Business

A Complete Guide to Online Marketplace Business Model!

A long-term plan is required when entering the marketplace. Therefore, you need to find a revenue strategy first before building a long-term, profitable marketplace platform.

If you run a non-profit or a side project, you can pay for the site’s development and maintenance with donations or your own funds. 

In most cases, funding for a website must come from the community it serves — the users.

A business plan that cannot scale in the long run is one of the most common reasons for failure.

You should familiarize yourself with the various marketplace business models if you plan to develop a marketplace idea. 

After all, creating your product isn’t just for recreational purposes. You should also be able to generate revenue from it.

There are many ways to monetize marketplaces. Ultimately, your choice will be determined by your unique circumstances. It is not necessary to be perplexed. 

Our goal is to help you make the best match possible by highlighting a few inspiring business examples. 

You simply need to pick the one most closely related to your business.

There are numerous online marketplaces, such as Amazon, eBay, Airbnb, and Uber. They are known for their wide range of products and ease of shopping.

You may not realize that these and numerous other marketplaces have grown to be some of the world’s largest and most valuable organizations.

Table of Contents

What is an Online Marketplace?

Platforms that link buyers with sellers are known as online marketplaces. 

The marketplace operator typically does not maintain inventory of its own but instead assists buyers and sellers with completing a transaction.

Online Marketplace’s responsibilities may include logistical management and facilitation of payments. However, it will allow sellers to focus on their primary competency: supplying the right product to the right customer.

Although markets can take on various shapes and sizes, they are most commonly classified as vertical or horizontal.

Marketplace Business Model

Markets that operate horizontally provide consistent service across numerous product categories. eBay customers can buy anything from clothing to gadgets, for example.

On the other hand, vertical marketplaces are focused on a single product category but include various services. Let’s take the market for unique sneakers as an example. 

StockX handles product identification and quality control, as well as payment and shipment. 

Additionally, it allows them to serve as a reliable source for prospective clients.

Marketplaces are built with the help of buyers and sellers transacting. However, when you begin, you lack all of those things. 

Therefore, how can you get suppliers to join a platform without buyers and vice versa?

As a result, the online marketplace is referred to as having a chicken and egg problem. Market enthusiasts need to decide which side to build first, just as with the dispute over which came first, chicken or egg.

You can offer more value to your clients if you recruit more sellers. A higher value attracts more buyers, which increases the value of the seller. 

Therefore, you can increase the attractiveness of your marketplace if you want first to attract consumers or sellers (or even both at once).

How to Attract Buyers to Online Marketplaces?

Here are some popular methods to attract buyers to online marketplaces:

Become a Producer

Some marketplaces, such as Lazada, began by selling their products first, and then they attracted sellers. 

Marketplace Business Model

You can ensure that your customers have the best shopping experience possible by doing so. A supplier might then join a platform with a demonstrated and engaged customer base.

Provide monetary incentives

If clients join your platform or purchase products from it, you can reward them. For example, a sign-up bonus might include a $10 gift card or a 10% discount on baskets exceeding a particular value.

Make your mission appealing. 

The initial purpose of some marketplaces was to address a severe problem in a market-oriented manner. 

You will be able to acquire customers more efficiently if your customer is in a state of misery. 

Uber and Lyft, for example, have resolved several issues with the taxi experience. Among them were late cabs and aggressive drivers. 

Due to their efforts, these companies offered a convenient, secure way to arrange rides, and as a result, customers quickly signed up. 

Therefore, Lyft’s objective is to “better people’s lives with the best transportation.”

How to Attract Sellers to Online Marketplaces?

Here are some ways to attract sellers to your online marketplaces:

Sellers Programs

Offer dedicated seller programs through online classes and account managers to show sellers your platform’s capabilities. The more informed an individual is about your product, the more likely they are to use it.

Keep it simple

The more simple your platform is, the easier it will be for merchants to navigate and begin trading on it. Furthermore, convenience reduces the cost and time required to open a shop,  encouraging more people to sell.

Examples of the Marketplace Business Model

Marketplaces occur in a variety of shapes and sizes. The typical person immediately associates the internet with online e-commerce enterprises like Amazon or eBay, but this is far from the only use of the Internet.

