Starting an online marketplace with no revenue model is not the way you launch a successful marketplace business.
In this post I will cover 10 different marketplace business models that will help make your marketplace profitable.
This article is part of our series on starting an online marketplace business.
I've seen a lot of two-sided marketplace platforms fail to generate revenues during my time here at MultiMerch.
Let me tell you – it's not pretty. You can have the best marketplace in the world and still go bust if you don't find the right business model.
These are the online marketplace business models you can try to generate steady revenues:
- 1. Sign up fees
- 2. Subscription business model
- 3. Product listing or insertion fees
- 4. Selling fees
- 5. Transaction or payment processing fees
- 6. Sponsored products and stores
- 7. Ads from third party advertisers
- 8. Pay per lead or lead fees
- 9. Bidding fees for auction marketplaces
- 10. Grow your marketplace through affiliates and referrals
- Bonus: designing a tiered marketplace membership system
- Conclusion: which marketplace business model is right for you?
Let's jump right in:
1. Sign up fees
Sign up fees are simple – a sign up fee is a flat payment collected from your sellers when they apply to sell through your marketplace platform.
Collecting a sign up or registration fee is one of the most straight forward marketplace business models.
You've seen it, you know it. Sign up fees are simple, you don't need complex payment gateways and your sellers pay you upfront.
If you're brave enough you can charge sign up fees even before you have a thriving two-sided marketplace. (You only need to sell your idea to your vendors and convince them to pay to join your platform early.)
And it's a business model that makes sense to your sellers, too – paying a small amount to join a budding marketplace platform isn't a bad deal (if you have a valid business idea and can convince your sellers).
Here are a few tips for making the sign up fee business model work, especially in the early stages:
- make sure the sign up fee is affordable and feasible for your vendors
- think of the benefits your vendors will gain by signing up with your platform – and make an emphasis on the benefits!
- create an incentive for early bird sign ups – make your vendors want to sign up early
- offer a personal approach to vendors signing up – after all, they're investing in your idea
It's also possible to defer the sign up fee payment – for example, ClickBank charges you a $49.95 "activation charge" only after your first product is approved. While still essentially a sign up fee, it gives vendors a bit of assurance they'll only pay when they're ready to start selling.
If implemented properly, sign up fees can be a motivator for legit vendors and a safeguard against dummy signups.
Pros of sign up fees:
- feasible in the early stages
- simple implementation
Cons of sign up fees:
- doesn't scale well in the long run
- you'll need to be really convincing
Sign up fees are a decent marketplace business model in the early stages of your business when selling fees aren't feasible due to low sales volumes.
However, you will have to combine them with a different revenue model to make it work in the long run.
2. Subscription business model with recurring payments
Subscription is king in 2019 – you know it, everyone knows it. The global sharing economy is powered by subscription businesses generating huge recurring revenues.
Over the past decade, businesses have been actively shifting from selling products and services to offering them as subscriptions.
Why? Because recurring revenue is the lifeline of any business, including online marketplaces. You can call subscriptions "the ultimate marketplace business model".
From digital products such as software, books, music and movies to services and even regular sales (think leases and installments), subscriptions rule the world – and for a reason.
First, subscriptions make it possible to split a large payments into multiple smaller ones, which are affordable. Shelling out $700 for a copy of Adobe Lightroom for personal use? Probably not. Subscribing to use Lightroom for $10 a month? Sounds like a bargain!
Second, recurring payments are a great way to help keep your business funded and evolving over the longer period of time. Doesn't matter if you're building an online marketplace platform or a mobile app – charging a subscription will let you keep your product maintained and improving as long as your users think it's worth paying for. Selling it for one time payments? Good luck surviving the first few years.
The most important rule of the subscriptions is simple – as long as your users are getting more value out of your services than it costs them keep being subscribed, they'll keep paying. The same applies to online marketplaces – your vendors won't mind paying $10 per month if this brings them 10x more.
While implementing subscriptions is a more complex feat than collecting one time sign up payments, you'll usually find many popular payment solutions like Stripe that are offering them out of the box. You can combine them, too.
