Blog

Blog

img

insights

img

Top 5 Online...

Top 5 Online Marketplace Revenue Models in 2021

Article Image
The choice of revenue model might be the most important decision for a marketplace startup to make. Monetization strategies have a strong impact across all aspects of marketplace business — they define how a business generates income and what value the platform will offer to both users and sellers (or item vendors).If the marketplace business model is incorrectly designed from day one, there will be no chance to develop a sustainable and scalable business. A great way to ensure you pick the right strategy is to examine existing marketplaces and their revenue models to understand how to monetize your platform.In this article, we'll take a look at the most effective marketplace business models and review their advantages and disadvantages in order to help you make an informed decision regarding your own strategy.

Types of Marketplace Revenue Models

Commission-Based Model

The Commission-Based model is the most popular business model for a marketplace. Here, users are charged with a commission for each transaction they make. When a user buys from a service/product provider, the marketplace facilitates this payment and charges a percentage or a flat fee. The platform can also charge fees from both buyers and service/product vendors.In terms of pricing, there are a few options of fee policies:

Order amount — the commission is calculated based on the item price.

Item category — transaction fees are set for each individual category.

Vendor type — the fee depends on the sales activity of the vendor.

Oftentimes, this marketplace revenue model is combined with other revenue models.Pros & ConsWhat makes this model so attractive is that users pay only when the item is sold, and vendors are expected to pay a fee only when the item is purchased. This helps to attract a large and loyal user base of both customers and vendors. On the other side, however, there is a need to constantly provide enough value for both parties, and to come up with a wise commission strategy.Pros:

Easy onboarding process

Predictable revenue stream

Ability to attract a large number of suppliers

The platform charges a fee only when a transaction occurs

Cons:

Balancing fee policies can be difficult

May not work for marketplaces with large transactions

Dependency on vendor sales

Potential scalability issues

Industry examples:Airbnb — an online marketplace for lodging and short-term rentals receives commissions from both guests and hosts for every booking made on the platform. Guests pay 6-12% in booking fees, while hosts are charged with a 3% fee on every successful transaction.Uber — the largest ride-hailing marketplace in the world takes an average 25% commission of each ride booked via the app. The commission is charged from the drivers. With lower fares, however, the fee rate can go as high as 42.75%.

Listing Charges Model

This model is highly popular in marketplaces where listings have high potential value or where non-monetary transactions take place. Here, sellers/providers are typically charged for the number of listings (1, 10, 100, 1000, etc.) that they post on the platform.The limitation in listings also forces sellers/providers to be more selective about items they add, which, in turn, increases the quality of listings on the marketplace. For this monetization model, the price per item always remains affordable — typically between $0.05-$0.30 — in order not to scare off sellers.The Listing Charges model is rarely used as a standalone revenue strategy — more often, it is combined with other online marketplace revenue models.Pros & ConsThe Listing Charges model works perfectly when sellers don't want to opt for a subscription (for example) and are only selling items occasionally. It takes a commission fee from all items listed, including slow-selling ones. The main disadvantage of this business model for a marketplace, however, is that it cannot be successfully implemented on all types of online marketplaces.Pros:

Platform generates revenue regardless of how the items perform

Improves the quality of items being posted

Works well for occasional sellers

Is effective for non-monetary listings like dating, jobs, services, etc.

Cons:

Doesn't work for all types of marketplace platforms

Can prevent sellers from adding more items on a platform

Large seller base is required for the model to work

Does not guarantee value for item providers as listing fee does not guarantee sale

Industry examples:Overstock — an American online marketplace focused on selling furniture. While the platform combines several monetization strategies (commission + subscription), it also has listing fee commissions which range from $0.10 to $3.15.Etsy — a global marketplace for unique items, independent artists, and crafters has a standard listing fee set at $0.20 per item. Just like the marketplace above, Etsy's revenue model is not limited to listing charges only and also includes a few other online marketplace revenue models (commission + subscription).

Membership/Subscription Model

The subscription model is not a new one. In fact, it's been around for hundreds of years, emerging first in the 17th century in the publishing industry. In the last few decades, it has deeply penetrated the digital world, and there's almost no single industry that hasn't seen subscription-based startups and corresponding success stories.Users are charged a recurring fee — on a monthly, quarterly, or yearly basis — to access the platform and its features. Membership packages and monthly plans are another common practice used by marketplaces to offer access to different sets of items/features at different price points.There are three most common kinds of products or services to be accessed under this revenue model for an online marketplace:

Access to Content — videos, music, articles, stock images, website memberships;

Access to Services — SaaS, insurance, leasing, utilities;

Access to Products — food, personal care, subscription boxes.

