November 16, 2018
The State (and Future) of Digital Marketplaces Webinar
When it comes to running a marketplace or any type of business, remember—money talks. You can have the highest quality sellers and a vast inventory to boot, but if you’re not generating substantial profit, it’s going to be difficult to stay afloat for the long-term. Fortunately for marketplace operators like yourself, there are a variety of ways to generate revenue that you can leverage to ensure your long-term success.
Take a look at the top 5 marketplace business models below to help you decide which one is best for your platform:
The commission business model is extremely popular because businesses are able to collect money from virtually all the transactions that flow through the marketplace platform. Since there are no upfront fees, marketplace operators benefit from being able to attract buyers and sellers by eliminating the risk of paying when they don’t get any additional value from the platform.
Although this approach sounds like a perfect arrangement for marketplace operators, one of the biggest downsides of this model is that the operator typically puts themselves at risk of losing money through leakage, which is when buyers and sellers transact off the platform.
The best way to minimize leakage within a commission-based marketplace is to provide value-added services that only apply to transactions that are completed on the platform. Two common examples of this include offering insurance or satisfaction guarantees.
Two examples where commission marketplaces shouldn’t be used are when there’s a large value transaction (e.g. a car or real estate being sold) or cases where money doesn’t change hands (e.g. dating websites and marketplaces built around bartering).
The membership and subscription fee monetization model comes into play when some, or all of a marketplace’s buyers and/or sellers are charged a recurring fee to use the marketplace platform. The main advantage of this model is that sellers pay a relatively nominal fee to access a pool of qualified buyers. Buyers on the other hand are free to transact as much as they want for a flat fee.
The main challenge of embracing this monetization model is the classic chicken and the egg problem, where buyers and sellers aren’t going to pay to use a platform that doesn’t have any traffic. While there are a variety of ways you can get your marketplace’s flywheel moving, one of the simplest ways to gain traction is by focusing on the needs of sellers first.
This can be done by providing tools to enhance the seller experience (such as transaction processing) and/or subsidizing sellers by providing them with discounted memberships. The key to success here is that you’re adding value to entice sellers to use your platform as opposed to the competition.
Although buyers and sellers are equally important, it’s important to focus on the needs of the latter because they are the ones who have to commit time and (in some cases) money to use a your platform. Buyers on the other hand don’t need to invest much. It’s easier for a buyer to browse 10 different properties than it is for a seller to list on 10 different properties.
Unlike the membership/subscription fee monetization model where the marketplace operator has an ongoing source of revenue, listing fees are one-off payments. This approach is ideal in cases where the seller gains significant value from a single listing. This revenue model is commonly used on properties where one-off transactions are the norm – such as classifieds websites, or job boards.
The primary disadvantage of the listing fee revenue model, for sellers, is that they have to pay even if they don’t derive value from the platform. It also doesn’t work well for all marketplace operators as they only capture a fraction of the value from the transaction.
Marketplaces that use the freemium business model employ a mix of advertising and paid functionality to drive revenue from their properties. For example, a marketplace could provide free listings, but charge a nominal fee for extra publicity. The logic of this revenue model is that by offering core functionality for free, the marketplace can hook buyers and sellers on using the platform.
It’s an attractive monetization model for many marketplaces, but there’s a significant challenge—providing enough value to entice buyers and sellers to pay for extra services. This is the reason that many marketplaces use freemium offerings to complement other revenue streams, as opposed to solely relying on it for covering expenses.
The freemium monetization model is ideal for marketplaces where sellers are offering low-value goods, bartering, or giving away items for free.
It used to be that building a marketplace and placing ad banners was a sufficient way to build out revenue, however as the web has evolved, advertising revenue has been on the decline. Buyers and sellers also have become weary of marketplaces platforms with excessive amounts of advertising because it detracts from the user experience.
Aside from detracting from the buyer and seller experience, marketplace operators that don’t directly charge fees to buyers and/or sellers are leaving money on the table. This is because they’re missing out profiting from the value the marketplace brings to the table.
With all that in mind, there is one case where advertising-supported marketplaces can succeed. That’s when there is a specific niche market containing advertisers which actually add value to the target audience. Marketplace operators that build relationships with the right types of advertisers can succeed using this technique.
In order to run a successful marketplace, you need to prioritize sustainability, which first and foremost means choosing the right monetization model, as outlined above. To further move in the direction of sustainability, you can also consider setting an appropriate take rate based on the level of service provided.
With this in mind, it’s important to note that you can’t just look at your competitors and use what they do as a baseline for your revenue. Every marketplace is unique, and unlike retailers that need to compete on price, marketplaces should focus on delivering an experience and bringing value to the table.
To learn more about how the marketplace business model can help improve your profitability, check out The Kahuna Blog. Simply click the button below!
A Bi-Weekly Newsletter Focused Exclusively on Online Marketplaces