What is the best business model for your marketplace?

What is the best business model for your marketplace?
Choosing your right online marketplace business model is an extremely vital thing as you will not have enough opportunity to change it when a marketplace will be successfully launched. However, we do not want to scare you cause all you need is to consider the entire list of possible options and find the most suitable one for you.

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Creating a marketplace can be a great business idea since it comes with fewer risks and requires fewer resources than creating a traditional online store.

As a marketplace owner, you can benefit from transactions between others, and you don’t have to sell goods or services of your own. However, due to the rising popularity of marketplaces, your value proposition should be competitive, and it needs to perfectly correlate with the marketplace business model and monetization strategy you choose.

In this article, we will compare different online marketplace business models and provide examples of well-known marketplace projects.

What are the different types of marketplaces?

Before moving to marketplace business models and the ways to earn revenue using each of them, let’s discuss the main types of marketplaces since each of them fits a different business model because of the specifics of the target users and goods or services offered.

  • B2B. What is a B2B marketplace? This is a business-to-business online platform that allows companies to get in touch with other companies and get the goods and/or services they need at wholesale prices.
  • e-Procurement marketplace. B2B marketplaces are also often defined as e-procurement marketplaces. They are used by companies to purchase batches of goods from other businesses. Government agencies may also be involved in an e-procurement marketplace. This B2B marketplace subtype allows companies to compete for government business, for example, for the construction of a new building funded by a local government budget.
  • B2C. The business-to-consumer model is the oldest and classic type of marketplace which helps customers connect with businesses they need goods or services from. Amazon is a well-known example of a B2C marketplace, and it is perhaps the most profitable and possibly the best multi-vendor marketplace.
  • P2P. These peer-2-peer marketplaces allow people to deal with each other. For example, Etsy's business model is an example of a P2P marketplace using a mixed monetization strategy.
  • D2C. The direct-to-consumer model is a new type of marketplace that allows manufacturers of goods to get in touch with end-users. The benefits of this model are that the manufacturers can offer a better price than a reseller, plus there is no need for them to develop the website beyond a simple landing page that serves as a manufacturer’s online business card.
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Marketplace business model definition and types

A business model refers to the main way the company earns revenue. As for monetization of marketplaces below are the strategies followed by leading companies in different markets.

1. Commission model

With this business model, the marketplace earns a commission each time a customer completes a transaction. The commission is generally a fixed percentage. For example, a marketplace may charge the seller 5% for each transaction processed. This business model is suitable for B2C marketplaces, and they are usually free for buyers to use. For example, Booking, Airbnb, and Amazon charge a commission to the seller for every transaction that comes through their portal.

Pros

  • It can be the most profitable marketplace business model since you earn from each completed transaction.
  • It is also familiar to sellers, and they usually agree on commission terms in exchange for access to the trading platform and its interested shoppers.

Challenges

  • You would be in competition with leading companies globally that also use this business model and that can be quite challenging.
  • The amount of commission should be reasonable and the sellers should be able to earn with the help of your platform; otherwise, the share of buyers will be higher than the share of sellers, and the buyers will not have enough range of products and services to choose from and keep customers happy.

2. Subscription model

Offering your users a subscription to your marketplace is one more monetization strategy. This approach works well for selling services that the users may need on an ongoing basis. In this case, paying for a monthly or annual subscription is more economical than paying for the service each time they use it. For example, house swapping and house sharing marketplaces allow you to get a subscription that is money-saving for users that need to change accommodations often. This monetization strategy is used by the Couchsurfing app as well as OkCupid and other dating services.

Pros

  • A one-time payment may be more beneficial for users.
  • Your earnings are more predictable since they don’t depend on the number of transactions, but instead on the number of users.
  • Your subscription plans may be quite flexible depending on the number of features you provide or even your users. For example, some dating marketplaces are free for women, but charge men a fee.

Challenges

The main challenge of this strategy is the value proposition. You need to come up with a set of features that users are willing to pay for, and clearly explain the benefits users will get after subscribing to your marketplace. You can offer discounts or free trials to let users test the platform before subscribing.

3. Listing fee model

With this business model, users pay for the opportunity to promote their goods or services at the top of the list or search results in your marketplace. This approach is used by Zillow, a real estate marketplace. The company allows real estate agencies to pay for the best rankings on their site and become more visible to potential home buyers or tenants. This model works well in the B2B segment, and may also be a good idea for the P2P marketplace, for example, one that allows users to sell and/or share items.

Pros

  • A listing fee may be cheaper compared to a subscription model.
  • It is not difficult to attract buyers since these marketplaces are free for them.

Challenges

The value proposition is a challenge of the listing fee business model as well. Some users may be satisfied using your platform for free, so you should always look for some ways that will motivate them to pay a listing fee. In this case, value-centric content (for example, you may share success stories of users who achieved great sales levels paying for a listing fee) may work well.

Also, you need to strike a balance between the users who paid for promoted listings and fairly distribute the best places throughout the list. The revenue may also be somewhat unpredictable with this business model.

4. Freemium model

Freemium models have a lot in common with the subscription type, but in this case, you offer basic marketplace features for free or you may combine them with a commission, but advanced features will be accessible only after making a payment.

This business model is used by Craigslist. Users pay to post their ads in certain categories like real estate and car sales, and customers can browse the offerings for free.

Pros

  • This business model is quite flexible since it allows the users to test the platform before investing in paid features.
  • Attracting users to this kind of platform is rarely difficult since they can get started for free.

Challenges

The main challenge is to convert your free users into paying ones, since the functionally you provide for free may be enough for many. Thus, the freemium model needs some support to be sustainable, for example, some advanced subscription plans, listing fees, or embedded ads.

5. Pay per lead model

To explain the essence of this business model, let’s use the example of UpWork. This platform connects businesses and freelancers, but in order for freelancers to bid on projects, they have to pay a fee.

Pros

  • This business model provides value since both parties are likely more confident using an intermediary platform to connect.

Challenges

The main challenge of this business model is the marketplace leakage that happens after the successful completion of a project, the parties often continue working outside the marketplace. Thus, the pay-per-lead fee should be reasonable but not too high to avoid leakage. Plus, providing some additional security and guarantees also makes sense in this case.

6. Mixed model

With the mixed model, you can use the best features of several of the business models described above. For example, you may combine a listing fee with embedded ads, or mix a subscription with a freemium approach. Zillow offers a subscription for some groups of customers, they also have paid advertising and listing fees. Plus, this platform helps real estate owners with their own website building. The company also buys and sells houses on its own. Thus, Zillow has several significant income streams which explain its success in the digital real estate market.

Pros

  • The mixed model allows for several revenue streams.
  • You may attract different groups of customers and offer flexible terms for each.

Challenges

In this case, researching the opportunities and finding the right balance is the key challenge. When using a mixed model, you should charge both sides of the transaction; otherwise, the deals may seem unfair for those who are paying. What’s more, you should carefully relate each of the features of different business models with the specifics of your marketplace and the expectations of the different groups of potential users.

Conclusion

Marketplace development can be quite a profitable venture, however, you still have to choose the right business model and a development vendor who can provide you with technical expertise.

Getting help with both of these tasks from one company is perfect for your future marketplace since your solution will be created with your business goals and project specifics in mind.

Our team can help you with business analysis, market research, choosing the right business model and monetization strategy, and creating your solution with the help of top-notch technologies and tools. You are welcome to get in touch with us at info@archer-soft.com to discuss the idea for your future marketplace and get insights into the development process!

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