Airbnb, Etsy, Craigslist, and Uber are all successful examples of the marketplace model. But how do these marketplaces monetize? To build a sustainable and successful marketplace, you need to find a business model that will finance its operations. This is where choosing the right business model becomes crucial.
In this third post in our series, we’ll take a deep dive into the six main marketplace business models, exploring the pros and cons of each and providing examples of successful marketplaces that have used them. By understanding these different models, you’ll be better equipped to choose the one that best suits your marketplace idea and enables you to build a sustainable and successful platform.
These are the six types of marketplace models –
Commission-based model is the most popular revenue model for modern marketplaces. This model involves charging a commission from each transaction that occurs on the platform. When a customer pays a provider, the platform facilitates the payment and charges either a percentage or a flat fee.
The biggest advantage of this model is that providers are not charged anything before they get some value from the marketplace, which is attractive to them. At the same time, from the marketplace’s point of view, this commission is usually the most lucrative as it gets a piece of all the value that passes through the platform. Some of the best-known marketplace platforms, such as Airbnb, Etsy, eBay, Fiverr, TaskRabbit, and Uber, use commissions as their main revenue stream.
However, the biggest challenge in getting commissions to work is providing enough value for both the customer and the provider. If users do not get enough value from the platform, they may find a way to go around the payment system, resulting in no payment for the platform. Another challenge with commissions is pricing. For instance, how big should the commission be? Should it be the same for all users? Should the platform charge the customer, the provider, or both? These are some questions that need to be addressed when setting up a commission-based model.
In general, it is recommended to use commission as the main revenue stream whenever feasible. However, there are scenarios where it is not feasible for the platform to facilitate payment transactions. For example, when the size of the typical transaction is huge, such as with car or real estate sales. In such cases, the marketplace cannot justify the commission. Another example is when the invoicing process is too complex for the marketplace to facilitate, which is common in business-to-business (B2B) and some business-to-consumer (B2C) marketplaces. In such cases, a different type of marketplace business model is needed.
The subscription model is based on charging a recurring fee to users in exchange for access to the marketplace’s products or services. This model is commonly used by marketplaces that provide ongoing services, such as professional tools or software, dating apps, or job boards. Some well-known examples of subscription-based marketplaces include Netflix, Spotify, and LinkedIn.
One of the main advantages of this model is the predictable revenue stream it creates. Because subscribers pay regularly, you can more easily forecast and plan your finances. This can be especially useful for newer marketplaces that are still building their user base and need a consistent revenue stream to keep operations going.
Another benefit is that it can help create a sense of exclusivity and loyalty among your users. By offering premium features and services to subscribers, you can make them feel like they’re part of a special community and build stronger relationships with them.
However, the subscription model can also present some challenges. One is that it can be difficult to attract users when there are so many free alternatives available. This is especially true if your marketplace is just starting out and users are not yet familiar with your brand or services.
To overcome this, you can offer a free trial or a freemium model (which we’ll discuss later in this article) to entice users to try your marketplace. You can also focus on providing unique or valuable features that users can’t find anywhere else.
Another challenge is keeping your subscribers engaged and retaining them over time. This requires consistently providing value and improving your platform to meet their needs. It can also mean offering incentives or rewards to encourage users to continue subscribing.
Overall, the subscription model can be a great option for marketplaces that offer ongoing services or products and want to create a steady revenue stream. But it requires careful planning and execution to be successful.
Next, let’s look at the listing fee model.
The listing fee model is another popular revenue model for marketplaces. In this model, the platform charges a fee for every item or service listed on the platform. For example, Airbnb charges hosts a fee for each listing on their platform.
One of the advantages of the listing fee model is that it allows the platform to earn revenue even if no transactions take place. Additionally, the listing fee model can be an attractive option for providers who may prefer to pay a one-time fee rather than a commission on every transaction.
However, there are also some potential downsides to the listing fee model. If the fee is too high, it can discourage providers from listing their items or services on the platform. Additionally, the listing fee model may not be suitable for marketplaces with a high volume of low-cost items or services.
Here are some examples of successful marketplaces that use the listing fee model:
If you’re considering the listing fee model for your marketplace, it’s important to carefully consider the fees you’ll charge and ensure they’re competitive and reasonable for your providers. You may also want to offer other value-added services, such as advertising or promotion, to encourage providers to use your platform.
The freemium model is a combination of “free” and “premium” services, where the basic features of the marketplace are available for free, but users can pay for additional services or features.
This model can be used in various ways, such as offering a free trial period for premium services, providing a limited version of the platform for free, or charging for additional features or upgrades.
One of the biggest benefits of the freemium model is that it allows the marketplace to attract a large number of users through the free basic version, which can help with user acquisition and retention. This can also help to build trust with users and establish the marketplace as a reliable platform.
