Choosing The Right Business Model

In the last article, we discussed how most entrepreneurs jump the gun and fail to generate a viable marketplace idea. Once you have the marketplace idea, the next step is to decide on a business model. In a competitive landscape, sustainability becomes the biggest challenge for a growing marketplace. Often businesses fail to develop a good revenue model and fail in a few months from launch.

If you don’t drive your business, you will be driven out of business

B.C. Forbes

Here are a few business models that most online marketplaces use:

Commission Fee

This is the most common business model for any marketplace. Since a marketplace is a two-sided market that facilitates transactions between a seller and a buyer, it charges either a percentage or a flat fee from the sellers for each transaction that takes place on the marketplace. This business model is favorable for the sellers or providers as they pay only for every successful transaction on the platform.

There are no fees for listing their products or services on the platform and thus encouraging more sellers to use the platform. The more sellers on the marketplace, the more choices every customer of the marketplace is offered. This eventually increases the users on the platform. Remember, the chicken-and-egg problem.

Although this is the most effective business model for most marketplaces, it cannot be justified for all marketplaces. Following are some exceptions:

Where money is not involved- dating sites like Tinder, OkCupid, etc.
Where the size of the offering is quite large, but efforts on the marketplace are minimum- sites that collaborate real estate agents or automobile dealers.
Where the nature of the offering is complex and is based on long term relationships – sites that aggregate insurance brokers where customers initially come for advice and then end up buying from the broker offline.
Where the invoicing process is quite complex for the marketplace- B2B transactions that involve negotiations and service bundling.

Subscription / Membership Fee:

This business model is most effective when you want to create a dedicated user base. In this business model, you charge a recurring fee from your participants, mostly customers, to access different levels of the marketplace. This model helps marketplaces that provide services or products which cannot be quantified using money.

Subscription for the marketplace increases commitment from the customers. This is a valuable proposition to get sellers onboard the marketplace. But how does one get customers to pay? This business model has problem of adopters who are ready to pay to access.

You could encourage users to use the subscription fees by offering discounts. Zomato Gold offered great discounts in India to increase its customer base. Once people realize the value of the offering and enough customer base is built for organic growth, the discounts can be taken off.

Offering trials is another way of encouraging people to use the service. Once people get hooked on to the product offerings, you could charge subscription fees for further usage. The period of trial depends on the value offerings of the marketplace.

Listing Fee:

In this business model, sellers and service providers are charged for listing their products and features on the marketplace. This business model is effective in charging sellers and service providers when non-monetary transactions are listed. Marketplaces that deal in sharing information usually charge such fees. Online classifieds are a food example. Listing prices are a good way of quality control for the marketplaces, as most sellers would not spend money to list their long tail or low-quality products.

Marketplaces operation on such a business model, usually faces the following challenges:

Committing Site Traffic: The only reason why sellers would pay to list their products, is if there are enough customers on the marketplace.
Committing Value: Since paying a list fee does not guarantee sales, it is difficult to convey the value of the marketplace to the sellers.

A premium offering in listing fee is the featured listing. It is a combination of listing fee and marketing efforts of the seller. Here the seller pays a premium to have their listings featured at top of the search page to have more visibility.

Lead Fee

This business model is somewhere between listing and commission model. In this revenue model, customers post request on the marketplace and service providers pay a lead fee to bid for the customer. Such a business model is effective when the value of a lead is high. Service Marketplaces like Thumbtack work on such revenue models.

The issue with such a business model is that relationships are formed out side the platform and after some time, customers won’t need the platform to get in touch with service providers.

Freemium

Some marketplaces create differentiated offering packages using the Freemium model. Freemium is a combination of ‘Free’ and ‘Premium’. In this model, you give your marketplace for free use and offer additional services for a fee. Amazon Prime is a good example of such marketplace.

The challenges of such a marketplace are

Deciding how much can be offered for free to customers. If this is too less, it would not be enough to attract customers on the marketplace. If this is too much, it would not encourage customers to try the premium package
The value-add of the additional offerings should be worth the premium paid for.

Advertisements

Ads are additional sources of revenue for your existing business model. To have ads featured on your marketplace, you will have to commit high site traffic to offer value. Also, it is not possible to overplay ads on your marketplace as customers find it annoying beyond a point and can increase bounce rates.

Although the safest approach is to understand which business model works best for your business and sticking to it, there is no rigid rule to that. Most experts would advise entrepreneurs to do a thorough understanding of the industry and competitor models and try out different models. Marketplaces could also combine two different business models and consider differentiated pricing. Entrepreneurs could also use different business models for different participants; you could charge list fees to seller and freemium to customers. All that is important is a good understanding of how the models would affect your marketplace.

Do you have a great marketplace idea but unable to decide on the revenue model?

Check out Yelo, the perfect online marketplace platform, and discover the easiest way to build you own online marketplace within minutes. With features like pricing control, create a powerful online marketplace on Yelo. Now you can choose and experiment with different business models without any technical hassles. Yelo also enables you to automate your commission for every transaction so that you don’t have to worry about following up with the sellers after every transaction.