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These are the different types of marketplaces that we see in the modern era. Here is the list of Marketplace business models we see these days:

  • Sign up fees
  • Commission Model
  • Subscription Model
  • Freemium Model
  • Selling fees
  • Listing Model
  • Featured Ad Placement
  • Transaction or payment processing fees
  • Sponsored products and stores
  • Ads from third-party advertisers
  • Pay per lead or lead fees
  • Bidding fees for auction marketplaces
  • Grow your marketplace through affiliates and referrals

Sign up Fees Model

A sign-up fee is a one-time payment received from sellers applying to sell on your marketplace platform.

The easiest way to build a marketplace business is to collect a sign-up or registration fee.

You’ve seen it; you know what it looks like. There are no setup fees, you don’t need complicated payment methods, and vendors pay you upfront.

You might be able to charge signup fees before you establish a two-sided marketplace. (You  need to pitch your concept to retailers and ask them to pay an early membership fee.)

Additionally, this is a business strategy that makes sense for your merchants – paying a small fee to join a fledgling marketplace platform isn’t a bad deal (if your business idea is good and your sellers accept it).

Here are a few pointers for implementing the sign-up fee model successfully, especially in the early stages:

  • Ensure that the sign-up fee for your vendor is affordable and feasible.
  • Make sure to emphasize the benefits that merchants will receive by using your platform.
  • Create an incentive for early bird registration – encourage your vendors to register early.
  • Make the signing-up process as personalized as possible for vendors. They are investing in your idea.

The sign-up fee can also be deferred – for example, ClickBank charges $49.95 for its “activation fee” when your first product is approved. 

While this is still essentially a sign-up fee, it gives sellers some comfort that they will only have to pay when they begin selling.

When applied appropriately, sign-up fees can act as a motivator for legitimate merchants and a  precaution against bogus signups.

Advantages of Sign Up Fees Model:

  • Early stages are feasible
  • Implementation is simple

Disadvantages of the Sign Up Model

  • Scalability is not good in the long run
  • Make sure you are convincing

In early-stage ventures where selling fees are not economically viable due to low sales volumes, sign-up fees may be a viable business model for the marketplace.

However, they will remain sustainable for the long run only if you combine them with a different earning strategy.

Commission Model

The most common marketplace strategy is one that charges a fee for each successful transaction. 

An operator of the platform then charges a fixed or variable fee for the product transacted.

The primary advantage of this revenue model is that providers are not paid until they receive value from the marketplace. 

Suppliers find it pretty appealing. The marketplace, however, sees this model as the most profitable: you receive a percentage of all value that travels through your platform. 

The most popular marketplace platforms, such as Airbnb, Etsy, eBay, Fiverr, TaskRabbit, and Uber, operate primarily on commissions.

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Platform operators typically handle payments and shipping, while merchants focus on providing the most popular items. 

This approach is based on the principle that anyone (buyers and sellers alike) can join for free. The marketplace operator profits from the platform’s value creation.

It is vital to provide consumers and providers with sufficient value if the commission model is to succeed. 

If your platform does not provide sufficient value to your users, they will find a way to circumvent your payment mechanism, resulting in you not being paid. 

How are you going to deliver this value?

A few examples are Amazon, eBay, Etsy, and Airbnb. All of these companies charge a transaction fee and have vendors selling various items on their sites.

The question is, how do you determine the appropriate commission rate? Would you prefer a percentage commission or a flat fee? You must keep the following in mind:

Your competition

You should consider your competitors. What is the commission rate? It does not necessarily dictate your pricing structure, but it can offer insight into what works for your market and specialty.

Cost margin

How much does it cost to produce an additional unit of a product or service? If your commissions are set too high, merchant profit margins will be too low for them to continue using your marketplace platform. 

Etsy, which allows users to sell handcrafted and vintage items with a higher marginal cost, charges 5% transaction fees. There is a 10% to 20% charge for Upwork, a freelance marketplace.

How do your users like it

Finally, you may need to change your commission model. You will earn a commission based on what your users want.

Subscription Fee Model

Subscription-based marketplaces charge buyers and sellers separately or jointly. For customers, the selling point is that they will save money or have access to a great experience. 

A seller may be able to attract clients who are more likely to buy. When you subscribe, you can divide a large payment into numerous smaller amounts that are more manageable. 

Would they be paying $700 for Adobe Lightroom on a personal basis? 

It is most likely not. How about $10 a month access to Lightroom? That sounds like a great deal!

It is difficult to charge recurring fees without the platform becoming valuable enough for sellers and customers. 

