A Complete Guide to Marketplace Business Models

When you think about e-commerce, such giant companies like Amazon and eBay are the first things that come to your mind. This is not surprising because according to statistics, Amazon is the most visited marketplace in the USA, and eBay is the most popular platform among U.S. sellers.

Indeed, the concept of an online store where third-party companies offer their products and/or services is not new, but what measures its success? The answer is simple - the marketplace revenue, which depends on the marketplace business model. In this article, we will shed light on what are the peculiarities, advantages, and downsides of the most popular business models, and which one you should choose to make your business flourish.

The Chicken And Egg Problem Of Marketplaces

The chicken and egg problem is the eternal dilemma of marketplaces. Online marketplaces don’t know who should be attracted earlier: sellers or buyers. The more vendors are represented in the marketplace, the more attractive the platform is for customers, subsequently, the greater their number is. The number of clients, in its turn, is one of the most important aspects for sellers.

There are several tactics for attracting buyers and sellers. We’ll take a quick look at the main ones.

For Buyers

  • Monetary incentives

This tactic involves rewarding users who join the platform and/or make a purchase. It can be a gift card of a certain denomination or a 5%, 10%, 15% discount.

  • Offer the most effective solution to customer problems

Carefully analyze all the pains of your target audience and create the highest quality product that will offer effective problem solving and a great user experience. For example, if your competitors don’t solve payment problems, then offer your customers payment protection and provide a compensation system.

For Sellers

  • Start by selling your own goods/services

Utilize a step-by-step approach. First, you should sell your own products/services, build a brand reputation, create a customer base, and earn customers’ trust. Suppliers will quickly join your platform with a loyal customer base.

  • Make the sales process as easy as possible

Your platform should be seller-friendly so that a vendor doesn’t spend much time on organizational matters.

  • Create a custom course for sellers

Create a guide for sellers describing all the stages of registration, listing, and sales process, as well as provide comprehensive information on fees. Besides, create a detailed overview of your platform, indicating all the features and available bonuses.

Marketplace Business Models Examples

Any leading company should keep up with the trends, understand the most popular and effective business models, and evaluate how they might apply to a company. There are three most sought-after revenue models, but in fact, there are more models that can skyrocket your revenue. Below, we will consider them and highlight their pros and cons.

Commission Model

This model is one of the most popular ones. It involves a middleman charging a commission for each transaction it handles between two parties or for any lead it provides to the other party. Besides, sometimes a platform charges a fixed or variable fee for the product or service that is being sold. Most often, cooperation is based on the following principle: the seller provides products or services, and the marketplace handles payment processing and logistics.

Advantages
  • This business model is popular because it attracts more suppliers. The seller uses all the advantages of the platform for free and pays only when his service or product is sold.

  • The marketplace is monetized every time a customer pays for a service or product, so your revenue is skyrocketing.

Challenges
  • To remain an essential tool for both sellers and buyers, the platform must offer attractive value to its users. For example, transaction protection and insurance.

  • The pricing problem is really a pain in the neck for any marketplace since there are many things to be considered: the percentage of the transaction fee, the choice of the party who will pay the commission, and the amount of the fixed commission that will support the profitability of the marketplace, but at the same time, it will not scare away customers.

Example

Amazon

Amazon sells various products and allows third-party vendors to sell on the platform. Amazon offers two selling plans. The first one has been designed for individuals who don’t plan to advertise or choose advanced selling tools. The platform charges a commission of $0.99 for each item sold (the maximum number of items sold per month is 40 pieces), plus additional selling fees. As for professional sellers, they must pay $39.99 a month, excluding additional selling fees.

Subscription Model

The basic principle of this model is to provide access to the platform, unique features to customers and merchants, and charge a fee for this access. To be popular with users, a platform must provide a valuable experience. For example, customers get tangible (cost savings) and intangible (unique experiences) benefits.

As for the vendors, they get the opportunity to attract more buyers. There are two main types of relationships between buyers and sellers: material relationships and non-monetary relationships.

  1. Marketplaces charge fees from one or both parties but do not participate in financial transactions between them.

  2. Marketplaces implement a subscription model, but the platform’s business logic does not imply financial relationships.

Advantages
  • The model offers a stable and predictable income as the platform has a customer base that pays for the services the marketplace provides.

  • Allows you to expand your client base due to attractive conditions. Users pay a small amount monthly and have the option to unsubscribe at any time.

