How Do Online Marketplaces Make Money?

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In the modern world of eCommerce, competition is tough. You have to make a name for yourself and make sure that people think about you whenever they need something new or different in your niche market. It can be difficult to stay at the top of your game with so many opponents, working hard to woo customers away from one another. But even small marketplaces are places where successful businesses can ride into profit if done well.

Today we’re going to talk about how Marketplaces themselves are structured these days, especially after the meteoric rise of e-commerce in recent years. We will discuss the History of Ecommerce, how it came to be what it is now, as well as who are some major Marketplace players today along with their respective planks for success under them.

1. Commission

With the commission model, a marketplace typically gets money from each transaction it processes on the platform. They can choose to charge either the seller, the buyer, or both, collecting either a percentage from each deal or a flat fee. The commission model is one of the most widespread models. It’s mostly used by-product marketplaces and rarely by service marketplaces.

Advantage: Attractive to visitors

As vendors are not charged before getting any value from the marketplace, they don’t have to worry about investing their money without getting anything back in return (as is the case with ads or listing fees). This makes commission-based marketplaces an appealing solution for both sellers and buyers, which can contribute to the increasing flow of members over time.

Advantage: Profit with each transaction

When you use this platform, you get a cut from every transaction passed through the network. The more transactions that take place, the higher your overall revenue increases.

Challenge: Users may avoid commission

The challenge is to provide enough value to consumers. If you don’t, customers might find a way around your platform and buy directly from vendors (i.e. cutting out the middle-man). Adding value-added services such as invoicing, tracking, and insurance could help retain those customers and ensure they stick around through the website or mobile app.

When to use the commission model

There are different ways to make your platform popular. The commission model is one way that makes sense for many platforms when they're just starting since it seems fair and convinces consumers that each party involved in the transaction is being treated fairly.

However, sometimes charging a commission doesn't work, especially if the amounts are large for example when you're performing transactions in real estate.

Example

When choosing how to monetize your marketplace or app, consider the commission model to start with. The commission model means that the business takes a cut of each transaction for providing transaction services. Like other prominent marketplaces such as Amazon, eBay, and Etsy use the commission model for revenue. Uber uses a dynamic pricing monetization model.

2. Subscriptions

A subscription model means that a marketplace charges users a recurring fee in exchange for access to the platform. Selling or buying is optional - any of these activities might become necessary or irrelevant. Different subscriptions can offer variable fees with names like basic/prime/premium, bronze/silver/gold, etc. The goal is to attract vendors and buyers willing to pay more than others.

Advantage: Predictable profit

Similar to having seasonal themed cuisine, subscription-based financial models are great for making steady income. However, consider the right balance of monthly prices because customers expect their favourite restaurants to stay open during the off-season.

Challenge: Proving value

Users might have a hard time adopting your marketplace when it first launches if they're not convinced of the value they can get. To reap the benefits from this model, potential purchasers in your marketplace should already be convinced of its reputation. If you want to convince more users to join sooner, consider offering heavy discounts for early adopters or even letting them test out the platform for free until it develops a solid reputation on its own.

When to use subscriptions 

This method works effectively in scenarios in which the margins are small or large, or in case a customer is involved in several transactions.

Examples 

Dating, recruiting, and home-swapping sites typically charge a monthly membership fee.

3. Lead fees 

A lead fee refers to the way acquiring leads is structured. For example, sellers might pay for every buyer who contacts them or simply like any client that purchases their products or services. There are different types of fees that businesses charge for leads. Here are some examples: paying for each lead sent to your business, paying only when the lead converts into an actual sale/buyer or charging a flat rate per year for leads sent directly to your email address every week.

Advantage: High value

This revenue model gives deals with tangible value to users since deals are held between suppliers and buyers who are interested in closing deals. With a lead fee, there’s less of a risk that you will waste money on ads rather than investing it in deals.

Challenge: Setting the price

Marketplace users might want to find ways of directly connecting with customers, especially if the fee is high. Its competitive and dynamic prices might help in this case as well as adequate audit policies.

