A Comprehensive Guide to the Marketplace Business Model

This comprehensive guide explains what is an online marketplace business model and how it works. Learn about different types of marketplace models such as Commission Model; Membership Fee; Publishing Fee; Freemium Model; Lead Pricing Model; Subscription Model; Prem

A Comprehensive Guide to the Marketplace Business Model

The marketplace business model is the structure that an Internet-based marketplace uses to attract buyers and sellers, maintain revenue, and remain competitive. It is similar to offline business models in some respects and different in others. Online marketplaces connect buyers and sellers on a proprietary, centralized platform. Often, the market operator does not have any kind of inventory, but rather helps buyers and sellers to facilitate a transaction.

The most popular revenue model for modern markets is to charge a commission for each transaction. When a customer pays a supplier, the platform facilitates payment and charges a percentage or a fixed fee. My recommendation is to use the commission model as the main source of income whenever possible. I expect more and more markets to adopt this revenue model in the future.

A membership fee can also be a good initial business model for B2C markets that eventually want to charge a commission but don't yet have the tools to facilitate transactions in their particular niche. Venuu, an Airbnb for event spaces, started with the membership model to earn revenue upfront, even before launching its site. Later, when they validated their business plan and had the resources to create a billing system, they moved to the commission model, a revenue model that was much more lucrative for them. Sometimes it can be useful to use multiple business models in the same place.

For example, Etsy is an example of a B2C marketplace that uses the commission model, but also charges a fee for running new ads. Etsy's reasoning is likely that its liquidity (the probability of a certain item being sold) varies greatly. While there are some very popular items on Etsy, most items will probably never receive a single sale because the total volume of Etsy ads is huge. By using both the commission model and the publishing fee model, Etsy earns revenue from popular and not-so-popular items.

A publishing fee is better than a membership fee in cases where vendors don't want an ongoing subscription and only want to sell certain items. This is the case of Mascus, a B2B classifieds site for expensive machinery. However, while Thumbtack has been working well with the lead pricing model so far, their problem is that providers no longer use Thumbtack with existing customers, but instead build the relationship outside the platform once they have the lead. That's why Thumbtack decided to create billing, payment and scheduling tools for professionals.

In the future, they can move towards the commission model to extract more value from transactions that help facilitate. The logic behind the freemium model is that the main offer is free, but after you hook your users, you offer paid features that add value. The challenge with this model is that these paid services must provide enough value to be tempting for a good part of their users. If only 1% of your users are interested in your premium offer and everyone else is using your site for free, it's probably not enough for a sustainable business model.

Creating a premium service that is interesting to a wide enough audience can be very complicated. Because of this, many platforms use premium services as additional revenue streams. For example, Mascus offers premium website services to its customers to complement its business model based on the payment of the quote. Etsy complements its model based on selling and transaction fees by offering premium services such as direct payment, listing promotion and shipping labels to its most important sellers, and has recently experienced strong growth in this revenue stream.

In some cases, a marketplace may start offering premium services as an add-on, but eventually change its entire business model to focus on paid services. Vayable started out as a purely peer-to-peer marketplace where individuals offered unique experiences to others, but after not getting enough traction, decided to switch to create a concierge service for a personalized vacation. The downside to this approach is that premium services are usually a less scalable option compared to the pure commission model. This is often due to the number of staff needed to deliver premium services.

Vayable only made the change because he couldn't make the commission model work well enough. Modern markets employ many different business models. In general, the best revenue model for most is to own the transaction and charge a commission for all purchases made through the site. This approach is very scalable and often quite lucrative.

However, in some cases, the commission model does not make sense, so alternative models are needed. Testing several business models to find the best fit for your concept might be a good idea. At first, you should have only one source of income in use at a time to avoid diverting your attention. Over time, when your platform grows, it may make sense to combine multiple revenue streams to create a market business model that takes into account everything that happens on your site.

The markets implement a subscription model but their business logic does not involve financial relationships. So we've covered all of these main business models: Commission Model; Membership Fee; Publishing Fee; Freemium Model; Lead Pricing Model; Subscription Model; Premium Services Model.

The commission model is by far the most widely used and is chosen by mastodons in e-commerce such as Amazon, Fiverr or Etsy. However, these big players remain on top not only because they choose the right business model but also because they successfully combine different models in order to increase their main income.

Yojji has extensive experience in developing online markets and integrating various revenue models. Our experts will provide you with all necessary assistance and create an online marketplace following your expectations and recommendations.

For more information please contact our managers or read our comprehensive guide about how you can choose and implement an effective marketplace business model.