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Choosing The Right Business Model for Your Marketplace

Summary

The marketplace, like nothing else, needs a well-chosen business model. We described various marketplace business models in detail so that businesses, having studied all the pros and cons, could create the most comfortable user environment and get the maximum profit.

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Theses:

  • The importance of choosing the right business model.
  • Advantages and disadvantages of each business model.
  • Marketplace business model examples.

What is an indicator of market success? What do business people strive for when starting their next project?

Global popularity, millions of loyal customers, and all these directly affect the revenue. So, revenue is a crucial aspect of each business.

Since the marketplace business is a long-term prospect, it’s necessary to choose a suitable business model. It is impossible to make the right choice without knowing all the advantages and challenges in each marketplace business model.

19% of startups fail due to the wrong business model choice that can’t scale together with the business.

So the question is: what business model to choose for your marketplace?

TOP 7 Online Business Models

Most online marketplaces work with several business strategies, for example, commission together with ads, listing, or premium subscription.

But in fact, there are many more marketplace business models in 2021. They have their advantages and difficulties in using, so let’s move on further to understand each model in more detail.

Commission Model

The commission model is a revenue business model in which the user charges a fee for each transaction. In 2021, this is one of the most popular business models used by the marketplaces.

Companies can choose different payment options – from the seller or the buyer.

This model is one of the most cost-effective since it only makes consumers pay when they receive benefits from the platform, without using the principle of charging money simply upon placement on the platform.

Examples: Airbnb, Amazon, TaskRabbit

Benefits of a Commission Model

Let’s clarify the main advantages of the commission model:

Ability to attract more suppliers

Users don’t risk their finances and pay when a transaction is made. This approach cannot fail to attract a large number of users and ensure transparency of cooperation.

Simple monetization

With each successful transaction, the marketplace receives money.

Challenges of a Commission Model

Despite of its advantages, the commission model has some challenges that should be taken into account:

Proper pricing is one of the essential troubles

Companies should choose a commission model depending on their niche and business model. Marketplaces can charge a percentage on each transaction or a fixed amount in case of a successful transaction. The choice depends on the type of marketplace and the services on it.

The choice of pricing is also influenced by whether the marketplace focuses on the seller or buyer. When the marketplace makes the fees from the seller, companies usually prefer a fixed price commission.

Opportunity to get a value reduction

Business owners should take care of additional value in their marketplace so that there is no user outflow. The less value on your platform, the more likely users will find a worthy place to follow. It’s the most important problem that marketplaces can’t scale using the commission model.

It’s crucial to think about how to maintain value for customers. For example, companies can offer:

  • insurance in case of goods loss
  • automation of some aspects of suppliers’ activities
  • analytics, etc.

Subscription Model

The subscription model is a revenue model where the user gets access to the marketplace for a regular fee. It’s the second-largest type of business model. By 2022, 53% of all businesses will be generated from a subscription business model.

If the company doesn’t have enough resources for a commission model with transactional conditions, a subscription model will be the best option.

Examples: OkCupid, CouchSurfing

Benefits of a Subscription Model

Predictability

The subscription revenue model allows you to predict your income. If the company has gathered a sufficient number of loyal customers, then this is an excellent model.

Large client flow

This model attracts customers with its relatively low cost. At the same time, users receive the value that allows them to improve.

Challenges of a Subscription Model

However, the subscription model may have some challenges such as:

Finding a unique offer

Companies can sometimes find it hard to search for a unique value that users will want to pay for. Otherwise, this business model will lose its meaning.

Unwillingness to make any advance payment

Many customers worry that by paying for access, they will receive an insufficiently unique offer. Human nature is such that people are willing to pay if they see a real benefit. It is vital to think through the marketplace ads how to attract customers.

This model also provides the ability to create different subscription plans – basic or premium for different groups.

Listing Fee Model

The listing model is a revenue model where customers are charged a fee for placing goods or services on the marketplace.

The listing fee model allows companies to solve the problem with less popular products, and make a profit from each item on the platform.