If you're considering the subscription marketplace business model, here are a few tips:
- make sure your vendors are be getting more value than it costs to keep being subscribed
- offer a free trial if technically possible
- describe exactly what is included and how you'll collect payments
- try offering a few different plans with different options and a way to seamlessly switch between them (more on this below)
- have a plan to keep your vendors engaged
- offer incentives for larger payments at once (e.g. 15% off for a yearly vs monthly plan)
The actual payment periods and subscription rates will depend on the industry and the products or services you're offering, but weekly, monthly or yearly payments are the most common ones.
Pros of subscription payments:
- great revenue model in the long run
- in many cases more affordable than one-off payments
Cons of subscription payments:
- more complex to implement than one-off payments
- difficult to implement in specific industries
If you can find a way to successfully implement this business model in your marketplace and make sure your sellers gain value out of their subscriptions – you'll do great!
3. Product listing or publishing fees
Product listing fees are one of the most common marketplace business models among two-sided marketplace platforms.
When you're just starting out with your online marketplace you'll consider listing or insertion fees as it's one of the easier revenue models to implement.
A listing fee is a flat or a variable amount collected from the vendor when they list their products for sale.
There's a number of different ways for a marketplace platform to calculate product listing fees:
- flat amount, e.g. $0.35 per product listing
- price-based amount, e.g. 5% of product's listing price
- category-based fee calculation, e.g. $25 to list a product in the Automotive category
- feature-based calculation, e.g. +$5 for each additional product category
- any combination of the above
Listing fees can be collected at once for each individual product or combined into a single invoice covering multiple products.
Here are a few tips to consider when implementing listing fees as your marketplace business model:
- make it easy for sellers to pay the fees – especially if you want to encourage them to list lots of products
- provide the sellers with a convincing argument why it pays off to list on your platform – via statistics, for example
- if you use price-based calculations and work with expensive products, consider maximum fee caps
Insertion fees will work great for marketplaces offering handmade items where vendors sell one-of-a-kind-products, but they may not work as well in regular retail online malls.
This business model is also popular among classified and ad platforms that don't process transactions and thus can't collect selling fees.
Pros of listing fees:
- straight forward approach that is clear to sellers
- will work great for one-off, unique and handmade marketplaces as well as classified platforms
- the way to go if you don't process transactions and can't collect selling fees
Cons of listing fees:
- won't work as well in the early stages while the platform is still gaining traction
- not suitable for all industries
- no products = no revenues
Before implementing listing fees, make sure it's a viable strategy in your industry. (If none of your competitors are doing it, perhaps it's not.)
4. Selling fees
Selling or sales fees is pretty much the most popular marketplace business model among online store and marketplace owners.
It is also one of the most difficult revenue models to implement correctly, in my personal opinion.
When you run a marketplace with selling fees enabled, you have a revenue stream that brings you a small share of each sale, usually before the payment reaches the vendor.
Both flat selling fees and percentage-based fees (or a combination of both types) are common.
The exact way you'll collect selling fees from the vendors in your marketplace will depend on the payment flow you're using.
There are three common payment flows in an online marketplace:
- direct payments, where customer's payment goes directly to vendor's account
- aggregated payments, where your platform collects payments from your customers and then distributes them to vendors in the form of payouts
- split or parallel payments, where the payment processor splits customer's payment between your vendors and your platform at checkout
With direct payments, you have no way of collecting the selling fee at the time of payment as the payment is made exclusively between the customer and the seller. You can still collect the selling fee as a reverse payment by invoicing your seller – either automatically at the time of sale or at regular intervals, e.g. monthly.
In case of aggregated payments, you'll keep track of the selling fees owed by the sellers, but collect them at the time of your payout to the seller. Depending on the amount of business your platform gets and the payment methods used you can either track the fee amounts manually or via toools designed to make it easier, such as seller transactions and balances.
Split or parallel payments usually take more time and technical skills to implement, but then make the process of collecting selling fees simpler than the rest of payment flows. In most cases, the payment processor you'll use to process split payments will let you handle selling fee collection automatically at checkout.
