How to make a profit from an online marketplace. Top 6 marketplace monetization models

a guide to online marketplace monetization models

The success of online marketplace platforms depends on various factors that include stakeholder satisfaction, industry competition, delivered functionality, and promotion strategy. Marketplace monetization is a key aspect that a company has to consider before implementing a software project.

When managing a marketplace application, an organization generally does not produce, supply, or sell any goods. The primary objective is to bring together vendors and consumers for value exchange. As a result, marketplace owners rely on the volume of sales generated via the system and the number of users. Therefore, by choosing a marketplace monetization model properly, you will be able to generate higher profit while improving the audience’s engagement.

In this article, our software experts describe the main marketplace revenue strategies for you to do benchmarking and find the best one for your project. Have a look.

Top 6 marketplace monetization models to consider

1. Registration fees

A registration fee, also known as a sign-up fee, is a popular marketplace business model that requires a flat payment from vendors for joining the platform. This way, sellers have to pay only once and then operate freely on a marketplace.

Benefits of using sign-up fees:

  • It is much easier to adopt this strategy in comparison with other practices. For example, when charging a commission, a percentage of every transaction amount has to be automatically calculated and transferred to marketplace owners while the remaining sum has to be sent to merchants.
  • By employing this strategy, the revenue will not depend on the volume of sales.

Drawbacks of this marketplace monetization model:

  • It can be quite challenging to assure sellers to make a payment before registration.
  • If you manage to attract the majority of vendors operating on the market, you will have to incorporate other revenue models to have a steady source of income.

When bringing the registration fees model into action, it is crucial to:

  • Conduct competitor analysis. Before launching a software solution, an organization should research conditions suggested by similar marketplaces to come up with more favorable terms. With lower fees, it will be much easier to draw the attention of merchants, which is vital for new market players.
  • Create a catching selling proposition. To engage vendors and earn a profit, it is important to convince them to register by describing the advantages.
  • Offer a bonus for signing up. This is a great way to draw the attention of service providers, especially when you have just released a marketplace.

It is worth remarking that typically, digital marketplace platforms do not require customers to pay sign-up fees, as they are not likely to pay before ordering products or services when there are so many other, free solutions.

Example with ClickBank

Established in 1998, ClickBank is a worldwide online e-commerce and affiliate marketplace delivering either physical or digital products. At the moment, the system is used by over six million customers across the globe.

To start using the platform, service providers have to pay an activation fee of $49.95. In addition, ClickBank also withdraws a $2.50 commission for payment processing.

2. Transaction commission

The commission is among the most widespread marketplace monetization models used by globally recognized companies, such as Amazon and Uber Eats. With this strategy, vendors and consumers can register on a marketplace application for free.

In this case, the revenue depends on the number of transactions carried out through the system, as well as their amount if a fee is not fixed.

Benefits of charging commission:

  • As marketplace operators receive a percentage of each transaction, it is easier for them to maintain the level of income.
  • Vendors have the possibility to try out system functionality prior to making any payments. As a consequence, the credibility of an online platform increases.

Drawbacks of this marketplace monetization model:

  • It is more difficult to implement this strategy in comparison with some other options such as flat sign-up payments.
  • When you have just launched a marketplace app, it may take a while to attract sellers and buyers.
  • As long as a small fee is withdrawn from each successful payment, this marketplace monetization model generally showcases the best results in the long run.

To make this business model work, companies should:

  • Calculate what fee has to be withdrawn for generating sufficient profit. Before setting up the amount of a transaction fee, it is also advisable to analyze the terms provided by competitors.
  • Help suppliers maximize sales by delivering components necessary to automate business operations and ensure a seamless experience. For instance, a company can integrate a digital marketplace platform with systems for order and shipping management.

With functionality like one-click ordering, voice payments, and product comparison, vendors will be able to significantly raise the conversion rate.

Example with Airbnb

Airbnb is a world-famous online lodging marketplace operating according to a peer-to-peer model. To improve the audience's satisfaction, Airbnb comes up with more beneficial conditions in contrast with many other marketplaces.

The platform demands a relatively small commission for carrying out each guest-host transaction, splitting it between two parties. While customers are charged a fee ranging between 5%–15%, vendors have to pay a fee of 3%–5%.