You’d have to convince sellers to pay if you wanted a sufficient number of users. It’s unlikely that prospective clients will join if they don’t see immediate benefits to doing so.

Your firm will be well supported and expand over time with recurring payments. 

It doesn’t matter if you’re creating an online marketplace or a mobile app – charging a subscription fee enables you to sustain and improve your product as long as your users find it valuable. 

Are you selling it once? My best wishes for the first few years.

Subscriptions are based on a simple logic: if you provide more value to your users than you charge them for subscriptions, they will continue to pay. 

The same holds for online marketplaces – vendors will gladly spend $10 per month if it results in a tenfold increase in revenue.

Several major payment providers, such as Stripe, already support subscriptions; however, creating subscriptions is more complicated than collecting one-time payments. Combine them if you wish.

Here are a few tips to consider when considering the subscription marketplace business model:

  • Be sure that your vendors receive more value than it costs to remain subscribed.
  • Provide a free trial if it is technically feasible.
  • The coverage and payment procedures should be clearly stated.
  • Provide separate plans with different features and an easy switch between them (see below).
  • Engage your vendors.
  • You can offer lump-sum discounts (e.g., 15% off for annual payments vs. monthly payments).

The payment terms and rates will vary depending on the industry and the goods or services you provide, but weekly, monthly, or annual payments are the most common.

Advantages of subscription payments:

  • Long-term revenue model
  • One-time payments are rarely as affordable as installment payments

Disadvantages of subscription payments:

  • Implementation is more complex than one-time payments
  • Execution is difficult in specific industries

Your marketplace will succeed if you can implement this model effectively and ensure that your vendors get value out of their subscriptions.

Freemium Model

Is it possible to monetize a marketplace where people freely share low-value things? For example, Peerby, a  Dutch start-up, offers free peer-to-peer lending. 

All platform users have access to the free basic experience. In addition, Peerby intends to monetize through the provision of premium services. 

A supplier primarily offers two services: insurance (in which the buyer pays an insurance premium in exchange for receiving the item for free) and delivery (the customer can pay a small fee to have the item delivered to their door rather than picking it up from the provider). 

Freemium marketplaces allow both buyers and sellers to use their services for free. Adding features, offering premium memberships, and cross-selling into other services generate revenue.

This strategy is based on the principle that your free platform hooks people to sign up for your premium services. 

A balance has to be struck between free and paid services so that users do not suddenly abandon you. 

The freemium model relies on a free starting service, but as your audience grows, you add paid features. 

The problem with this strategy is that the premium services must be of sufficient value for many of your users to become loyal customers. 

Only 1% of your users are interested in your premium service, and the rest use your site for free is unlikely to be enough to sustain a business strategy. 

It can be quite challenging to create a premium service that appeals to a large enough audience. 

As a result, several platforms leverage premium services to generate additional revenue. 

Mascus, for instance, offers premium web page services in addition to generating revenue from listing fees. 

Etsy supports its transaction and listing fee-based business model by providing premium services to its power sellers, including direct checkout, listing marketing, and shipping labels. 

As a result, revenue from this source has recently grown significantly.

A good example is Unsplash. The sellers provide the photos, while the users can view a subset of them for free. 

A monthly subscription fee is paid, or they can compensate the photographer directly if they want full access to all accessible stock photos.

A marketplace may begin offering premium services as an add-on but later focus solely on paid services. 

Vayable began as a pure peer-to-peer marketplace where individuals offer one-of-a-kind vacation experiences to others. 

Still, after struggling to gain traction, the corporation pivots to operate as a concierge service. 

Premium services are frequently less scaleable than pure commission models, which is the disadvantage of this method. 

It is often due to the high level of staffing necessary to provide premium services. 

The only reason they switched was that they couldn’t make their commission model work.

Selling fees

Marketplace businesses, such as online retailers and marketplace operators, rely heavily on sales or commissions.

The model is also one of the most difficult to implement, in my opinion, successfully.

You can earn a tiny percentage of each sale by charging selling fees on your marketplace, often before the payment reaches the vendor.

Flat-fee commissions and percentage-based commissions (or combinations of the two) are both common.

Your payment flow will determine how you receive selling fees from merchants on your marketplace.

A typical online marketplace accepts three types of payment:

  • First, a direct price is when the customer’s payment goes directly to the vendor.
  • A platform that accumulates payments from your customers and then distributes them to vendors in the form of payouts.
  • Parallel payments, where the payment processor splits the customer’s payment between your vendors and your platform at checkout.

