So, you have decided to build an online marketplace. You validated your idea, analyzed your marketplace demand, and got inspiration from competitors. You also have chosen your platform business model, weighing the pros and cons. Now, it’s time to select the proper monetization strategy, as it is one of the critical factors in building a successful marketplace.
This blog post covers the most commonly used monetization models to run a thriving online marketplace. We will show how the most recognizable marketplaces, such as Etsy, eBay, Airbnb, Indeed, and others, use these strategies.
We hope our advice will help you choose a suitable online marketplace revenue model.
What is the monetization model?
The monetization model is the method of how a company earns a profit. This concept closely relates to the term business model, but they are different.
The marketplace business model describes how a company delivers value to customers. It reviews the company’s products, services, target audience, and costs. Meanwhile, the monetization, or revenue, model is a method that brings company revenue on the products or services. Thus, two companies may have the same business models, but the approaches to monetization strategies may vary.
Several revenue models successfully work for different marketplaces. Each of the strategies works for particular industries and points of marketplace growth. Below we dive into the most common monetization strategies that marketplaces use. Thus, you can choose the most profitable revenue approach for your marketplace.
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Top monetization models for marketplaces
1. Commission model
Both new and existing successful platforms widely use the commission monetization model. This revenue-earning model gets a part of every transaction completed directly on the website. Another option is when the marketplace owner charges a fixed fee. The commission model is the most profitable and favorable monetization way for marketplaces.
The commission amount depends on the item sold and varies from 1% to 50% when we talk about a unique product, such as stock photography. One more thing to remember is that the commission percentage on a service is higher than on a material product.
There are three types of commission fees:
- Charging a vendor for each transaction completed on a platform;
- Charging a buyer for each successful payment;
- Charging both for each transaction on a marketplace.
The commission revenue model works at once and scales perfectly. However, you can combine several types of monetization to make your business more profitable.
Users pay a commission only after they get a value from the platform. This eliminates risks for buyers and sellers to invest a commission without revenue. For example, this is the case with other revenue models, such as listing or ads charges.
The commission model helps solve the chicken-and-egg problem by attracting sellers and buyers. Thus, the marketplace gets more conversions.
With this model, the marketplace receives a commission from each transaction. So, you win an interest whenever a seller and a buyer have a deal.
The challenge of the commission model is that a marketplace needs to provide enough user value. Otherwise, sellers and buyers will be looking for a chance to avoid transactions on the platform. In this case, they will try to connect directly without using the marketplace as an intermediary.
You can include incentives to help with this, such as invoicing, insurance, or order tracking.
When to apply
The commission model is helpful when you start a marketplace and try to win your users’ interest and trust. After you engage the critical mass, your user base will likely grow exponentially.
Meanwhile, commission might not be suitable for business models with high transaction amounts. These include online marketplaces selling cars and real estate. Also, the commission is challenging to apply to platforms that offer diverse products, sharing, or finding people. The commission model does not suit B2B and B2C platforms with the complex invoicing systems as well.
Uber, Amazon, Booking.com, eBay, Rakuten, Etsy, Airbnb, and others use this online marketplace monetization model.
For example, Airbnb charges a guest fee under 14.2% of the booking subtotal. For hosts, the commission typically makes 10% - 16%. We can see that this strategy works. Check the revenue results for Airbnb below:
2. Subscription model
A subscription, or membership, fee is a strategy when consumers pay to access the marketplace regularly. It includes monthly or yearly fees for a particular set of features. Besides, new sellers should also pay a membership fee if they want access to superior benefits.
When using a subscription fee, ensure your online marketplace provides unique value, goods or services. If you give the customers content which is not easy to find on other sites, the membership strategy will work for you. Otherwise, you may lose your potential clients.
Compared to the commission fee, a subscription model makes your revenue stream predictable. You know how much you will earn in a particular period with a membership fee.
Another advantage is that users are inclined to pay small amounts for accessing your platform. In this case, your services should be valuable for your users.
You need to balance the fee amount in the subscription model. A high price will turn off users from your platform. A low amount will mean reduced income.
Also, users are reluctant to pay a subscription fee unless they understand the value of your platform. So, users will more likely to pay to access the marketplace platform.
If you have not proved your reputation yet, discounts and free trials can be a remedy in winning your audience.
When to apply
The subscription model works best with marketplaces that offer access to a database of potential clients or partners. They include dating websites, recruiting platforms, or portals connecting people to share homes.
HomeExchange is an excellent example of using the subscription revenue model. The platform’s subscription makes $175 a year. In return, their users get help in case of canceled requests and property damage. They also give the members a 10% discount if they renew their subscription before the expiration date. This comes along with access to exclusive Facebook groups.
