforward commission fee.
Further, the size or amount of a typical transaction in your platform also might be considered.
For instance, with the high dollar amounts in real estate and automobile transactions, it can be difficult to justify a high marketplace commission fee.
Ready to move to the next step with your online marketplace idea? Sign up for a free trial at Yclas.