How Do Marketplaces Make Money? Digital Marketplaces Business Models
Oct 94 min read
Co-funder and CEO of Ideamotive. Entrepreneur, mentor and startup advisor.
It is absolutely clear that a marketplace business model can generate more than satisfying revenue for its owner. But first, one fundamental question must be asked:what is the best way to make money in a particular case?Let’s look at the most popular marketplace financial models.
If you look at the best-known marketplaces such as Amazon, eBay, Airbnb, or Uber, you quickly notice one thing they all have in common. They are giant and profitable companies, well-known all around the world and gathering hundreds of thousands of vendors as well as customers or users. But if you think about marketplace development, you don’t necessarily set these brands as your benchmark. You would instead seek smaller marketplaces, much closer to your business capabilities and ambitions. Yet, when you analyze their financial model, you conclude that no matter the scale, all (or the overwhelming majority) marketplaces have implemented very similar solutions.
Therefore, there is no need to reinvent the wheel when it comes to balancing your expenditure and income. Instead, you should rather operate on one of the tested, trusted, and existing internet marketplace business model. No matter if you plan to launch a product-based or service-based marketplace, the solution for you is probably already waiting for you.
Now it is time for in-depth analysis for such business models as commission, subscriptions, and listing fee to find out how do online marketplaces make money.
This could be called the most popular marketplace payment model if such opinion would be based on comparison how big brands use it for their everyday operations: Airbnb, Amazon, eBay, Etsy, and Uber are the best-known marketplaces with commission model. The basic rule defining it is that marketplace owner or manager receives previously agreed on part of the transaction that is done at an internet platform.
Logically, if there is no transaction, then there is no money for marketplace owner. Users meant here as physical persons or companies providing products or services to the platform, as well as final customers looking for offer do not have to pay for their activity. Platform admin has excellent variety in shaping the marketplace payments. Charging may be dependent on the value of the transaction, the number of transactions in any period or on the number of products sold.
Such flexibility is undoubtedly one of the pros of this marketplace financial model. Another one is its simplicity and clarity. Once the rules for calculating transaction share are set, they can be easily followed. Algorithms can immediately precisely estimate the amount of money that should be paid to marketplace owner. The risk of complaints or arguments between admin and vendors or customers is minimalized.
The challenges which must be addressed in this model are mainly focused on fiscal issues. Flat fee or percentage on the transaction or maybe both? What should be the frequency of splitting a commission with users? How to differentiate fees between various products, services, or even vendors. A serious obstacle is aninability to predict the number of profitsas it may visibly vary in the following periods.
Melltoo is an excellent example of a marketplace witha commission model.As they underline, “we only make money if you sell,” what elegantly explains this model. Then they add, “so our job is to help you sell,” which pretty comprehensively explains the duties of every manager owning platform that uses this marketplace financial model.
Contrary to the commission model, this example here gives quite reliable insight on what revenue could be generated in a month, quarter, or even a whole year. This happens because data needed for calculating profits is available: number of current members (vendors, clients), the potential number of future members, and membership fees. Maybe because of this predictability, the subscription model is attracting the attention ofmany marketplace owners.
In this model, the marketplace owner receives money from registered users on a regular basis. Price for membership may be varied: the more exclusive membership with more options available, the more expensive. The users are usually acquired for a longer time. It is equal with smaller spending on marketing, retargeting, and social media campaigns set to activate marketplace users as they are already spending money on a membership. Instead, the marketing budget may be utilized for attracting new users.
The greatest challenge of this marketplace financial model is balancing the membership plan. If fees would be too high, people may not be attracted to a given marketplace. On the other hand, too low price could limit admin’s profits while favoring members and giving them too many benefits.
There are some interesting case studies from the beauty industry: members of such platforms asCratejoyreceive boxes consisting of beauty, health, and interior products delivered by renowned brands. Content of such box depends on the membership fee.
Listing Fee Model
Instead of charging users for signing, a different marketplace financial model can be chosen. Users may have to pay marketplace owner for listing products or services. It is quite a transparent payment option as the marketplace has own strictly defined stakes for multiple products. All users have access to the same information and have to pay the same amount of money for goods or services they offer. They are treated equally and feel that the marketplace plays fair.
The most positive effect of listing fee model is that simultaneously with the growth of the marketplace – defined here as the increase in the number of listed goods – its admin is earning more money. It should be noted that the listing fee model may directly improve the quality of the marketplace offer. Users, knowing that they are obliged to pay for any item they wish to sell, do it wisely and automatically try to adjust to customers’ needs. As a result, such a marketplace is steadily gaining approving opinions as people are aware that they probably would find what they are looking for.
But there are some minuses of listing fee monetization model. If the stakes are chosen wrongly and are too low, the platform may attract spammers. Contrary, if they are too high, people would be discouraged from placing any products at all. Results are easy to predict:marketplace will stop to grow.
Delivery Hero is one of the numerous marketplaces that have adopted listing fee model. Its owners and team of managers are actively experimentingwith binding fees, trying to optimize it. And judging by Delivery Hero current market position, their efforts bring positive effects.
As you may see, the majority of existing marketplaces have utilized one of the aforementioned marketplace payments and optimized it. They may vary in smaller or bigger details. However, the general rules are the same.
If you wish to consult your monetization strategy for your marketplace,contact us.We will be more than happy to analyze your ideas for marketplace business and give you some expert feedback, as well as help in finding the ultimate answer to the question of how do online marketplaces make money.
Robert is a co-founder and CEO of Ideamotive. Entrepreneur, who with passion spreads digital revolution all around the internet. Mentor and advisor at startup accelerators. Loves to learn and discover new business models.