Marketplace businesses are tricky, but only if they are not handled properly. Those who have successfully solved the chicken and egg problem and found the product market fit, are making billions of dollars. On the flip side, there are those who have worked on various marketplace business ideas, but still, they haven’t figured out how to implement the perfect marketplace business model.
In the previous article, we had discussed two sided marketplace and its examples. We had also seen what goes into starting a successful marketplace business.
In this article, we are going to dive deeper into the business model of marketplace businesses. But before that, let’s clear out some misconceptions around online marketplaces.
Some people believe that online marketplace and aggregator business models work on the same principles. However, there is a fine line between these two. Let’s first clear out those and then move forward to understand the business model of the online marketplace.
What Is the Difference Between an Online Marketplace and an Aggregator?
|It allows multiple vendors to sell different products on the same platform. It acts as the bridge which connects vendors to sellers.||It unites multiple unorganized services/businesses on the huge platform under one brand name.|
|Vendors and sellers have their own brand image and sell on their brand name.||Service providers sell under the company’s brand name.|
|I.e Amazon. Sellers registered in Amazon sell their products under their brand name.||I.e Uber. Registered taxi owners agree to work under the one brand name Uber.|
|Quality differs in the online marketplace as there are various sellers selling their own products.||Quality remains the same as vendors have to follow strict guidelines of the company|
|Prices are determined by the sellers, not the marketplace owner. Hence, the same product could be sold at a cheaper price by the other seller.||Prices are decided initially when the platform owner and service provider discuss the contract.|
|Brands and marketplace both have their reputation.||Service provider users Aggregator’s brand name for better business.|
|Examples: Amazon, eBay, Airbnb, Upwork, TripAdvisor, Postmates||Examples: Uber, Instacart, Google|
What Are the Types of Marketplace Business Model?
Online marketplaces are on the boom and they all work on different business models. You can’t compare Amazon’s business model with the upwork’s or Airbnb’s business models. Their target market and niche both are different. Also, we have seen a surge in sharing economy marketplaces (peer-to-peer marketplaces) like Airbnb, Uber, Turo, TaskRabbit, and many more.
Many startups hurriedly decide on their business model and end up selecting a model that doesn’t scale with the business. Which as a startup, you should avoid at any cost. If you look closer to the successful marketplaces like Amazon, eBay, you would see how sustainable their business models are. The amount of influence their products and services have on their users is something to study. With their services, they have infused a concrete trust in their customers that they automatically recommend other users to use these platforms. And that creates a network effect. You would want to build that kind of trust that no competitor can think of coming close to you.
We have listed the popular six online marketplace business models. It’s more of a monetization strategy for marketplace businesses. Study them and understand which could be perfect for your marketplace startup.
While booking for a hotel on Airbnb, you might have noticed the service fees charged on the original tariff. Well, these fees are charged as a commission by Airbnb for using their platform to book a particular villa or apartment. Airbnb also charges hosts certain percentages of commission for letting them register on the marketplace.
In the commission-based marketplace business strategy, you can charge a certain amount of transaction fee to either buyer or seller. Depending on your idea of the marketplace, you can charge a certain percentage or a flat fee to your customers and/or service providers/vendors. This revenue model is beneficial for providers as they are charged only when a successful transaction happens.
For startup owners, this model is lucrative as well as challenging. Reason? You have to provide enough value to both sides of the marketplace. If users and vendors don’t find that value from your platform, they are most certainly going to find an alternative to your platform.
Deciding on the commission rates is also the common problem most marketplace startups face at the initial level. As long as your business is not known among your customers and vendors, you can set a low commission rate. Once it gets enough traction and you feel that there is word of mouth playing its role, you can then increase the previous rate.