When to use lead fees

If you're running a contract-based or service-based marketplace, the fee per lead may work best for you. Lead management is often used in B2C or B2B service platforms, where multiple deals can be built with long-lasting relationships from each “lead” that you acquire through your network.

Example 

Thumbtack, an online marketplace that connects local professionals with consumers for services like painting or cleaning out gutters, charges lead fees. Calculating pricing for individual services is complicated due to so many factors so the commission model isn't the right route for this company.

4. Listing fees 

This Monetization Model means making money off of the listings that get posted onto your website registry.

However, you don’t need to get money every single time a new listing is added by one of your site’s vendors. Some categories can be free while others paid and so on.

Just like commission fees, some listing fees can also be a flat rate while others might be figured based on some kind of percentage of value for every item or service on your site.

Advantage: Flexibility 

Being clear and straightforward, this monetization model is perfect for marketplaces. You can charge for specific products or categories of sellers. At the same time, your revenue is not solely dependent on sellers’ profitability.

Challenge: Moderate revenue

The listing fee model is an effective way to ensure the value of marketplace users, but cannot promote too high because it will discourage consumers from using the service or product. Listing fees can then be used to supplement any other monetization model, for example by consumer commission. 

When to use listing fees

Listing fees are a common business model for online marketplaces. If your product involves a high number of leads who make independent decisions, then this pricing scheme might not be the best option because lead-based businesses should have more control over their leads.

Example 

Craigslist is an online platform that provides users with their own set of benefits upon using this website. Although the company itself is free to use, there is emplacement(s) where it requires payment for one to obtain better or more superior services compared to the ones that are offered for free.

5. Featured listings and ads

Answering the question of how online marketplaces make money is simple. It’s all about exposure. Featured listings and advertisements are ways for providers to ensure they bring more traffic to their offerings.

If you want to give your products and services exposure, you can feature vendors on your main page and include sponsored products on other product pages.

Advantage: Profitability 

When you're doing business within a highly competitive marketplace and your platform is well-known and popular, you can make big profits by recruiting people for paid advertisements and product listings.

Challenge: Advertising attitudes

As customers increasingly distrust advertisements, it’s more difficult to sell a product or service to them. Customers prefer featured listings and ads that are of good quality and not too intrusive. If you have a low-quality product, then it’s best not to promote it because you risk harming your customer experience.

When to use featured listings and ads

Featured listings and ads can be a valuable monetization tool in your arsenal, but only if you have already presented a valuable service to the community.

Example 

Newegg, an online retailer of items including computer hardware and consumer electronics, places numerous ads on their landing page. 

6. Freemium 

This model goes by several different names with most widely known as the "freemium" model. The crux of this business strategy is that you provide a "free" service to all users with optional paid upgrades that provide additional advantages and capabilities (the "premium" service).

The logic behind the freemium model is that after your users are initially hooked on your basic services, many agree to pay for the premium package as they see the value in it.

Advantage: Highly attractive

The key advantage of the freemium model is that you attract a higher number of interested parties in a shorter amount of time, which means more people will visit your platform than they would if you charged for membership.

Challenge: Providing enough value.

Your paid services need to provide enough value to be alluring to a significant portion of your users. If very few are interested in what you’re offering, you won’t have a strong business model. Letting people choose from free delivery alternatives and allowing them to pick up in-store can be a great way to help make products more attractive for potential buyers.

When to use the freemium model

The premium model is a good choice if you've just started your marketplace. This model can supplement other models like featured listings and advertising.

Example

Peerby is a Dutch company that operates sharing services. Their free offering allows users to share any object, but for those who want the added assurance of insurance or reliability of delivery, there are two pay-to-use packages available.

Conclusion 

Picking out the best marketplace monetization model requires you to look at all of your choices. Finding the right fit for your company involves strategic decisions regarding which model will benefit you, your customers, and your sellers in the long run. Balancing these needs is crucial to overall market survival. The most successful companies are open to trying new approaches that might alter their approach over time.

The wisest move is to always be willing to bend with the wind rather than stick stubbornly with one strategy that no longer works for you no matter how strongly it has performed in the past - because change happens whether we like it or not.

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