3. Freemium model
This online marketplace revenue model implies that you offer essential services for free. In addition, you suggest advanced or premium services for a fee.
This method aims to grow the user base with the core value of your marketplace as an introduction. Later, vendors are ready to pay to get more additional features beneficial for their business.
The freemium revenue model is an easy way to attract users by offering free features. You don’t put pressure on users as they can join your marketplace without paying. This makes users loyal to your platform. Later, more users will join your portal thanks to the network effect. And many users will attract interested sellers.
It is challenging to find a balance between free and paid services in the freemium model. You need to gain profit while keeping the churn rate low.
Therefore, paid services you suggest need to be new, attractive, and beneficial for vendors. So, they will be eager to pass from free to paid plans.
When to apply
The freemium model helps when you start a marketplace. Combining this approach with other marketplace monetization methods is helpful. You can support it with featured listings or ads if your marketplace business model allows for it.
Cratejoy is a marketplace where sellers offer subscription boxes for different interests. The platform offers an accessible Marketplace Only plan. The portal also provides the All-in-One plan for $39 per month. The paid plan adds hosted storefront and designer tools to maintain the storefront running.
4. Lead fees
When transactions occur outside the platform, a lead fee may be the right solution for you. It means that your buyers have to pay to get access to details about the potential clients or individual deals they are interested in. Thus, your marketplace leads the performer to a potential buyer.
Lead fees can help you if you build an online marketplace that offers services such as cleaning, design, music teaching, and others.
There are two main options to charge lead fees:
Collecting the fee to access each lead. In this case, you charge providers for access to the lead’s details regardless of the deal's success.
Collecting the fee for successful deals. With this option, you collect a fee if the deal is made. You will need control over the right fee collection to see how deals go through.
This revenue model offers tangible results for providers as they are connected with their prospects. Lead fees promise value to buyers when investing money, unlike with advertisements or listings.
The challenge with the lead fee model is to find a balanced price. High lead fees might discourage providers. So, they will try to build cooperation with their prospects directly outside the platform.
To avoid such risks, make your lead fee competitive and flexible. Also, you can use various techniques to prevent provider leakages, such as invoicing, insurance, and payment tools.
When to apply
The lead fee model suits best if your marketplace is contract-based or service-based. It means that your website connects service providers and their potential clients. It works fine for B2C or B2B marketplace business models as each made deal promises to grow in long customer relationships.
Indeed, a hiring platform, can serve as a perfect example of this revenue model. The platform charges from $0.10 to over $5 per click on a job posting.
Further reading: How Much Does It Cost to Build a Website Like Indeed
5. Selling fees
Selling fees are another popular revenue model among internet marketplaces. Like with the commission, you get a piece from each transaction. The difference is that you get a percentage of selling fees before the vendor receives the payment.
There are three payment selling fees strategies:
Direct payments. A customer pays directly to a seller’s account.
Collective payments. Your marketplace charges buyers' costs and sends the revenue to sellers as redemption.
Parallel payments. Your website payment settings divide a customer’s expense between a seller and the platform at the checkout phase.
You can introduce selling fees at a fixed rate as a percentage of each sale. Also, particular rates can be based on the sellers’ ranks on your platform or fees for specific product categories.
The selling fee model ensures stable revenue stream as the sales on your marketplace platform grow. The selling fees scale well, so at a rate of 5%, your profit will be $5 for $100 and $50,000 for $1,000,000.
When implementing this marketplace model, you need to consider different levels and rates. Also, your marketplace needs a broad customer base for this model to work well.
While you introduce selling fees to your platform, you can back up this approach with subscription fees or offering fee discounts.
When to apply
One of the most important things to remember is that this monetization strategy does not produce the desired result in the early stages. It works for online marketplace business models where quantity matters. So, first of all, you should gain the audience and their trust.
This revenue model is great for marketplaces with tiered membership. The monetization approach allows for setting an appropriate amount of selling fees. Also, the approach works well for large retail stores as the number of sales is substantial.
eBay charges two main types of selling fees. These are an insertion fee when a seller lists a product and a final fee when the seller sells the product. The digit of the fees depends on the item sold, its category, and format.
Annually, eBay reports its full-year revenue results. In 2022, the online marketplace delivered $10.4 billion, including selling fees.
6. Listing fees
A listing fee is an amount that a marketplace charges a seller when they publish their items.
This strategy works well for handcrafted or slow-selling goods, but it’s not suitable for all types of online platforms. Why is it so? The main reason is that online marketplaces may propose items that have never caught a buyer’s eye.