There are a few different levels you can apply different fee rates to when building your revenue model:
- marketplace-wide fees, e.g. $0.35 + 3% on each sale
- different rates based on plans or performance, e.g. 1.5% for power sellers, 3% for everyone else
- individual rates for individual sellers – consider this if you're running a smaller niche marketplace
- different selling fee rates for different product categories or even individual products
If you're building a marketplace platform with a tiered membership system, you'll have greated flexibility when planning your selling fees.
When considering whether or not to implement selling fees in your online marketplace, remember the following things:
- selling fees scale well as your sales grow, but don't work as great in the early stages of the project
- low selling fee rates may be enticing to your vendors, but might not be sustainable for yourself
- when implementing selling fees, don't forget to take your own processing fees into account
Pros of selling fees:
- they're great when scaling – 3% of $100 is $3, but 3% of $1,000,000 is $30,000
- they'll work well in large retail online malls where quantity is more important, than quality
Cons of selling fees:
- they're more difficult to implement compared to other marketplace business models
- they won't work well in the early stages when your two-sided platform doesn't have many sales yet
Selling fees will get your online marketplace platform to success in the long run – just make sure you have other revenue streams to rely on while you grow (or just get some VC funding!)
5. Payment processing or transaction fees
This marketplace business model is similar to sales fees, but charging payment processing or transaction fees brings your revenue generation to the next level.
If you only charge selling fees, you only get a cut of the order at the time of the sale.
However, there are many more payment types that will happen in a regular online marketplace in addition to order payments:
- sign up and listing payments from vendors
- recurring membership payments
- payments for promotions and featured listings
- earning payouts to vendors, referrals and affiliates
- payments from advertisers
With transaction fees, you get a small share of ALL payments that happen on your marketplace. You've heard the term "own the transaction". That's exactly what you're doing with this marketplace business model.
While the payment processing rates differ between companies and industries, even a 1% fee makes difference when you're processing millions in transactions.
Pros of charging your own payment processing fees:
- earns your marketplace a great amount of money when scaling up
- the more payments you're processing, the better off you are
Cons of charging your own payment processing fees:
- difficult to implement from the technical perspective
- shifting your processing fees to vendors will make them unhappy
It's a difficult business model to pull off, but it's the one you should be aiming for when building your online marketplace.
6. Sponsored products and stores
Promoting products and profiles is a great way to give your vendors that extra exposure after you've gotten your marketplace platform going.
It's a business model most of the popular marketplaces out there use to generate revenues.
Marketplace promotions can come in a few different forms, such as:
- sponsored products on other product pages and in categories
- promoted products in cart and at checkout
- featured vendor profiles and products on the main page
- promoted blog posts and newsletter mentions
Sponsored products will usually work best in product-focused marketplaces (such as eBay or Amazon, where the product is more important than the vendor), while featured vendor profiles are a great way to engage customers in vendor-centric marketplaces (where vendors sell unique or handmade products and build relationships with your customers).
When it comes to collecting payments for promotions, you can choose a few different approaches:
- have vendors pay for individual product and profile promotions (and set different rates for different promotion periods and locations)
- include product promotions in a higher-priced membership plan
- implement a credit system to let vendors purchase credit in bulk and use it for promotions at their discretion
- offer free promotions as part of a wider marketing campaign to attract new customers
If you decide to include paid featured listings and promotions in your marketplace business model, here are a few tips by MultiMerch:
- make sure your offer to sellers is clear and makes sense for them – if it doesn't pay off, they'll be reluctant to do it in the future
- consider the shopping experience of your customers who may be wary of sponsored products – will you promote everything or have some kind of validation in place?
- don't forget about the technical part of implementing sponsored listings – can your current system handle them out of the box or will you need to have it developed first?