In recent years, this business model for modern marketplaces has gained significant traction — according to Gartner, 75% of organizations selling their products directly to customers will move to a subscription-based model by 2023. Traditional industries are not going to lag behind, either. For example, it is predicted that the market for automotive subscriptions* will reach the $40 billion mark by 2026.* — customers access different vehicles for a monthly fee.Pros & ConsOne of the features of the subscription-based model that makes it so popular is that it can be easily adopted by any company regardless of its industry and niche — C2C, B2B, B2C, and even B2G in some cases.Another significant benefit that comes to mind is that subscription services have a low entry barrier (membership fees can go as low as $0.99/mo) which makes them popular among customers.When it comes to the disadvantages of this approach, these include an inability to retain long-term customers, increasing competition due to the crowded subscription-based business market, and a need to constantly keep the product value at the 'WOW' level.Pros:

Predictable revenue stream

High expansion opportunities

Good customer relations

High potential for untapped markets

Cons:

High competition

Risks of high churn

Requirement to constantly maintain value

Customers may be afraid of contracts

Industry examples:eBay — for its online sellers, the platform offers several subscription packages that carry different features depending on the size of the seller's store. Store subscription packages are as follows: Starter ($4.95/mo, for occasional sellers), Basic ($21.95/mo, for sellers wanting to reduce platform fees), Premium ($59.95/mo, for sellers who are looking for additional tools), Anchor ($299.95/mo, for advanced sellers who seek dedicated platform support), and Enterprise ($2,999.95/mo, for large scale sellers with high transaction volumes).Amazon — another major marketplace player, Amazon offers two subscription plans for its sellers: Individual (free when selling no more than 40 items per month), and Professional ($39.99/mo for those selling 40+ items monthly). Apart from that, sellers are also expected to pay selling fees ($0.99 for individual sellers + referral fees + closing fees).

Freemium Model

As the name implies, this is a combination of two words — 'Free' and 'Premium.' Here, users can access a set of free product features at no cost, or pay an extra fee to upgrade to full or more advanced functionality.The practice of offering basic-level functionality to users has been around since the late 1980's — this approach was quite popular among computer software companies who were giving away free-to-try versions of their products, and offering to pay extra to get the full package.The term 'Freemium,' however, was first introduced in 2006 by Jarid Lukin, the Director of eCommerce at Alacra. In his blog post, he very precisely formulated the definition and the psychology behind the Freemium model:Give your product for free and efficiently acquire a customer base via different marketing channels. Once that's done, offer premium-priced functionality or the enhanced version of your product to the users.Pros & ConsAmong the most obvious advantages of this online marketplace business model is actually the fact that it has the word ‘FREE’ in its name. How do you make a product stand out in a crowded market? Tell people that it's free - the science proves that this actually works. Another advantage of this model is that it allows the platform to acquire a large user base in a pressure-free way.On the flip-side, however, there is significant budget consumption with this model, and a need to have a really huge user base to make this model work (since the conversion rates will be relatively low in this case).Pros:

High potential for virality

Ability to monetize the user base

Extremely low entry barrier

Great for beta testing of new features

Cons:

Expensive

Conversion to premium packages is ≤5%

ROI requires a large user base

It's difficult to find the right balance between free/premium offerings

Industry examples:Eventbrite — a global ticketing and event management platform that lets users create, share, find, attend and promote local events. The marketplace offers free ticketing services for unpaid events like local neighborhood parties and charges a fee from event organizers for paid events.Peerby — A Dutch C2C platform that lets users borrow things from one another at no cost. The basic functionality is free and the monetization strategy is built around premium services such as insurance (a fee paid by the customer to guarantee that the provider will get their item replaced if it gets damaged or stolen) and delivery (a small fee paid by the customer to get the item delivered to their door).

Advertising & Featured Ads Model

Another popular revenue path for marketplaces that is normally combined with other monetization strategies is the Advertising and Featured Ads Model. Here, third-party vendors pay a company to place their CPC or CPM ads on its platform. Marketplace sellers can also get their products featured on the Homepage or in the 'Featured' section of a particular category.Pros & ConsThe Paid Ad model is a great way to ensure the platform generates a steady income. It also works well on marketplaces that have a large user base or target a specific niche. The major challenge with this model is that it requires a significant amount of users to display the ads to, and the fine-tuned balance between interests of users (ad relevance) and desired amount of generated revenue (ad frequency).Pros:

Steady additional income

Effective for niched marketplaces

High scalability potential

Boosts other marketplace fees

Cons:

Ads can be disturbing to some users

Does not work well if the traffic is low

Hard to control quality of third-party ads

Non-relevant ads will lower the retention rate

Industry examples:Häätori — a Finnish online marketplace for used wedding dresses, wedding decor, and accessories. The platform doesn't charge users for adding or selling items; instead, it sells on-site ads to wedding photographers, planners, and other wedding-related service providers.Zillow — one of the largest online platforms for real estate that allows agents and property owners to list their homes for sale or rent. The marketplace doesn't charge a listing fee, allowing vendors to promote their listings in four ad categories (native search, native property, home expenses, and rich media) across all websites in the Zillow Group.