If an e-commerce website charges only a commission fee, it will not get revenue from several transactions. However, with a listing fee, an online platform can profit from slow-selling products or even goods that might never be sold.
In addition, an e-commerce website needs to be significant and recognizable and show value to buyers. In this case, vendors will be ready to pay listing fees.
The listing fee model allows for flexibility in charging users. You can set a fee for particular items or categories.
Also, providers pay per listing. As providers want higher revenue from each listing, they care to offer the best quality of each item.
Vendors pay listing fees with no guarantee that buyers will purchase their products. You need to set a low listing fee to keep vendors using your platform. So, your revenue will not be high. To get a higher profit, your marketplace needs to hold a massive user base.
In this case, you can combine listing fees with the commission to provide value to sellers and increase your marketplace revenue. Also, offering an unlimited number of listings during a trial period will keep vendors interested in your platform.
When to apply
This marketplace revenue model applies great with marketplaces selling unique items. For instance, a platform offers hand-craft products. The strategy is also common with classified or ad platforms. The marketplace business model does not imply selling products in this case. Thus, you cannot collect transaction commissions.
Listing fee model suites a marketplace with an established lead flow. Choose this strategy if your platform has a strong reputation and has formed the user base.
Also, make sure that this strategy works efficiently in your industry. If similar marketplaces do not use it, you better opt for another revenue model.
Listing fee model is a widespread revenue strategy used by two-sided e-commerce websites. For instance, Etsy is one of the most well-known marketplaces for handmade items. As of 2021, Etsy’s revenue was around $2,330 million.
Horizontal online marketplaces, including Etsy, mainly implement listings and premium listings. On the site, payments for merchants are required. They must pay listing fees for each product announced. At the same time, the company makes its fees and taxes policy transparent.
7. Featured listings
Websites selling particular types of assets, like boats, cars, and real estate, use this monetization strategy. Featured listings ensure providers’ items will be more visible to buyers on the platform. You can place featured articles on the first page of your platform.
Featured listings work as markers. They rank vendors’ offerings to the top so customers can see them without effort. Naturally, sellers start with listing fees. Later, they can upgrade to the premium option when the marketplace scale is achieved.
There are several types of featured promotions used in marketplaces:
- Promoted products listed on other pages or in different categories;
- Featured suggestions that appear in the cart and during checkout;
- Sponsored vendor profiles displayed on the main page;
- Featured blog posts or newsletters.
Featured listings are an excellent way to catch buyers’ attention. Still, they should resonate with buyers’ interests and improve their experience with your platform.
It is a flexible marketplace revenue model that allows you to place different combinations of featured items. If you run a well-known marketplace with a broad customer base, featured listing fees become a source of stable and significant profit.
You must ensure stable profit, which is tricky as free customers outnumber paid ones. That is why it is helpful to ensure that featured listings are relevant to users’ needs and promote good-quality products.
When to apply
Featured listings are a good choice for platforms with various categories of products and unique items.
This strategy works well for a well-established marketplace with a constant flow of users. Also, you should use it along with another monetization approach as support.
As an example of this revenue model, we can name TradeRV, an online marketplace for campers in Australia. It offers to feature a listing within a package for $149. Other packages offer standard or higher appearance of your listing.
Another example is the Rightmove platform. It is the leading website for selling real estate property in the United Kingdom. The premium listings are promoted for £50 per property, and the Featured property mark requires £180 per month.
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This marketplace model allows third-party advertisers to promote their products and services. It means they pay for publishing ads on your marketplace.
You can opt for other revenue streams if you have a well-thought advertising approach and a significant user base.
The ways to promote goods may vary and usually include graphics, banners, and text.
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Advertising done properly raises brand awareness and helps to increase sales. But advertisements should not be overwhelming for customers. As customers come to your platform due to particular needs, keep the value of your platform clear for them. In this case, your users will be coming back to your marketplace.
So, if you provide a personalized experience to your customers, ads can become a stable source of profit for your portal.
Consumers search for more relevant experience with brands and use technologies to bypass ads. Many ads may cause the loss of potential customers, driving buyers away from the marketplace. So, use this marketplace monetization method wisely. For this, you can include ads to your marketplace platform slowly.
Also, your marketplace advertising has to balance the needs of your buyers and sellers. A seller wants to reach out to a particular group of customers. Meanwhile, customers prefer to see personalized ads that meet their interests. It is costly and challenging to untie this knot.
Another problem is that you can’t always control the quality of third-party advertising. Thus, you can allow third-party commercial offers to occupy only certain positions on the website.
