So, you have decided to build an online marketplace. You have chosen your platform business model, weighing the pros and cons. Now, it’s time to choose the proper monetization strategy, as it is one of the key factors in building a profitable and scalable platform.
In this blog post, we cover the most commonly used monetization models to run a successful online marketplace. We will show how the most recognizable marketplaces, such as Etsy, eBay, Airbnb, Upwork, and others, successfully implement these strategies.
We also hope that our advice will help you choose the right revenue model for your platform.
The commission monetization model is widely used by both new and existing successful platforms. This revenue earning model gets a part of each payment completed directly on the website, thus becoming the most profitable and favourable monetization way.
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 a commission percentage on services is higher than the one on material products.
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 main advantage of the commission monetization model is that it works at once and scales perfectly. However, you can successfully combine several types of monetization strategies to make your business more profitable.
Example: eBay, Etsy, Airbnb, Uber, Booking.com, Rakuten, and others primarily use this online marketplace monetization model. And we can see that it works:
Selling fees is another popular monetization model among internet marketplaces. Like with the commission, you get a piece from each transaction. The difference is that with selling fees you get a percentage 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 with payments and then sends the revenue to sellers as redemption.
- Parallel payments. Your website payment settings divide a customer’s payment between a seller and the platform at the checkout phase.
One of the most important things to remember is that this monetization strategy does not bring you the desired result in the early stages. It works in large retail on websites where quantity matters. So, first of all, you should gain the audience and their trust.
Example: eBay charges two main types of selling fees. These are an insertion fee and a final fee. The digit of the fees depends on the item sold, its category and format, etc.
Annually, eBay reports their full-year revenue results. In 2018, the online marketplace delivered $10.7 billion, including selling fees.
Related reading: Top 5 Online Marketplaces: All You Need to Know About Leaders
Listing fees and premium listings
A listing fee is an amount sum that a marketplace charges a seller when they publish their items.
Listing fees is a widespread revenue strategy used by two-sided e-commerce websites. For instance, Etsy, one of the most well-known marketplaces for selling handmade items. On their site, you have to pay listing fees for each product announced.
This strategy works well for handcrafted or slow-selling goods but it’s not suitable for all the types of online platforms. Why is it so? The main reason is that marketplaces may propose items that have never caught a buyer’s eye. If an e-commerce website charges only a commission fee, it would not get revenue from a number of transactions. However, with listing fees, an online platform can gain profit from slow-selling products or even from goods that might never be sold.
In addition, an e-commerce website needs to be large and recognizable. In this case, consumers will be ready to pay listing fees.
Premium listings work as markers. They rank vendors’ offerings to the top so that the customers could see them with no effort. Naturally, sellers start with listing fees. Later, they can upgrade to the premium option, when the marketplace scale is achieved.
Example: Listings and premium listings are mostly implemented by horizontal online marketplaces, including Etsy.
Etsy makes their fees and taxes policy transparent.
A subscription or a membership fee is a strategy, where some or all consumers are charged to get access to the marketplace. It includes monthly or yearly fees for a certain set of features. Besides, if new sellers want to get access to superior benefits, they should pay a membership fee, too.
This monetization method is not widely used, however, it occurs. When using a subscription fee, make sure that your online marketplace provides unique goods or services. If you give the customers content which is not easy to find on other sites, this strategy will work for you. Otherwise, you may lose your potential clients.
So, we highly recommend you to integrate this monetization model when your online marketplace has reached the winning audience.
Example: eBay is a great sample of the subscription revenue model.
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This business model allows third-party advertisers to promote their products and services. It means they pay for publishing ads on your marketplace.
The ways to promote goods may vary and usually include graphics and banners, text and mixed advertising. However, take into consideration the fact that ads can be annoying for your visitors. So, use this monetization method wisely. Allow third-party commercial offers to occupy only certain positions on the website.
Also, you can’t always control the quality of third-party advertising. And last but not least: it may cause the loss of potential customers, as ads drive buyers away from the marketplace.
In addition to that, applying this monetization strategy to e-commerce websites with low traffic will bring a little revenue.
Example: Facebook, Twitter, and LinkedIn are social platforms that benefit from using advertising business model only.
Facebook reported the full-year 2018 financial results, showing that the advertising revenue model works.
When transactions take place outside the platform, lead fees may be the right solution for you. It means that your buyers have to pay to get access for detailed information about the item they are interested in. Thus, your marketplace leads the performer to a potential buyer.
Lead fees can help you if you are going to build an online marketplace which offers non-standard goods or services, including cleaning, design service, music teaching, dating sites, and others.
One important thing to remember is that providers and customers might work building their cooperation outside the website. So, implement various techniques to prevent this, such as invoicing, payment tools, etc.
Example: Upwork can serve a perfect sample. For example, a service provider pays to apply to a potential project.
You should pay special attention when choosing the proper monetization strategy as it plays a crucial role in generating a profit on the platform.
Before deciding on a revenue method of your future online marketplace, we recommend following these steps:
- Analyze the market and competitors.
- Define the business model of your future online platform.
- Take into account the location, culture, and habits of your target audience.
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 revenue models fit your business the most perfect way.
Further reading: How UX Design Solves Online Marketplace Issues