As direct payments are made between the consumer and the seller, you do not have the option of collecting the selling charge at the time of payment. 

You can still receive the selling fee from the seller by invoicing them – either automatically at the time of sale or regularly, such as monthly.

If you aggregate payouts, you will keep track of selling fees owed by sellers but will collect them when payouts are made to sellers. 

You may be able to track fees manually or through tools that make it easier, such as seller transactions and balances, depending on the volume of activity on your platform and the payment methods used.

The implementation of split or parallel payments usually requires more time and technical expertise, but they simplify collecting selling fees. 

When you use a payment processor to process split payments, you can automatically collect selling fees during checkout.

Several different fee rates can be applied to different tiers of your revenue model:

  • Charges across the entire marketplace, e.g. $0.35 + 3%
  • Plans and performances are charged at different rates, e.g., 1.5% for power sellers, 3% for everyone else
  • Rates for individual sellers – consider this if you operate a smaller niche marketplace
  • It depends on the category of products or even the individual product what the selling fee rates are.

If you develop a marketplace platform with a tiered membership structure, you will have more options for pricing your products.

When deciding whether to introduce selling fees in your online marketplace, take the following factors into account:

  • Sales fees scale effectively as your sales increase, but they are less effective at the project’s outset.
  • Cheap selling fees may appeal to suppliers, but they may not be sustainable for you.
  • Remember to include your processing fees when establishing your selling fees.

Advantages of Selling Fees:

  • They’re excellent at scaling up: 3 percent of $100 is $3, but 3 percent of $1 million is $30,000.
  • A massive retail internet mall where quantity trumps quality will benefit from their use.

Disadvantages of selling fees:

  • They are more challenging to implement than alternative marketplace business models.
  • When there are fewer sales at the beginning of your two-sided platform, they will be unusable.

Selling fees will eventually propel your online marketplace platform to success – just make sure you have other revenue streams in place to support growth (or simply raise venture capital).

Listing Model: Classified Marketplace Business Model

Some marketplaces charge providers for adding new listings. When providers receive compensation by receiving listings on the site, this pricing strategy is generally employed when the value of each listing is significant.

Each time a seller submits an offer to the website, they are compensated.

This paradigm is used to list high-ticket items, such as cars and houses. The scarcity of resources means that sellers benefit from listing more of them.

This marketplace business model is quite popular with classified ads. 

A significant benefit is that it consolidates many listings into a single online location and ensures that those listings are widely advertised. 

Most classified ad networks don’t assist in transactions.

A purchase transaction occurs outside the marketplace following a meeting with a seller and viewing an advertised item. 

Listing marketplaces typically do not facilitate the transaction (by processing payments) due to the item’s complexity.

A listing marketplace’s primary selling point is that they draw a lot of traffic to their platforms, allowing providers to increase the visibility of their listings.

It is difficult to determine an appropriate listing fee with this arrangement. However, an excessive fee will discourage vendors from listing on the site.

This marketplace business model is quite popular with classified ads. A website like this has a simple value proposition: It consolidates a vast collection of listings into one online location, ensuring that those listings receive plenty of exposure. 

A classified ad network usually does not try to facilitate the transaction.

Furthermore, these sites have to generate a high volume of traffic to justify listing fees. 

This means that the algorithm determining which results to display for each search query is frequently at its mercy.

Websites like Trulia.com and Realtor.com are examples of this business model.

This marketplace business model is quite popular with classified ads. A significant benefit is that it consolidates many listings into a single online location and ensures that those listings are widely advertised. 

Most classified ad networks don’t assist in transactions.

It is still essential to draw enough users to the site to make sellers pay for ads.

Featured Ad Placement

A featured ad is frequently integrated into other marketplace structures, such as commissions or listings. 

An additional fee can be paid by the seller in this situation so that their listing appears first.

Once again, the primary problem is to get enough users to the site to entice sellers to pay for these advertisements.

eBay makes use of this in its classifieds segment. While listing and selling are possible on their site, individuals must pay a fee to have their product listed first.

The problem with these models is that they require a large user base to generate significant income. 

Your income per user is almost certainly lower when you sell eyes than if you could extract value from your transaction process. 

Additionally, advertising on your site serves two audiences with competing interests: advertising is seldom an improvement to the user experience, and most visitors would prefer to avoid it. 