When to apply
This method is proper when you have the strong trust of users in your marketplace value. So, foreseeing a niche in your online marketplace business model is advisable. In this case, service providers or sellers will be more interested in payments for ads on your platform.
Also, it is advisable to have ads as an additional revenue stream along with another monetization model.
An example of a marketplace using ads is the Finnish wedding platform Häätori. It is free for customers. Meanwhile, the marketplace platform lets wedding service providers to buy ads. As advertisements offer wedding services, website users are more interested in them.
9. Signup fees
Signup fees are a popular marketplace monetization model. You charge users a fixed payment for access to your platform. It's simple and doesn't require complex technical solutions. Users pay from the start.
For this model to bring profit, you need to persuade providers with a specific value to join your platform if you are at the start. It will be easier for you to make the most of this model if your marketplace has both buyers and sellers on board. Also, it is helpful to find an affordable signup amount for your sellers.
It can be used for starter online marketplaces while sales volume is low. Also, this monetization model is simple to include in your marketplace from a technical point of view. Thanks to this, it is easy to develop your online marketplace revenue model and forecast your profit.
It does not scale, so it is helpful to back up this strategy with another monetization approach. One more challenge is that users are reluctant to sign up for your platform for a fee. To encourage them, you need to prove the benefits of your marketplace. Free trial periods can be another incentive for your customers.
When to apply
This model is great in the early stages of marketplace growth. To use it in the long run, combine it with another online marketplace revenue model.
The signup fee is collected by ClickBank, a global marketplace that connects vendors from over 200 countries. The platform charges a one-time activation fee of $49.95 when a vendor’s first product on ClickBank is approved.
Another example is Anytime Fitness. It is a 24/7 fitness franchise that embraces 500 clubs in Australia and 4,500 clubs worldwide. The platform charges a down payment of $80.43 and different paid plans.
Further reading: 5 Biggest Mistakes When Building a Marketplace and How to Avoid Them
10. Mixed online marketplace revenue model
It is a widespread practice for marketplaces to combine two or more monetization models. This enables the platforms to generate revenue through several resources.
Using two or more marketplace revenue models helps you grow your user base and your profit. As you support several monetization strategies, you gain stable revenue flow. Also, you can balance charging between both sides of your platforms, buyers and sellers. Thus, you keep more customers interested in your platform service.
You must build the right monetization strategy and consider all revenue streams you want to apply to your platform. For example, you can combine freemium and commission models.
When to apply
The mixed revenue method allows for flexibility in charging users and helps back up revenue flows. Thus, this approach suits growing and established online marketplaces with various business models.
Amazon successfully implemented several monetization models. The platform introduced two selling plans for $0.99 per unit sold and $39.99 per month with an unlimited number of sold items. Among other costs that sellers pay to the platform are referral, selling, and premium services fees.
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Codica’s expertise in building marketplaces
Choosing the right monetization strategy is one of the vital aspects of your marketplace’s success. Typically, it is advisable to choose it at the product discovery phase. At this stage, our analysts discover the business potential of your project. Also, Codica analysts will help you to choose the most profitable strategy depending on your specific niche.
Another essential factor is choosing the right development partner. Your marketplace will thrive with the right monetization strategy and our professional approach.
At Codica, we know that future users will help you grow your marketplace. That is why we focus on creating user-friendly solutions. For this, we apply proven technologies to develop your platform.
At all stages of development, we involve experts that tackle the needed tasks. They deliver a marketplace following your requirements and high design and tech standards.
Here is how we built the online marketplace for boats in Australia. This website is Australia’s helper in selling boats and marine equipment. The founder of the platform needed to improve business results and promote it to users and advertisers.
We enhanced the inventory management system that handles ads from Australian dealers. Also, our team introduced the function of choosing paid packages. This increased the number of ads listed by private sellers and dealers.
The platform uses featured listings to promote particular items from sellers. Also, the website shows thematic ads. As the ads promote marine vessels, the buyers are interested in them.
We care about each project and use our knowledge to bring your marketplace to success. Check our portfolio to see how we delivered this marketplace for boats and other platforms.
Every marketplace owner should pay particular attention when choosing the proper monetization strategy. It plays a crucial role in generating a profit on the platform.
Before deciding on a revenue method for your future online marketplace, we recommend following these steps:
- Analyze the market and competitors.
- Define the business model of your future online platform.
- Choose the right monetization model depending on your website niche.
In short, it is always a good idea to start with a single monetization method making it a priority. Later, as your business scales, combine other strategies to find out what marketplace revenue models fit your business.
If you have a marketplace idea in mind, contact us. We know how to make your solution stand out among competitors and bring the best experience to your users.