Popular Commission Based Marketplaces Based Business Model
Taskrabbit- 15% commission taken from customers
eBay- 1.5-12% commission taken from sellers on each sale
UpWork- Takes a 20,10, 5% fee from the freelancers/contractors depending on the amount they have billed
Etsy: Charges 5% on every sale for letting sellers selling their craft items on their platform
2) Listing Fee
Apart from charging a transaction fee, you can also take a listing fee from the vendors. Renowned marketplaces like Etsy and eBay impose a listing fee on their vendors. In this monetization model, sellers have to pay decided fees for uploading new items to the marketplace. One thing you must keep in mind while considering this model is that you have to have a significant size of your marketplace.
One of the plus points of having a listing fee model for revenue generation is that you can expect good quality and useful products on your marketplace. Also, spammers would think twice about uploading an unworthy product as they will have to pay for it.
However, a downside of the listing fee model is that not every seller would be ready to pay for every product they list on your platform. So, as a platform owner, it might be a little hard to promote and convince sellers to register on your platform.
3) Premium Listing
Have you ever landed on a search results link labeled with “ad” before it on Google? Well, these are basically premium listings of google. Google lists these promoted links on the top of search results. As soon as any visitor clicks on these links, the publisher gets a visitor on his website and Google gets a certain amount of money.on that click.
Many marketplaces promote their vendors’ products on their platform, but for that, they charge a decided amount of fee. These listings are labeled as promoted or premium listings on the marketplace.
Another example of a premium listing model is “Yellow Pages”. It allows businesses to list their profile in a nice way without paying any fees, but they will have to pay to yellow pages if they want an appealing profile. They provide you with the badges of trust as well as higher ranking.
In short, the premium listing model is suitable for the marketplace that doesn’t facilitate online transactions. Just as the listing fee model, you can charge more to the businesses as your marketplace scales.
4) Variable commission and Listing fees
Instead of setting a fixed commission rate or listing fees to vendors for businesses, you can also implement a variable commotion and listing fee model. The deal is simple. Those who are ready to pay you more commission or a listing fee will get a greater chance of getting exposure; they will be listed above than the rest of the businesses who have paid less. For that, you can set a range of commission rates(15-20%). Some sellers would stick to a 15% commission rate while some want more exposure and could pay you 20%. Usually, marketplaces that implement variable commission strategy also put efforts into the marketing of the businesses that have paid a higher commission.
Google was the early adopter of the variable commission model. It allows the advertiser publisher to bid for their ‘keywords”. The one who bids more has more chance of getting to the top of the search result. However, the ranking of that website does not only depend on the bid, it also relies on the quality score of the website. If a website’s performance is not that great they will have to pay more to rank higher.
5) SaaS/Subscription-based Model
You would find many SaaS-based marketplaces on the internet and honestly, this model has become more popular in recent times.
Udemy is a popular learning platform that implements a Subscription-based marketplace business model and connects students and learners to the instructors. Instructors can sell their online courses on the Udemy and learners can purchase courses from instructors. Udemy gets a chunk of the total fee a student has paid to the instructor.
Now Udemy also sells a subscription to the enterprises. The employees of these enterprises are the end-user of their business model. Enterprises purchase subscriptions for their employees so that they can learn new skills and important business lessons from the leading instructors.
6) Charge only Demand Side
Unlike most of the marketplace which impose commission fees on the supply side, this type of monetization model prefers to take a commission from the demand side.
Take an example of Care.com, a leading personal care service provider, they charge on the demand side. I.e parents. And it makes sense to consider your monetization strategy considering the side which has more money.
Takeaway.com is yet another example that charges an extra fee to its users for online payments.
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Choosing a suitable business model for your marketplace business idea is a vital decision, and you might not want to take that in a hurry. Study the above-mentioned marketplace business plan strategies and then start building the platform and mobile apps.
As a leading web and mobile app development company, we have successfully handled multiple marketplace related projects. If you think you have a unique idea that solves the problems of supply-side and demand-side problems, we can be a trustworthy development partner of yours. Also don’t worry about your idea, as we sign NDA(non-disclosure agreement) before commencing any project. Let’s talk.