This business model is not the best choice if you want your users to have the best experience possible.

When you have a highly targeted audience, and commercial providers interested in personalizing their offering for that demographic, ad-based models work best. 

For example, Häätori, a pre-owned bridal gown marketplace in Finland, is free to use. 

The site makes money by selling advertisements to wedding planners, photographers, and other wedding-related service providers. 

The advertisements’ content is very relevant to the website’s users, which makes them less annoying.

Transaction or payment processing fees

A transaction or payment processing marketplace is similar to a sales marketplace; however, charging fees for payment processing or transaction processing takes your income generation to the next level.

You will receive a percentage of the order at the time of sale if you charge simply selling fees.

There are, however, a few other types of payments that may occur in an online marketplace besides order payments:

  • Payments from vendors are listed after signing up
  • The cost of membership is recurring
  • Promotional and featured listings payments
  • Payouts to vendors, referrals, and affiliates
  • Advertisers’ payments

As a marketplace owner, you earn transaction fees on all payments made to your marketplace. 

The marketplace business model accomplishes precisely what is meant by the expression “own the deal.”.

Payment processing fees vary by company and industry, but even a 1% difference makes a  difference when millions of transactions are processed.

Advantages of charging payment processing fees:

  • Scaling up your marketplace earns you a lot of money
  • Payment processing increases your chances of success

Disadvantages of charging payment processing fees:

  • Technically difficult to implement
  • Vendors will be unhappy if you shift their processing fees to you.

It can be a complicated business model to achieve, but it is the best to look for when building an online marketplace.

Sponsored products and stores

Promoting products and profiles can enhance the capabilities of a marketplace platform.

A large number of prominent marketplaces utilize this revenue model.

You can use marketplace marketing in a variety of ways, including:

  • Pages and categories featuring sponsored products
  • Promotional products in the cart and at checkout
  • Product and vendor profiles featured on the homepage
  • Mentions in newsletters and blog posts

When sponsored items appear on marketplaces with greater importance for the product than the vendor (such as eBay or Amazon), they perform best. 

Vendor profiles feature a focus on the seller in marketplaces with a greater emphasis on the seller (where vendors sell unique or handmade items and build relationships with your clients).

There are several ways to collect fees for promotions:

  • First, vendors should pay for individual product and profile campaigns (and set different rates for different promotional periods and locations).
  • Offer product promotions as part of a higher-priced membership plan
  • Provide vendors with bulk credit that they can use for promotions according to their whim
  • Using free promotions as part of a broader marketing campaign to attract new customers

When it comes to sponsored featured listings and promotions, MultiMerch offers the following advice:

  • You should make sure your offer to sellers is clear and makes sense to them – if it doesn’t pay off, they will be reluctant to do it again.
  • Think about your customer’s shopping experience. Are you going to promote everything, or do you have some sort of validation in place?
  • Make sure to analyze your current system’s ability to handle sponsored listings – is it ready to take these out of the box, or will it need to be developed first?
  • Be careful not to overdo sponsored listings to make your marketplace unusable for organic purchase flow.

Advantages of sponsored listings and promotions:

  • The more exposure your marketplace receives, the more your vendors are willing to pay.
  • The more placements you arrange, the more combinations you can offer your vendors.

Disadvantages of sponsored listings and promotions:

  • You may negatively affect your customers’ experience by promoting low-quality products
  • Custom development may be necessary if your system does not support featured listings
  • To get your sellers to pay for it, you’ll need to convince them of its value.

You can use sponsored sponsorships and product promotions in practically any business or market – just make sure you do it correctly!

Ads from third-party advertisers

There is a slight difference between the business model for advertisements from third parties and those for advertised goods. 

As opposed to your marketplace members, you allow third-party advertisers to promote their products, services, or websites.

Advertising is often handled similarly to the previous example – you have various ad locations and charge advertisers to publish their ads.

There are several ways to incorporate advertisements into your online marketplace:

  • In-house software for advertising
  • Third-party services, such as AdSense
  • You can manually manage advertisements

Your advertising model will depend on your requirements and platform capabilities.

  • Cost per impression (CPI/CPM)
  • Paid-per-click and CPC (pay-per-click/cost-per-click)
  • For example, $125 daily or weekly for the homepage ad
  • Blog posts cost $250, for example

You can implement the last option, the simplest if you don’t have a separate advertising system – assuming your marketplace platform has at least some activity.