Pros and Cons of Marketplace Business Models: Comparison Table

MONETIZATION MODELADVANTAGESDISADVANTAGES
Commission

Fast user onboarding process

Predictable revenue stream

Attractive model for suppliers

Each transaction gets monetized

Difficult to balance fee policy

Does not work well for large transactions

Largely dependent on vendor's sales

Possible scalability issues

Listing Charges

Revenue is generated regardless of how items perform

Improves quality of platform listings

Model is attractive for occasional sellers

Great solution for non-monetary listings

Does not work in all types of marketplaces

Prevents sellers from adding more items

Large seller base is required

Listing fee does not guarantee the vendor a sale

Membership / Subscription

Sustainable revenue stream

High scalability opportunities

Fosters customer loyalty

Works well for new markets

Highly competitive environment

Platform may suffer from a high churn rate

High value required

Some users are afraid to opt for subscriptions

Freemium

Fosters virality

Monetizes user base

Entry barrier is low

Very effective for beta testing of new features

High support costs

Low conversion rate

Large user base is required

Balancing between free/premium offerings is hard

Advertising & Featured Ads

Steady revenue stream

Fits well niched marketplaces

Highly scalable

Improves performance of other monetization models

Users may find ads annoying

Doesn't perform well on a low user base

No control over quality of third-party ads

Non-relevant ads damage the platform's reputation

Final Thoughts

So here it is. We've gone through the five most popular revenue options for marketplaces. As you see, the monetization strategy is an integral part of a company's business development plan, so the decision of which online marketplace business model to pick should solely depend on the objectives being set.Another aspect to keep in mind is that different audiences react to all of these approaches differently, so we encourage you to perform market research to choose the best revenue model for a marketplace or even a combination of a few online marketplace revenue models.If you are still not sure where to start with the monetization of your marketplace or want to get more information about the implementation process, don't hesitate to contact us through our form at the top of this page. Subscribe to our newsletter so we can keep you updated on the latest industry news!

FREQUENTLY ASKED QUESTIONS

🚀 How do I choose a revenue model for my marketplace?

arrow

The choice of a particular revenue model depends on several factors, including the interests of the users, vendors, and the platform itself. The best revenue tactic, however, will always be the one that best fits your business strategy.

⌛ What are the signs that my monetization strategy is in trouble?

arrow

The most obvious sign of something going wrong is when your customer acquisition costs are getting close to the revenue generated per customer. Another red flag is the rapid increase in churn rate and customers switching to other marketplaces.

💵 How do I price my monetization model?

arrow

Normally, marketplace startups stick with one of two strategies: value-based pricing or competitor-based pricing. The first implies a pricing model that is adjusted to the value provided by your marketplace. The latter involves doing market research and adopting prices that are similar to your competition. This approach works well for new products or for those companies who don't want to completely miss the target when entering a new market.

💻 Can I switch my current revenue model to a different one? Won't it hurt my business?

arrow

Your business model may change with new products, market evolution, etc., so it's normal to adjust the revenue strategy as you go. There are dozens of large marketplaces that have changed their monetization strategies over the course of time: Upwork, Shutterstock, Fiverr, etc. The only thing you need to do is to make sure that all parties (users/vendors) are well aware (in advance) of any new changes taking place, in order to minimize any negative experience.

img

LOOKING OFFSHORE SOFTWARE DEVELOPMENT?

We are ready to help! Get consulted with our specialists at no charge.

TOP 5 POSTS

How to Design a Successful SaaS Application?
How to Build an MVP for an Online Marketplace
Social Learning Platform: 5 Best Examples For Education
How to Find Investments for an Online Marketplace Startup
7 Key Steps of Business Intelligence (BI) Implementation Process

Table of contents

Show moreimg

icon

Types of Marketplace Revenue Models

icon

Commission-Based Model

icon

Listing Charges Model

icon

Membership/Subscription Model

icon

Freemium Model

icon

Advertising & Featured Ads Model

icon

Pros and Cons of Marketplace Business Models: Comparison Table

icon

Final Thoughts

img

would you like to receive notifications about our updates?

icon

Your subscription is confirmed.
Thank you for being with us.