How do online marketplaces generate profit?
No one likes to work on startups that do not have a clear profit source. And nowadays online marketplaces are booming like never before. Everyone wants to build a marketplace around a unique or doing well niche in the market. Though many are confused or having very little understanding of ways through which online marketplaces generate profits!!
Well, An online marketplace is a portal that facilitates exchange of product or services from various sources. The best part of these marketplaces is that the operator need not own any inventory. The marketplace business facilitate other people’s inventory to a user while providing a safe and easy way of transaction.
eBay, Uber, Amazon, olx are some of the well known online marketplaces. Though they dwell in various categories. To help you understand, here we have made a quick category guidelines:
Types of Online Marketplaces
Product Marketplace (To buy and sell products)
Examples: Amazon, eBay, Alibaba, flipkart
Service Marketplace (To search and provide services)
Examples: Uber, zocdoc, Taskrabbit
Project Marketplace (Where people arrange fundraising for startup projects and donate or provide fund to them)
Example : Fundable, Kickstarter, indiegogo
Hybrid Marketplace (Where people buy or sell products and services both)
Example: olx, oodle, Craiglists
How do marketplaces generate profit?
If you have ever thought of making your marketplace, you probably wondered how all these market giants generate revenue!!
The answer is simple − they use the right marketplace business models that align with their mission, vision, and business plan.
Emerging companies can pick the one that will perfectly suit their needs to start their success journey. Alternatively, they can employ a mix of several models. Thus, they can have more ways to generate revenue.
Without profit, online marketplaces wouldn’t be able to evolve into more proficient businesses that reach excellence in their services. Hence to help you decide, here we have listed below are six models of how marketplaces generate profit:
- Membership fee
This business model sets up your online marketplace so that each merchant or customer pays a membership fee to sell or buy on the online marketplace. Using this business model ensures that you get a consistent amount of revenue monthly.
Typical examples of such models are the dating and matrimonial sites. They give you a platform to interact with people on a monthly subscription basis. A similar example is the housing exchange sites.
But the problem with this model is that you may get stuck in a vicious circle; no visitors, suppliers won’t pay for placing on the marketplace. So, you can offer good discount offers to the first participants or completely abandon the fees. Matrimonial sites have been offering such things during the COVID 19 lockdown phase.
2. Listing fee
Charging a fee for each advertisement. By using this business model your online marketplace will charge merchants a fee for listing their goods or service on your online marketplace.
The listing fee could be based on a flat-rate amount or a percentage of the value of the good or service, and it’s typically used when there’s value in how many listings a merchant has posted on the online marketplace.
A listing fee is better than a membership fee in cases where providers don’t want a continuous subscription, and only want to sell certain items. The challenge with the listing fee model is that it doesn’t guarantee value for providers, and thus the fee cannot be too high.
3. Commission Model
This is the most common type of online marketplace business model and means that you will earn a commission from every transaction that takes place on your online marketplace.
It’s an ideal business model because you’re guaranteed to earn revenue from each transaction and it builds trust within merchants and customers because they know that facilitating successful transactions is important to you. After all, you have a stake invested in it.
The biggest benefit of this revenue model is that providers are not charged anything before they get some value from the marketplace. This is attractive to the providers. The best-known marketplace platforms — like Airbnb, Etsy, eBay, Fiverr, TaskRabbit, and Uber — all use commissions as their main business model.
The biggest challenge in getting the commission model to work is to provide enough value for both the customer and the provider. Another problem is the pricing. How big should be the commission? You can try first having a lower commission to get people to join your platform and raise it later on.
However, there are some situations in which the commission method may not be the best. Such as:
· Marketplaces where people share something for free like dating, no monetary transaction involved, and thus no way to charge a commission.
· When the size of the typical transaction is huge. With car or real estate sales, for instance, it’s difficult for the marketplace to justify the commission.
4. Customer contact fee
Customer contact (lead fee) fees are somewhere between the listing fee and the commission models. In a typical lead fee model, customers post requests on the site, and providers pay to make a bid for these customers.
The model gives a better value proposition than the listing fee model: you only pay when you are put in touch with a potential customer. This option doesn’t always guarantee a successful deal. But compared to the placement of ads, the likelihood of positive response is much higher.
A recent well-performing example of this model is Thumbtack, a B2C marketplace for all kinds of local professional services, from plumbers to guitar teachers.
5. Freemium
The logic behind the freemium model is that the core offering is free, but after you get your users hooked, you offer paid value-adding features. You can use the basic version of service but the advanced version is available only for the VIP clients who pay a good amount.
Once a customer is hooked enough, they will transfer to the paid versions. Many OTT platforms use this model like Disney +hotstar. The advantage of the freemium model is that it is much easier to attract an audience to a free marketplace.
Also, users are more willing to pay for additional services if they can first evaluate the capabilities of the basic offer. However, to convince consumers to take advantage of paid features, you need to make them useful. If only 1% of all users are interested in a premium offer, and the rest use the site for free, the model will not work effectively.
6. Featured Listing & Ads
When using this business model, merchants can often list their goods or services for free on an online marketplace but to promote their listing to a viable audience, a fee must be paid.
This ensures merchants use the marketplace but the online marketplace can still earn revenue from merchants who are eager to sell their goods or services.
This marketplace business model is relatively close to pure advertising models — ones where you show ads (such as Google AdSense) to your users. Featured listings and ads are both popular revenue streams for classified ad sites.
Any Combination of These Models: Oftentimes, these business models are combined to create more favorable conditions for merchants to sell their products and for online marketplaces to earn consistent revenue.
So, it becomes very important that you balance the need of customers and sellers and at the same time, while generating a good profit for yourselves you need to ensure enough revenue to efficiently run the site.
Hashstudioz, having experienced with various marketplace projects knows its ins and outs and is here to help all the startup minds in reaping the maximum potential.
So, if you are having any requirements feel free to contact us.You may also check our dedicated Service marketplace page to explore its various modules and revenue model.