As a comparison, requires an average commission of 15%, which is paid by accommodation owners only. This fee can vary depending on property type and location. It is worth noting that a transaction fee in on-demand service marketplaces like Uber Eats and Postmates hovers around 30%.

3. Subscription

With a subscription monetization model, vendors have to make regular payments in order to use a marketplace platform or access some bonuses. To make this strategy work, it is crucial to keep merchants engaged.

The key benefits of a paid subscription:

  • A company receives a steady source of income while sellers do not have to make a large payment before they run a business on the platform.
  • This practice is perfectly suited for the long run.

Drawbacks of this marketplace monetization model:

  • A high churn rate may become the biggest challenge.
  • Subscription may not fit some sectors due to their specifics. For example, operating in the foodservice industry, Uber Eats does not apply a paid subscription to avoid the risk of encountering restaurant churn.

When using this strategy, it is important to:

  • Provide a free trial. By allowing businesses to try out marketplace functionality, you will manage to increase the number of registrations and subscriptions.
  • Create value that outperforms the price of a subscription. Communicate with vendors to find out their suggestions and proposals while introducing changes accordingly.
  • Describe the main arguments of joining an online marketplace platform and demonstrate them to users.
  • Offer different subscription plans and enable users to switch between them at any moment. Additionally, you can provide discounts for advanced plans.
  • Continuously track metrics such as lifetime value and satisfaction rate to prevent churn.

Example with Coursera

Founded in 2012, Coursera is a popular e-learning marketplace that has 77 million users, as of 2020. Allowing trainees to use the platform free of charge, the company offers a subscription program called Coursera Plus.

To get unlimited access to 90% of the educational content, customers have to purchase a $59 monthly or $399 annual subscription. Hence, students have the possibility to pass multiple courses and get certificates, saving a lot of money.

If you aim to create a marketplace like Coursera, read our guide on the topic describing project cost and timeline, as well as functionality that you should implement.

4. Listing fees

By applying listing, or insertion, fee, marketplace platform owners charge a certain amount from merchants for posting their goods. This amount is based on the product value: the higher its cost is, the higher sum is demanded.

This strategy is commonly used in marketplaces delivering expensive items, such as cars, electronics, property. Examples of popular marketplaces applying insertion fees are eBay, Amazon, Etsy (e-commerce); (real estate).

The main benefits of this marketplace revenue model:

  • It is easier to attract vendors when charging a small fee for posting their products.
  • If you have an online listing marketplace that doesn’t process transactions, implementing this monetization strategy is a good way to earn income.

Drawbacks of employing listing fees:

  • When you have just launched a marketplace, generating revenue may be a tricky task, as you do not have a critical mass of customers required to achieve high listing visibility.
  • This marketplace monetization model doesn’t fit all industries. For instance, online healthcare platforms for virtual consultations generally do not apply it.
  • To prevent seller churn and make a profit, it is essential to drive a high traffic volume to a digital marketplace platform. By showcasing positive statistics on the number of users and their engagement rate to merchants, a company will manage to convince them to pay insertion fees.

When putting into life this marketplace business model, an organization should:

  • Offer free listings. Thanks to this strategy, you will be able to increase the loyalty of sellers and encourage them to list their goods on the platform.
  • In case a marketplace application delivers high-cost items such as jewelry or property, it is advisable to impose the maximum fees possible. However, the amount of charged payment should be lower in comparison with competitors.

Example with Etsy

Founded in 2005, Etsy is a globally recognized e-commerce marketplace that connects consumers with vendors selling craft, handmade, and vintage items in various categories. Before building a website, the founders conducted competitor research and found that the niche of vertical, narrow-focused marketplaces was rather vacant.

What’s more, they revealed that it was costly for merchants to operate on e-commerce platforms like eBay. At that point in time, eBay charged 50 cents for listing a $25 item and a commission of between 8–15 cents. Additionally, creators had to pay $20 per month to maintain the eBay store.

Aiming to engage artists and help them make a profit, Etsy decided to withdraw 10 cents for four-month listings and a commission of 3.5% for each sale. Coming up with a more beneficial marketplace monetization model, the company was able to attract 450,000 merchants by 2007. Soon, Etsy managed to raise $3.3 million in funding.

