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What are the different types of revenue models in the online marketplace?

By Kruthika Vadhera 19th January 2021

When you think of starting a business, there are three basic types of online marketplace platform models that you will fall in.

  • The Service Provider Model
  • The Outright Seller Model
  • Marketplace for service providers or sellers and buyers

If you are a service provider, revenues are significant, but all the hard work is yours. Similarly, if you are an outright seller of goods, the production part is on your shoulders. However, a marketplace model explores an entirely different way of generating revenue. Here, you are just a medium for sellers and buyers to connect. 

As this above tweet indicates, an online marketplace is among the top startup ideas on the entrepreneur’s checklist. According to Statista, Uber stands to be the best online marketplace platform with a market cap of $63.9 billion. At the same time, Mercado Libre from Argentina ranks second with a $53.8 billion market cap.

These are some staggering numbers for anyone wanting to begin their online marketplace business. If you wonder how these marketplace giants earn and what is the best revenue model for your business, then here are some options to choose from.

1. Commission Based Model

One of the most common revenue models in the online marketplace is the commission-based approach. Here, the platform receives a commission from each sale conducted on the market. The online marketplace platform is a facilitator of the trade between a seller and buyer. If you choose this revenue model, the most vital part will be to determine the commission percentage. 

Image Source: www.uber.com/in/en/. The commission percentage depends on the kind of business or niche. For example, a service provider like Uber may charge around 20 to 30% of sales, and at the same time, a stock photography online marketplace platform may charge 50%.

It is observed that most services are charged lower than physical products. But, then there are customized commission charges for every online marketplace. For example, Amazon decides on the commission charges based on the number of products you list on their online marketplace platform. 

A commission-based revenue model is ideal for,

  • Businesses with small transactions like car rentals, property rentals, or even home-based services(Handyman).
  • Websites are offering classified ads for different businesses.
  • The invoicing is simple and does not need extensive documentation.
  • Services that offer value in return for payments(not ideal for sharing, bartering, or partnerships)

Pros: 

  • It attracts more suppliers and service providers.
  • Monetisation with every transaction.
  • Ease of revenue sharing between marketplace and service providers.

Cons:

  • Need to offer higher value.
  • Setting the pricing percentage is a challenge.

2. Listing Charges Model

There are many online marketplaces like Etsy, Delivery Hero, and eBay that charge listing fees and the commission’s costs. This model works for platforms that can offer better value for each product listed. Such a revenue model is relatively standard among classified ads that you might have seen in newspapers. 

But, with digital space, the listing charges are focused on the value per listing. With this model, you need to build a marketplace that aggregates several product listings and provides value to each of them. 

Take the example of Etsy, a multi vendor marketplace platform that aggregates handmade product listings from different artists and designers. It is almost similar to eBay in terms of the revenue model, but the difference here is Etsy’s value to buyers and sellers.

It has more than 25 million users worldwide with a focus on offering more value. The online marketplace platform ensures that antiques listed are more than 20 years old while sellers provide the unique facility to set up a store on the platform. 

Pros: 

  • It is a great revenue model for websites with a massive user base.
  • Monetisation is based on sales per listing.
  • Buyers have more options that help in increasing the user base.

Cons:

  • Sales is not a controllable factor for the marketplace.
  • Listing fees can make sellers go away in the marketplace.

3. Advertising Model 

Advertising and featured listings are common not just in the online marketplace but even on other eCommerce platforms. Take an example of a multi vendor marketplace platform like Haatori, where users can find used wedding dresses. 

They do not charge for listing the products and instead earn from featured ads and sponsored listings. Several wedding photographers, event planners, and caterers use it as an advertising model. 

An advertising revenue model is just like classified ads in a newspaper, but with a twist. Some marketplace like Etsy offer featured listings for sellers, but they charge for such services. At the same time, some marketplaces do not charge for listings but ask for ad fees. 

The main challenge you will face with this revenue model is to have a considerable user base to attract sellers. As they are spending money on advertising through your online marketplace platform, they expect high ROI, which is only possible with a good user base. 

Pros: 

  • Monetisation depends on the number of clicks, considerable just like Google Ads.
  • It attracts more sellers as the listing is free, and sometimes there are no commission fees.

Cons:

  • Monetising your platform depends on the popularity and user base.

4. Subscription Model

A subscription model explores the approach of revenue per subscriber. Here, the user is charged for access to a platform. The value proposition for a subscription model offered by the online marketplace is better outreach to clients. The online marketplace does not involve directly in the transaction and instead have the seller deal with it. 

Take an example of OkCupid. It is a dating app that offers access to personalized data about other users through paid subscriptions. It starts from $9.95 per month, and its premium plans go up to $34.90 per month. 

Pros:

  • Fixed monthly revenue from each user.
  • Ensures customer association through content, data, and other elements.

Cons:

  • Data security needs to be high with privacy features.

Conclusion

As you figure out the right revenue model, you can plan your entire development and execution of the marketplace app or website. A revenue model is quintessential for your business logic when you build a digital marketplace to imbibe it in the web logic. 

Which revenue model to choose will largely depend on the core service or product of your business. For example, if you are a ride-hailing business like Uber, a commission-based revenue model is perfect. 

At the same time, for an online reselling marketplace, listing fees model is a great option. So, choose the best revenue model that suits your online marketplace platform and start the journey towards success!

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