- don't overdo sponsored listings so as to make your marketplace unusable for the organic purchase flow
Pros of sponsored listings and promotions:
- sponsored listings scale well as your marketplace grows – the more exposure, the higher price that your vendors will be ready to pay
- promotions are a flexible monetization strategy – the more placements you can arrange, the more combinations you'll be able to offer to your vendors
Cons of sponsored listings and promotions:
- allowing promotions of low quality products may negatively affect your customers' experience
- implementing featured listings may require custom development if your system doesn't support it
- you'll need to convince your sellers that it's worth for them before they'll be ready to pay for it
You can implement paid sponsorships and product promotions in virtually any industry and marketplace type – just make sure you do it the right way!
7. Ads from third party advertisers
This business model is a little different from promoted products or sellers – in contrast to your marketplace members, here you allow third party advertisers to promote their products, services or websites.
In general, the approach to ads is similar to the previous case – you have a number of ad placements and charge advertisers to publish their ads.
There are a few ways you can implement ads in your online marketplace:
- using in-house ad software
- using third party services, such as AdSense
- manage ads manually
Depending on your requirements and your platform capabilities, you'll use one or more of the advertising models to collect payments from your advertisers:
- CPI/CPM (cost per impression)
- PPC/CPC (pay-per-click/cost per click)
- cost per period, e.g. $125 daily or weekly for the homepage ad
- cost per post, e.g. $250 per blog post
If you don't use a dedicated advertising system, the last one will be the easiest one to begin with – as long as you have at least some activity in your marketplace platform.
A few of the different ad types and placements you may consider:
- display advertising, such as graphics and banners
- text advertising, e.g. blog posts or newsletter mentions
- mixed advertising, such as sponsored third party product listings
When considering third party ads to generate a revenue stream from your online marketplace, keep the following things in mind:
- ads essentially drive visitors away from your website – is it worth it for your platform?
- you don't always control the content promoted by third party ads – how will it affect the overall experience of your marketplace members?
- if you don't have a built-in ad system, implementing one will require some technical skills – can your team handle it?
Pros of ads:
- if implemented properly, relevant native advertising may provide the extra value to your marketplace members
- monetization through ads scales well as long as you can reach the relevant advertisers in your industry
- unlike affiliate and referral systems, you don't have to implement revenue sharing with vendors for advertisement
Cons of ads:
- low quality non-native advertising will negatively affect the experience of your users and visitors
- successfully implementing and managing online marketplace advertising requires a cooperation of multiple members of your team
Advertisement is a huge, but often controversial industry – if you go with monetizing your marketplace through ads, make sure you know what you're doing.
8. Pay per lead or lead fees
If you're running a contract-based or service-based marketplace and don't process orders through your platform, charging lead fees might be a viable marketplace business model for you.
In this case, your vendors will be able to browse the list of potential clients or deals, but will need to pay to view the details or an individual deal.
When it comes to charging the lead fee, you have two distinct options:
- charge to access each lead
- charge for successful deals only
In the first case, your vendors will have to pay to access the details of the lead or the deal, whether or not the outcome is good for them.
With the latter option, you'll only charge your vendors if the deal with this particular lead goes through – however, here you'll need to have some control over the deal flow.
9. Bidding fees for auction marketplaces
Bidding fees are similar to the pay per lead revenue model, but in this case you charge the other side – the customers.
The most common case of bidding fees are penny auction type marketplaces, where customers pay a small amount to bid on the product.
If you're running a penny auction marketplace, charging bidding fees will be a mandatory step as it's the primary revenue model for penny auctions.
In case you've got a different marketplace type – bidding fees are probably not for you.
10. Grow your marketplace through affiliates and referrals
While not a business model per se, running affiliate and referral systems will increase your marketplace customer and user base, thus driving sales.
Depending on your marketplace software capabilities and your requirements, you can choose either of these or run both at the same time.
The main difference between affiliates and referrals is:
- in affiliate marketing, third party advertisers promote your marketplace products without being members themselves
- in referral marketing, existing marketplace members refer new visitors to your marketplace based on their own experience
While running an affiliate system will usually result in a greater reach, it won't necessarily provide great results in terms of revenues.
Since affiliates are basically third party advertisers, they have a relatively low trust score among their audiences.