5. Freemium

A freemium monetization model means that a marketplace allows vendors and customers to interact with the application for free while requiring them to pay for additional features. The key idea behind this strategy is to attract and engage the audience, encouraging them to subscribe to premium functionality.

The principal advantages of applying a freemium model:

  • Since users can join and employ the system free of charge, it is much easier to quickly gain a critical mass of users.
  • Providing free access to an online marketplace platform, an organization receives loyal sellers and consumers.

Drawbacks of using this marketplace monetization strategy:

  • The main task is to find the balance between free and paid functionality to generate high profit while preventing user churn.
  • It is challenging to predict the level of income.
  • Convincing the majority of users to pay for premium features can be rather difficult.

How to make this marketplace monetization model work:

  • To find the right balance, you should test various pricing plans.
  • It is reasonable to carry out polls and surveys to identify user expectations about features they would like to have. Then, you should improve the app according to their feedback.
  • Analyze the audience’s needs prior to online marketplace development to get an understanding of industry specifics. This way, you will discover what functionality they will be willing to pay for.

Examples with Unsplash and Pixabay

Stock photo marketplaces like Unsplash and Pixabay provide a range of high-resolution images for free while enabling customers to donate money. Furthermore, Unsplash requires a monthly subscription fee to access stock photos for either commercial or non-commercial use.

6. Advertising

Advertising is a great marketplace business model for popular marketplaces that helps merchants maximize sales. There are a few ad types, including sponsored banners and third-party product listings, text advertising (i.e., mentions in news and blog articles), and a combination of several options. Numerous marketplaces across different sectors use this approach, involving Uber Eats, Zillow, and Craigslist.

Benefits of employing paid promotion:

  • Online marketplace operators receive a steady source of income.
  • As the system allows for using functionality free of charge, the loyalty of sellers increases.
  • If implemented properly, this strategy can assist a company in adding value to not only vendors but also consumers. For example, an organization can employ data analytics to monitor customer behavior and display ads based on their interests.

Drawbacks of this marketplace monetization strategy:

  • This practice will not bring sufficient profit if the platform has a low traffic volume. However, attracting a critical mass of users may consume time and costs.
  • It may be impossible to generate revenue when bidding on this strategy only, especially when you have just released a marketplace application.

To make this monetization model work, it is important to:

  • Conduct research to discover which type of ads will perfectly suit a marketplace platform. For instance, consumers may find banners annoying.
  • Ensure strong competition between service providers to motivate them to use advertising, as well as extend product offering for customers.
  • Apply a combination of models to earn sufficient profit while growing a user base.

Example with Uber Eats

Launched by Uber in 2014, Uber Eats is an online food delivery marketplace that currently operates in 32 countries. With promotions, restaurants are charged for having their company name displayed at the top of search results.

Employing the Uber Eats dashboard, businesses can launch a sponsored campaign, indicating the target audience, timeline, and budget. In this case, they have to pay a certain amount each time a user clicks on an advertisement.

With this marketplace monetization model, businesses manage to catch the attention of customers and increase the conversion rate. Combining this strategy with transaction fees, Uber Eats maximizes its revenue.

How do you choose a marketplace monetization model?

To choose a marketplace monetization strategy that will be especially suited for business-specific objectives, it is crucial to:

  • Conduct competitor analysis. If you see that companies operating in the same industry do not use a certain strategy, you should not apply it, too.
  • Research the audience’s issues and expectations. You may find out, for instance, that online retailers do need to visualize and download comprehensive reports on the number of users, their engagement rate, lifetime value, and other metrics. By charging a fee to access this functionality, you will manage to generate profit while resolving a challenge of merchants.
  • Take into account the stage in the marketplace life cycle. As mentioned above, some revenue models show the best results in the long run (subscription, transaction commission) while others perform great at the very beginning (registration fees).
  • Consider the number of unique users coming to the platform. For example, it may be difficult to earn income from listing fees if traffic is low.
  • Estimate the volume of sales. In case a marketplace application processes hundreds or millions of transactions per day, it is advisable to charge a commission from every transaction. If not, you should apply other strategies whilst improving customer satisfaction and helping vendors boost sales.

If you want to launch a marketplace, you are welcome to contact our team. Specializing in online marketplace development, our software experts will assist you in preparing a technical specification, prioritizing features, and choosing a marketplace monetization model. Project consultation is for free.

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