How to make a profit from an online marketplace. Top 6 marketplace monetization models
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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%.
Explore how to build a marketplace like Airbnb, involving project cost and timeline.
As a comparison, Booking.com 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.