On the other hand, allowing your existing members refer new users to your marketplace will let you build an organic ecosystem and a community, provided you maintain the quality of your marketplace at a proper level.
If you're considering implementing a referral or an affiliate system of your own, here are a few things to consider:
- while an affiliate system may be a good idea for larger marketplace, an organic referral system is great from the start as long as your existing users are happy
- don't forget about fees and revenue sharing – if you sell products by third party vendors, who'll pay the affiliate/referral commission?
- building your own referral system from scratch will be a complex endeavor – can you handle it?
Pros of affiliate and referral systems:
- rewarding happy users to refer their friends will help you build an ecosystem within your marketplace organically
- implementing an affiliate system may work good on larger marketplaces
Cons of affiliate and referral systems:
- affiliates will often generate low quality traffic
- you'll need to consider revenue sharing if you're selling products by third party vendors through affiliates
Referral programs will usually work well as a marketplace business model in most industries, affiliate systems are a bit more difficult – in any case, do your homework before rushing to implement these.
Bonus: designing a tiered marketplace membership system
If you're going to implement sign up, recurring, listing and selling fees in your online marketplace, you'll usually want to create a few different tiers for your marketplace members.
In this section, I'd like to share a few helpful tips on designing a tiered membership system.
There are a few differentiators you can use when designing your plans.
Fee rates and selling restrictions:
- different sign up fee rates for different plans
- lower product listing fees for higher tier plans
- more expensive recurring plans with more features
- lower selling fees for power sellers
- maximum orders or maximum revenue per plan, possibly with automatic tier switching
While you're here, you'll also need to consider whether or not to offer free and freemium plans, as well as free trials.
When it comes to product listing, there are a few product publishing restrictions (or benefits) you can use to differentiate your plans:
- allow a maximum number of product listings per plan, e.g. 15 listings per week
- specify the maximum number of categories sellers can list to, e.g. one category per product at the lowest plan
- restrict product publishing to specific categories only and unlock the rest at higher plans
- allow sellers to upload up to a maximum number of product images and charge for additional images
- specify minimum and/or maximum prices sellers can define for their products, e.g. only premium plan members can list expensive products
You'll need to be careful here, though – restrict your plans too much and watch members leave to a more open competitor.
In addition or instead to product listing restrictions, you can grant or restrict access to whole features depending on your seller's plan, such as:
- limits on storage space, e.g. 200 MB on image storage for sellers on the free plan
- discount codes and gift cards, e.g. only paid members are allowed to configure coupon codes and create gift cards
- staff accounts, e.g. allow team access to seller control panels on higher tiers
- advanced analytics, reporting and sales tools – free members only get basic reporting and no access to advanced marketing tools
- manual order creation – allow premium plan subscribers to manually create orders for their customers
- automatic fraud analysis – grant premium sellers access to your platform's fraud tools for their peace of mind
- integrations with third party solutions – restrict free members to basic tools and enable integrations with custom tools for paid sellers only
- support level by your company – provide personal, live support to sellers subscribed to higher tier plans
Basically, there's quite a lot of possible features you can use as a differentiator when designing the membership system for your online marketplace.
The main thing I'd recommend keeping in mind here is not to go overboard with restrictions and end up with a system that's unusable for your sellers.
As long as you don't forget about your sellers and keep your membership levels feasible for them, they'll be happy to switch to the next level when they're ready.
Conclusion: which marketplace business model is right for you?
When it comes to marketplace business models, there's no "one size fits all" approach.
So, when designing a revenue model for your online marketplace platform, keep the following factors in mind:
- your industry and the competitors – if nobody else is doing what you have in mind, you could be wrong (or a visionary)
- the size and life cycle of your marketplace – some business models work well in the early stages, for others you'll need large selling and traffic volumes
- the nuances of your target market, geographical location and culture – what works great in one region, may not turn out so well somewhere else
In most cases, I'd recommend starting your revenue generation journey with exploring sign up fees, product listing fees, selling fees and featured listings before going deeper into advanced monetization.