Here are a few ad formats and placements to consider:

  • Graphics and banners are examples of display advertising
  • Advertisement on blogs or in newsletters, e.g.
  • A mixture of advertising, such as sponsored product listings from third parties

When you think about monetizing your online marketplace by selling third-party advertising, consider these factors:

  • The ads on your website drive visitors away – does it provide any value to your platform?
  • You don’t always have control over third-party ads – how will this affect your marketplace members’ overall experience?
  • Implementing an ad system will require some technical skills – is your team up to the task?

Advantages of Ads:

  • Native advertising can provide your marketplace members with additional value if appropriately implemented.
  • If you reach out to the right advertisers in your field, monetization through online ads scales well.
  • You do not have to implement revenue-sharing agreements with vendors for advertising, unlike affiliate and referral systems.

Disadvantages of Ads:

  • Your users and visitors will be negatively affected by low-quality non-native advertising.
  • Multiple team members are needed to implement and manage online marketplace advertising successfully.

When monetizing your marketplace with ads, ensure you understand what you’re doing. Adverts are a massive but frequently contentious industry.

Pay per lead or lead fees

You may be able to charge lead fees if you operate a contract- or service-based marketplace and do not handle orders directly through your platform.

You will be able to browse a list of potential clients or transactions, but suppliers will have to pay to read the details of any particular agreement.

When it comes to charging a lead fee, you have two different options:

  • Leads are separately charged.
  • Only successful deals are charged.

Regardless of whether the supplier benefits from the outcome, they will be required to pay for access to the lead or deal in the first scenario.

The latter lets you charge vendors only if the deal closes – but in this case, you’ll need to have some control over the deal flow.

Fees for bidding on auction sites

The value of bidding fees is somewhat similar to the revenue model of pay per lead, except you are billing the clients rather than the vendor.

The most common form of bidding fee is found on penny auction-style sites, in which users pay a small amount to bid on products.

As the primary source of revenue for penny auctions, you must charge bidding fees if you operate a penny auction marketplace.

Bidding fees are probably not for you if you operate a different kind of marketplace.

Promote your marketplace through affiliates and referrals

The affiliate and referral programs on your marketplace do not constitute a business model in and of themselves. 

Still, they can help you increase revenue by growing your marketplace’s clients and users.

You may choose one of these options or run both simultaneously, depending on the requirements and capabilities of your marketplace software.

Affiliates and referrals differ primarily in the following ways:

  • Affiliate marketers promote your marketplace products without being members themselves.
  • Referral marketing consists of existing marketplace members referring new visitors to your marketplace based on their own experience.

An affiliate program usually results in increased reach, but it is not always a money-maker.

Affiliates are essentially a third-party advertising channel, so their audiences don’t trust them very much.

Maintain a high standard of quality in your marketplace. You can allow existing members to refer new users to your marketplace, enabling you to establish an organic ecosystem and community.

You can create an affiliate or referral program for your business by considering the following points:

  • Affiliate systems may be a good idea for larger markets, but organic referral systems are great from the beginning, provided your existing users are satisfied.
  • You should still consider affiliate and referral commissions – who will pay for them if you sell products sold by third parties?
  • The creation of your referral program will be a complex undertaking – are you up to the task?

Advantages of affiliate and referral systems:

  • Your marketplace can become more organic with the help of rewarding users for referring friends.
  • A system of affiliates may work well on larger marketplaces.

Disadvantages of affiliate and referral systems:

  • Affiliates often generate low-quality traffic.
  • Using affiliates to sell third-party products requires revenue sharing.

The majority of industries can benefit from referral programs; however, affiliate programs are more challenging. So do your homework before rushing to implement these programs.

Advantages of the Online Marketplace Business Model

Network effects

A platform can grow organically into a marketplace when it has a sufficient number of consumers and sellers. 

Your platform will naturally attract more customers and users if it’s attractive and valuable to your target client group, whether the customers recommend the platform to their friends or users provide exciting comments.

A high user engagement rate

Marketplaces that typically rely on recurrent sales (e.g., Poshmark) usually have a high level of engagement. 

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This is because a market facilitates communication and discovery, attracting customers in search of the best prices or simply browsing stores. 

Meanwhile, merchants try to stay ahead of their competitors and conduct extensive market research.

Hard to replicate

People are almost certain to remain loyal to the platform once it is established. 