Examples: Etsy

Benefits of a Listing Fee Model

The listing fee model has lots of advantages for different types of marketplaces such as:

 

Quality

Sellers try to meet high-quality standards, as each post is paid for. Also, ads directly affect the reputation of sellers.

Price

The listing fee is usually small and much cheaper than the subscription price.

Challenges of a Listing Fee Model

The listing model has some challenges and pitfalls marketplaces may be faced with:

Prepayment

Some sellers aren’t ready to make a payment before making a successful transaction. Marketplaces need to create additional value to push consumers to place ads, for example, an extensive customer base or a first free ad.

Less permanent revenue

It is difficult for companies to guess how many users will want to place products or services. Marketplaces usually charge a small fee for listing.

Companies should choose this business model if they have a massive users pool or as an additional monetization model.

Freemium Model

Freemium is a revenue model in which a marketplace has both free and premium features. It’s a good idea to create attractive options so the visitors appreciate the premium features.

Examples: Craigslist

Benefits of a Freemium Model

Freemium has undeniable advantages such as:

  • Fast Lead Generation

Most users are attracted to using free features. It’s an opportunity to engage more users from the start. However, this approach works only at the initial stage. Over time, users want exclusivity. Therefore, it is better to offer freemium options after creating a strong customer base.

Challenges of a Freemium Model

Free access from the start creates some issues for marketplaces:

Transiting to a paid plan

The biggest problem is turning free users into paid users. Not all users will be willing to pay even for a unique value, and an outflow of a certain number of users is inevitable.

Sufficient Value

The freemium model is similar to the listing fee model since they both need to offer enough value for users. This can be a fee for posting your material or promotional offers for partner resources.

Featured Listings and Ads

The featured listing and ads is a revenue model in which sellers buy advertising privileges to increase their ranking on the marketplace.

Sellers or service providers pay to be on top in a specific category.

Examples: Zillow

Benefits of a Featured Listings and Ads Model

Additional Revenue Stream

It’s a great model for companies that already have a core revenue model and want to increase their stream with reputable ads.

Challenges of a Featured Listings and Ads Model

Complex to monetize

As practice shows, people don’t tend to pay for top offers, and it would be hard to gain sufficient revenue using this model.

Users Retention

A lot of advertising scares away visitors. If your marketplace is filled with hundreds of ads, it will most likely scare away or annoy your customers.

Lead Fee Model

The lead fee model is a revenue model that allows a customer to place requests and suppliers to bid for this request.

Examples: Thumbtack

Benefits of a Lead Fee Model

Value

With this model, it is easy to get sufficient value because there are minimal risks for suppliers to burn out since they are closely connected with customers.

Challenges of a Lead Fee Model

Overreacting

The effect of overreacting can happen when the marketplace charges a heavy price and users find loopholes in how to work with customers directly. As a result, the platform receives an outflow of users and loses positions. So the main task for this model is to create affordable payment terms.

Mixed Revenue Model

Successful marketplace players prefer not to choose a single revenue model but to use a combination for more successful monetization.

Examples: Etsy, Amazon

Benefits of a Mixed Revenue Model

Multiple Revenue Sources

Earlier, we mentioned the revenue models that marketplaces use as the main ones. However, it would be nice to add one or two more models. When choosing, it’s vital to study the audience and its needs, and income. Then the choice will be easier to make.

The maximum number of models in the marketplace should not exceed three.

The advantage of a mixed system is the ability to combine several monetization models covering all audience needs.

Challenges of a Mixed Revenue Model

Saving Balance

For the marketplaces, it is necessary to establish a balance between the models. If the marketplace constantly charges only one category of users (only suppliers or customers), the platform will suffer from visitor outflow.

It is crucial to think about how to provide additional values for both parties through monetization.

Conclusion

The marketplace is a perfect platform for implementing business ideas and trying effective monetization strategies. Companies can start having revenue instantly by choosing a suitable revenue model.

It’s vital to analyze the following tips before making the final business model choice:

  • Study competitors and their business strategies
  • Learn everything about your niche and its needs
  • Find additional values of the marketplace
  • Create convenient conditions for using the platform
  • Read customers ‘ reviews and constantly improve

 

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