On the other hand, the biggest challenge of the freemium model is finding the right balance between the free and paid versions, to ensure that users see enough value in the paid version to justify the cost. This can be especially challenging when users are used to getting certain services for free, and may not see the value in paying for them.
Some examples of successful marketplaces that use the freemium model include LinkedIn (where the basic features are free, but premium features like InMail and Premium Insights require payment), and Dropbox (which offers a free basic version with limited storage, and a paid version with more storage and additional features).
If you decide to use the freemium model, it’s important to carefully consider what features or services to offer for free, and what to charge for. You may also need to consider different pricing tiers or packages to cater to different types of users.
The Advertising Model is a marketplace business model that involves generating revenue by displaying advertisements to users. This model is based on the principle that marketplaces can leverage their user base and traffic to attract advertisers who are looking to reach a particular audience.
In this model, the marketplace provides advertisers with the opportunity to display their ads to the platform’s users. This can be done through a variety of ad formats, including banner ads, sponsored content, native advertising, and video ads.
One of the biggest advantages of the Advertising Model is that it allows marketplaces to generate revenue without directly charging their users. This can be particularly attractive for users who are price-sensitive or who are reluctant to pay for a service. Additionally, the Advertising Model can be a great way to generate revenue in markets where it is difficult to charge users directly, such as in emerging economies.
However, the Advertising Model also comes with its own set of challenges. One of the biggest challenges is to balance the needs of advertisers with those of the marketplace’s users. Advertisements that are too intrusive or irrelevant can lead to a poor user experience and drive users away from the platform. On the other hand, if the marketplace fails to attract enough advertisers, it may struggle to generate revenue.
Some examples of marketplaces that use the Advertising Model include Facebook, Google, and LinkedIn. These platforms generate a significant portion of their revenue from displaying advertisements to their users.
If you’re considering using the Advertising Model for your marketplace, it’s important to carefully consider the trade-offs and potential risks. You’ll need to ensure that the ads you display are relevant and non-intrusive and that they don’t detract from the user experience. Additionally, you’ll need to attract enough advertisers to generate sufficient revenue to sustain your platform.
The transaction fee model is a revenue model that is used by marketplaces to charge a fee on every transaction that takes place on the platform. In other words, the marketplace takes a percentage or a flat fee on each sale that happens through its platform. This model is often used in conjunction with other revenue models such as commission-based or subscription-based models.
The transaction fee model is popular among marketplaces that offer digital products and services such as software, music, ebooks, and digital courses. It’s also used in marketplaces that facilitate peer-to-peer transactions such as crowdfunding or donations.
One of the biggest advantages of the transaction fee model is that the marketplace only charges a fee when a transaction occurs. This means that the providers don’t have to pay anything upfront, making it an attractive option for providers who are just starting out or who are unsure of how much revenue they will generate.
Another advantage of the transaction fee model is that it can be used in conjunction with other revenue models, such as the commission-based model. For example, a marketplace may charge a commission on sales and also charge a transaction fee on each sale that happens through its platform.
One of the biggest challenges of the transaction fee model is that it can be difficult to determine the right fee to charge. If the fee is too high, it may discourage providers from using the platform, while if the fee is too low, it may not generate enough revenue to sustain the marketplace.
To overcome this challenge, marketplaces need to find the right balance between the fee they charge and the value they provide to their users. They also need to consider the fees charged by their competitors and ensure that their fees are competitive.
Examples of successful marketplaces that use the transaction fee model include Kickstarter, Indiegogo, and GoFundMe, which charge a percentage on each transaction on their crowdfunding platforms.
The transaction fee model is a great revenue model for marketplaces that facilitate digital transactions or peer-to-peer transactions. It can be used in conjunction with other revenue models and offers an attractive option for providers who are just starting out or unsure of how much revenue they will generate. However, marketplaces need to find the right balance between the fee they charge and the value they provide to their users to ensure the success and sustainability of their platform.
Choosing the right business model for your marketplace is critical to its success. While the commission-based model is a popular choice, it may not always be the best fit for your platform. Each model has its pros and cons, and you should carefully consider your marketplace’s unique needs and goals before making a decision.
Some models, such as the subscription and listing fee models, offer more predictable revenue streams, while others, like the freemium and advertising models, rely on user engagement and traffic. The transaction fee model, on the other hand, is more suitable for marketplaces that facilitate transactions between buyers and sellers.
It’s also worth noting that you don’t have to stick with one model forever. As your marketplace grows and evolves, you may find that a different model makes more sense for your platform. Ultimately, the key is to experiment and find the model that best aligns with your marketplace’s vision and values.