Competitors who wish to surpass you will need a superior product and a network of comparable size. 

The process is time-consuming and costly. Moreover, the top position of established marketplaces makes them challenging to dethrone.

Pricing monopoly

Despite being unethical, dominating marketplaces can determine their fees and commissions. 

For example, merchants are frequently charged more over time due to the platform’s lucrative nature. 

In addition, sellers are often obliged to absorb rate hikes if no similar marketplace exists.

High margins

The margins on individual transactions might become extremely high if a marketplace becomes the market leader in its segment (and incurs fewer marketing expenses). 

Once you become the solution to a buyer’s buying needs, you spend less money inspiring shoppers to make a purchase.

Data creation

Marketplaces produce many (consumer) data, which operators may sell or use to enter new businesses. 

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Amazon’s case analyzes the data it gets from its sellers and sells it under the Amazon Basics brand. It is common for companies to prioritize their items over those of their suppliers.

Disadvantages of the Online Marketplace Business Model

Dependence on other platforms

Many marketplaces (e.g., real estate or automobile listings) have a low purchase frequency, making brand building more challenging.

Therefore, you will have to continue advertising on platforms such as Google and Facebook for customers to find you. 

As a result of the limited number of touchpoints, it is far more challenging to build a brand through repeated interactions.

High set up cost

The cost of developing a marketplace includes building the necessary technology stack, advertising to attract buyers and suppliers, and hiring the essential personnel. It may take considerable effort and money to build a substantial revenue stream.

Many competitors

Competition is often fierce in a marketplace concept because of its viability. A growing number of investors are willing to spend financial resources to help businesses compete, even if setting up a marketplace is expensive.

Varying seller quality

Vendors and the products or services they offer can vary greatly. Vendors who also handle delivery can make this difficult. 

Marketplace owners should take this into account and invest in their seller communities. 

Verifying the authenticity of products and establishing a logistical network for efficient transportation are among the responsibilities.

Essential KPIs & Metrics of Marketplace Business Model

There are many types of marketplaces. For example, business-to-business (B2B) and business-to-consumer (B2C) businesses may operate globally or locally and vertically or horizontally.

As a founder, how do you know if you’re on the right track? A vital component of the approach is gauging your growth by tracking a few key indicators. The following are among them:

  • Net Revenue
  • Gross Merchandise Value (GMV)
  • Gross & Contribution Margin
  • Customer Acquisition Cost (CAC)
  • Net Promoter Score (NPS)
  • Rake (Take Rate)
  • Average Order Value (AOV)
  • Liquidity
  • Repeat Purchase Rate (RPR)

Net Revenue

Net revenue is the actual revenue generated by the marketplace during a specified time. It is computed by multiplying the Gross Merchandise Value by the Take Rate.

Net Revenue = GMV x Take Rate

Therefore, we have a net revenue of $10 million x 20% = $2 million if we continue with our prior instances.

Gross Merchandise Value (GMV)

Gross merchandise value (GMV) is the total value of goods and services exchanged. The average order value is calculated by multiplying the quantity sold by the average order value.

GMV = Average Order Value x Total Sales

If your platform facilitates one million sales with an average value of 10 dollars, your gross merchandise value (GMV) is 10 million dollars. 

If you want a more realistic representation of your GMV, you should subtract cancellations and returns. Therefore, you calculate based on delivered items rather than bookings.

Gross & Contribution Margin

Gross margin is calculated by subtracting net revenue from the cost of goods sold (COGTHS). 

Thus, the contribution margin provides a complete picture of profitability, although it provides an accurate profitability picture.

To determine the contribution margin, we subtract the cost of goods sold and other variable expenses such as customer service, research, and personnel hiring. 

As a result, the contribution margin is an excellent indicator of market profitability.

Customer Acquisition Cost (CAC)

The CAC metric shows how expensive it is for our organization to acquire customers and sellers on the platform. 

A marketing and sales expense ratio is calculated by adding up all of the costs and dividing them by the number of new clients.

CAC = Sales & Marketing Costs ÷ New Customers

Therefore, if we spend $5,000 on advertising and receive 100 new customers, our CAC equals $5,000 x 100 new consumers = $50 per new client.

It is critical to distinguish between CAC for buyers and sellers in the marketplace. Frequently, many marketing methods are used to develop these two sides.

Your objective is to keep CAC to a minimum. The more money spent acquiring a client or seller, the more value the client or seller must generate on the platform to break even.

