Let’s learn how a marketplace operates and generates revenue from its products and services.
eBay, the first company that launched a product-focused marketplace, was founded more than twenty years ago. Very soon, companies all over the world realized that a marketplace offers variety, choice, and flexibility to buyers, which substantially increased the number of websites of this type.
Marketplace is a type of an eCommerce site, where buyers can purchase goods from multiple sellers. The marketplace owner acts as a middleman, showcasing products sold by different companies on the platform and attracts buyers.
The main advantage of marketplaces for end customers is that they can compare prices for the same product from different suppliers and make a rational choice. Unlike brick and mortar stores, a marketplace can unite a hundred of sellers on a single platform.
Marketplace types
Vertical
A vertical marketplace sells products from different sellers, but of the same category.
For example, TrueFacet offers only jewelry and designer watches. The site guarantees the authenticity of all their items, which is extremely important, considering the prices. The platform gives each item a unique model id, which proves its origin and authenticity.
Horizontal
A horizontal marketplace sells products of different categories, but with a unifying feature.
Panjo.com falls into this type. It’s an enthusiast marketplace, where people sell and buy recreational products — from rare comic books to spare parts for sports cars. Panjo connects enthusiasts, hobbyists, and collectors in finding information and sharing expertise.
Another example of a horizontal marketplace is doteshopping.com. Dote offers buyers an all-in-one marketplace with famous brands like Forever 21, Topshop, and Zara, which solves the problem with downloading and installing tens of mobile apps from different retailers.
Examples of horizontal marketplaces: Etsy (gift shop) and Otto (clothes).
Global
A global marketplace sells products across all categories. An advantage of such marketplaces is in the huge variety of merchandise. At the Shoptalk conference, Bob Kupbens, eBay’s Vice President of Business-to-Consumer Selling, explained that marketplaces have self-regulation of pricing policies due to the competition among sellers.
Everyone knows online marketplaces like Amazon, AliExpress, Taobao, Flipkart, and a lot more.
Marketplace business models
Transaction fee
This model is one of the most popular ways to monetise. It’s the fairest monetization model for suppliers, as they only pay a fee if and when they sell something. The benefit for the marketplace is that it takes a cut of each transaction generated through the platform.
The challenge is to provide buyers with high-quality products or services, and guarantee suppliers a constant flow of buyers, otherwise both will find a bypass not to pay a commission to the marketplace.
Examples of marketplaces that operate on the commission-based approach: Airbnb, eBay, Fiverr, and Uber.
Subscription fee
The main advantage for sellers in this business model is that the marketplace helps attract new buyers. In turn, buyers get access to a limited resource for a considerable fee. This approach will work if the value proposition is very strong to entice consumers to pay a subscription in order to buy a product or service.
A weak point of this business model is gaining and retaining customers. You may need several email funnels or lots of advertising on social networks to convey the value of the marketplace to customers and encourage them to get a subscription.
Examples of C2C marketplaces that work on subscriptions are Love Home Swap, a home switch site, and OkCupid and Tinder, dating sites. Resources like these usually identify customer preferences to offer personalized services, thus justifying the subscription fee.
As for B2C segmentation, the subscription-based model is frequently used on hiring resources. For example, StackOverflow Careers set a fee for companies to access the candidate base. Studiotime is an online community to search and rent music studios, which is another example of a niche, where this model can work.
Listing fee
This business model is similar to the way paid advertising work—a marketplace also provides sellers with an audience and guarantees views for their listings. A listing fee is beneficial for both the marketplace and the seller—the marketplace gets profit from the cost of listings, and the seller profits from the quantity of listings submitted to the site.
Lead fee
Lead fee is the model in between listing and commission fee. In this model, customers will post a request, interested providers will pay to bid for that request. This model is more profitable for providers, as they pay only when they connect with the potential customer.
The lead fee model only works its best when the probability of getting new customers is high for sellers. This model is rarely found in the C2C segmentation, it is more often used on B2C and B2B sites. Providers primarily rely on the fact that one request can result in a long-term cooperation.
Examples: YouDo, GetBlogger
Freemium
A Dutch startup Peerby is a good example of marketplace monetization, where people can borrow household items or lend them to others. The core service on the marketplace is offered for free, however, users can upgrade to premium accounts.
Peerby offers two main paid-for services through its platform. First, owners can ask an insurance on items they lend through the site. Second, a new owner can order delivery of an item instead of picking it up from the previous owner.
The challenge of this model is to ensure that premium features are really valuable. If only one percent of all the users have premium accounts, and the rest users get by with the free version, you need to change something in the business model.
Featured listings and ads
All advertising on the site is free, providers pay in order to get more visibility for their listings. For example, providers pay to have their listings featured on the main page or at top of page.
In order to make this model work profitably, a high traffic to site is of utmost importance, which is the main challenge of this monetization model. Moreover, users may get annoyed by the ads.
All business models based on paid ads work best in narrow niches, where sellers are able to personalise their content.
An example here would be Häätori, a Finnish service, where users sell pre-owned wedding dresses. It has the following working business model: individuals can list their dresses on the site for free, but professionals who want to advertise their services (from photography to wedding planning) need to pay. The advertising content co-mingles with user-created content and does not cause irritation.
A marketplace normally combines the main model with additional ones. For example, Etsy operates on the commission-based model and also requires payment for normal listings, featured listings and ads. On Avito, users pay an additional fee for featured listings, ads and creation of a micro-store within the marketplace.
What you need to know to open a marketplace
- It would be sensible to launch a marketplace for a niche with no similar services.
- To start off, find a reliable development company that wouldn’t just develop a site, but would also become your partner to help you along all stages from business consulting to project launch.
- You may want to change the marketplace niche, audience, and even the platform. It’s normal.
- The platform must be both reliable and scalable. A good example is Multi-Vendor platform.
- Try Agile—development in iterations usually allows to complete routine tasks faster.