How to Build a Multi-Billion Marketplace Business Model? The detailed guide

 

Revenue models for a marketplace

A marketplace can earn money in 6 major ways. We have discussed the major revenue models of a marketplace model below.

Commission

Charging a commission from every transaction happens to be the most common revenue model for marketplaces. Marketplaces normally charge only the sellers on every successful transaction completed from their portal. A major advantage of this commission model is that the sellers pay the marketplace only when the transaction is completed. They do not have to pay anything if they do not get any value from the marketplace.

Major marketplace platforms like Amazon, Etsy, and Fiverr use the commission-based model on their platforms. The biggest challenge that marketplaces face in the commission model is that they need to provide enough value to the sellers as well as the buyers. If the marketplace fails to provide value, then nobody will use the marketplace, and the users will look for other alternatives. 

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Pricing is another challenge that the marketplace operating on the commission model has to overcome. 

As a marketplace owner, you need to answer the following questions. 

How much should be the commission rate?

Should you keep the commission the same for all sellers?

Should you charge a commission to both the sellers and buyers or only to the sellers?

Is it a good strategy to keep a lower commission at first and then gradually increase it as more people join?

A commission model may not be the best fit in certain cases like

When the transaction is big, it is difficult to justify the commission fees, for example, car and real estate sales.

When money is not involved in the transaction, for example, a dating site.

If the invoicing process is too complex for the marketplace

In such cases, you will need a different type of marketplace revenue model.

Listing fee-based model

In the listing fee-based model, the marketplaces charge the sellers a fee for publishing new listings on the marketplace. The listing fee model is used whenever the people who list products get value based on the number of listings they have on the marketplace.

Classified ads use this kind of revenue model. A classified ads marketplace has a simple value proposition. The marketplaces aggregate a large number of listings on a single platform and provide a lot of visibility to these listings. 

Craigslist is a well-known example of the listing fee-based model. Craigslist is a collection of local sites where people can post listings about jobs, real estate, dating, services, or any product they want to sell. Although posting on Craigslist is free, the portal charges fees on certain categories like real estate listings and jobs in some major U.S. cities.

Many marketplaces sometimes use a lot of revenue models on the same site. The Etsy business model is an example of such a multi-vendor marketplace business model that gains a major part of its revenue from commissions and listing fees. The reasoning of Etsy is that the probability of certain items being sold varies as there are a few extremely popular items on Etsy, while most items won’t be sold ever on the platform. Listing the unpopular items also requires costs on Etsy’s side, and this is the reason why Etsy charges based on listings to cover these costs. 

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For expensive items, a listing fee can prove to be a better proposition for the marketplace. For instance, Mascus is a portal dedicated to selling expensive machinery, and due to the cost of the products that it sells, Mascus charges a listing fee. 

A major problem with the listing fee model is that, unlike commissions, the sellers have to pay upfront without the guarantee of their product being sold. This is why you need to keep the listing fees low otherwise, your marketplace will fail to attract the sellers. In order to have a sustainable revenue model that relies on listing fees, you will have to build a marketplace that has a very large volume of listings. 

Subscription fee model

A subscription fee-based model is a revenue model in which the marketplace charges either some or all of its users a recurring fee to access the marketplace. Typically the marketplaces operating on such models help the sellers acquire new customers. The customers find unique experiences or save costs by subscribing to such marketplaces. The membership or subscription fee model can work well if the value that you provide is good and if the revenue model is such that the user keeps coming back. Dating sites like Match.com, Tinder, and OkCupid use the membership fees model.

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These sites verify the credentials of all the subscribers to ensure quality matches. The quality matches and the sense of exclusivity that these dating sites provide justifies the subscription fees.

Companies like linkedIn and StackOverflow charge businesses a subscription fee to provide them access to the talent pools they have on their portals. In many B2C companies, the platform is free for the customers but requires a paid subscription for people who want access to these users.

A membership model can sometimes prove to be a good starting point for marketplaces that want to charge commissions but do not have the requisite infrastructure right now. Vennu is a classic example of such a business. The founders at Vennu started their portal with a membership model. The idea was to validate their business plan and attract investors. Once the revenue model was proven to be a successful one, Vennu started charging commissions.

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A major hurdle that marketplaces that want to charge a subscription fee face is that without a certain number of users, it’s hard to attract people to the marketplace. Take the example of dating sites. You cannot start charging people a subscription fee if there are only a couple of thousand users on your site. You will have to wait till hundreds of thousands of users join the marketplace and people have enough choices to validate paying a subscription fee. One way to solve this problem is to keep signing up to the portal free or heavily discounted initially and start charging once the number of users reaches the desired level. 

Lead free

In a lead fee-based model, the marketplace provides qualified leads to people who want to sell products or services. The customers who want to buy a product or service come to the marketplace and put in their contact details. The marketplace then provides this lead to sellers, and the sellers contact the customer to sell their products.

The lead fee model provides a much better value proposition to the sellers than the listing fee model. This is because the sellers only pay when the marketplace finds a potential customer for them.