Net Promoter Score (NPS)

NPS is another critical indicator for determining customer happiness and retention. A score is calculated by asking a customer, “On a scale from 0 to 10, would you recommend this product?”

People can be categorized into three types based on the scores they received:

  • Detractors = score of 0 to 7 given
  • Passives = score of 8 or 7 given
  • Promoters = score of 9 or 10 given

NPS is calculated by dividing the percentage of promoters (customers who recommend you) by the percentage of detractors (customers who wouldn’t recommend you).

  NPS = % Promoters – % Detractors

If you have 35% promoters, 50% passives, and 15% detractors, your NPS is +20. A Net  Promoter Score of more than 50 is considered exceptional.

You should measure NPS frequently to see how happy your consumers are over time.

Rake (Take Rate)

A take rate complements gross merchandise volume and helps us to understand how robust the market is. Take rate refers to the amount of money a business earns per transaction.

Commissions and fees (or other revenue sources) are divided by the total sales.

Rake = (Commission + Fees) ÷ Total Sales

If a marketplace sells 10,000 items in a specific time period and makes 500 USD in commissions and fees, the Take Rate equals (1000 + 1000) / 10,000 = 10%. So, the firm receives about 20% of those transactions.

Take Rates can vary a lot depending on the type of commodities sold and the value offered by your marketplace. 

Digital freelance marketplace Fiverr, for example, charges between 5% and 20% per transaction. eBay’s marketplace, however, charges a maximum of 12%.

Checkout, How Does Glovo Make Money?

Average Order Value (AOV)

We can determine the company’s revenue based on the average order value – in this case, on the transactional level. The AOV is calculated by dividing the transaction value by the platform’s total sales.

AOV = Total Transaction Value ÷ Total Sales

If you sell things worth $10 million and your total sales are $1 million, the average transaction value is $10.

Comparing your AOV with that of competitors can help us understand how they perform. 

Furthermore, we can also determine how hard it will be to attract buyers to the market. For example, commodities and services with higher prices are less likely to be bought by buyers.

Liquidity

Liquidity is the motor that drives our marketplace. It shows the market’s activity at any given time. In terms of liquidity, we consider factors such as:

  • Platform users – number of buyers and sellers
  • Amount of listings
  • The number of returns and purchases
  • Diversification of geographical locations (number of locations we sell at)

It isn’t an exhaustive list, and any company or model should be selected based on its strengths and weaknesses.

An online marketplace’s objective is to maximize liquidity. Therefore, our clients are more likely to engage with our product if we offer them multiple transactional options.

Repeat Purchase Rate (RPR)

New clients are expensive to acquire. Ideally, you would want to sell only to people who are already enrolled on your website.

Consider email or push notifications as a more cost-effective marketing alternative to advertisements. You can do this even after the user has entered your environment.

A repeat buy rate is the percentage of existing customers that make a second purchase. 

To calculate it, divide the total number of consumers by the number of consumers you have conducted at least two transactions with.

This calculation should be performed regularly, i.e., for a particular year or month. 

We’ll assume that your platform has 50,000 clients who have completed transactions and 1 million buyers. Therefore, your RPR equals 50,000/1,000,000 = 5%.

The vendor side of the platform can also track this rate—for example, the frequency of listing uploads by vendors.

You can spend more money on customer acquisition if this percentage is higher. It is easiest to achieve this in an industry with a high rate of repeat sales. 

For example, there are many examples of pre-booked taxi trips (such as Uber and Lyft). However, a website selling used cars would need significantly more revenue since they are infrequently bought.

Read, How Does TaskRabbit Make Money?

What is the best business model for the marketplace?

Various business methods are employed in modern marketplaces. For example, most income plans involve “owning the transaction” and charging a commission on all transactions made through the site. As a result, the strategy is highly scalable and often quite rewarding.

The commission model does not make sense, however, in some cases, necessitating the development of alternative models. The best way to determine which business model is the best fit for your concept is to experiment with several. 

Start with only one revenue source at a time to avoid being distracted. However, eventually, the business model you create for your site, as it evolves, may subsequently be a marketplace model that includes all the things that happen on your site.

Also read, How does Birchbox Make Money?

About the author

Madhav

Hey Folks, I am Madhav! I lead a team of Marketers at Tech Startup based in Australia. In my free time, I dissect the business models of various businesses. And if there's any free time, I cook some new Dish!