Challenges
  • Providing sufficient value. You need to create a unique value proposition for users that they will be willing to pay for.

  • The chicken and egg problem is relevant in this case. There are several possible solutions to this issue: offer a free trial to users, develop different types of subscriptions with distinctive feature sets, and various capabilities for particular groups of platform members.

Example

Couchsurfing

This is a well-known service for international travelers. New users are rewarded with 10 requests per week. To get an unlimited number of requests for three months, the users (hosts and travelers) should get mutual reviews. Another way is to pay $60/year for account verification.

Freemium Model

Under this model, the marketplace offers free use of the platform for both parties. Revenue is based on the value of additionally offered premium features, subscriptions, and cross-selling of other services.

Advantages
  • The freemium model provides fast lead generation as it offers free use of the platform. According to research by Professor Dan Ariely, “Free” has a special appeal to customers and is inviting. This explains why businesses with freemium offers attract many users on launch.

  • Once you’ve built a customer base that appreciates all the benefits of the platform, you can offer premium features for an additional fee.

  • Users have a certain number of functions in the free version, sufficient for comfortable use. However, if they want to advertise or exceed the feature limit in the free version, then additional fees will be charged.

Challenges
  • The main challenge is to turn lookers into bookers. This requires much time and in the long run, the percentage of paying users may be very low, so the business may not be profitable.

  • Providing sufficient value is the second global problem of the model. You need to strike a balance between free and premium features and offer exceptional features the users will be willing to pay for.

Example

Unsplash

Unsplash is a platform that offers photos on a variety of subjects. Some photos are free for users, but to access all photos, you need to pay a monthly fee or pay a commission directly to the photographer.

Listing Model

This model involves charging a fee for each listing posted on the platform. This business model is often used by platforms selling expensive items (houses, apartments, or cars). As a rule, platforms do not facilitate or protect transactions between parties.

Advantages
  • It attracts high traffic, so seller listings become visible to more people.

  • The listing cost is affordable.

  • All listings displayed are of high quality because the seller pays for every ad posted.

Challenges
  • The issue of the listing fee amount is relevant for this model. It must be acceptable to sellers but not too low for this business model to be profitable.

  • Just like in the subscription model, the chicken and egg problem is relevant here. To solve it, you can offer favorable terms of cooperation. For example, a certain number of free listings or an unlimited number of ads during a certain trial period.
  • Since the cost of one listing is not high, it is quite difficult to get a stable and sufficient income.

Example

Craigslist

Craigslist is a collection of local sites where people can post ads for the sale of real estate, goods, or services. Posting a listing is free of charge, however, fees may apply when posting a job or for-sale-by-owner listing (FSBO) in certain cities.

The featured ad placement model means that vendors pay money to increase their visibility on the platform. The sellers pay an additional fee to ensure that their listing is displayed before other similar ads or to be shown at the very top of the list in a specific category. This business model integrates favorably with listing and/or commission models.

Advantages
  • It can be used as an alternative or additional source of income.

Challenges
  • Driving traffic to a website so that suppliers are willing to pay for advertising is a daunting task.

  • Finding a balance between paid and free ads is important because if the platform gets overwhelmed with ads, it can scare away its users.

Example

Ebay

Users can post listings on eBay for free, but a fee is required if sellers want their ads to appear first.

Mixed Revenue Model

This model offers a combination of several models: one model is the main one and is the main source of income, and the second model is used to generate additional income.

Advantages
  • The use of several monetization channels increases the marketplace’s income.

Challenges
  • A balance needs to be struck between two models of income. They should not be directed only at one party so that the marketplace doesn’t lose a certain segment of customers.


Example

Amazon

Amazon offers various models for individual and professional sellers. Individual suppliers pay a flat commission for each item sold, while their counterparts pay a flat monthly fee.

Bottom Line

Thus, we’ve covered the main business models. The commission model is by far the most widely used and is chosen by e-commerce industry mastodons such as Amazon, Fiverr, Etsy. However, the big players in the market stay on top not only because they pick the right business model but also because they successfully combine different models to increase the main income. Yojji has extensive experience in developing online marketplaces and integrating various revenue models. Our experts will provide the necessary assistance and create a marketplace for you, following your expectations and recommendations. For more information, please contact our managers.

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Yevhen Piotrovskyi
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