Commissions are by far the most popular revenue model for digital marketplaces. Although they might come under different names by different marketplaces - Amazon calls them referral fee, eBay has final value fees and Etsy refers to them as transaction fees - they are all the same thing: a percentage or fixed amount that a marketplace chargers a vendor for each sale they make on its platform.
The widespread popularity of marketplace commissions is mainly due to their success and simplicity. The marketplace owner gets a share of each sale made through its platform while the vendor only incurs costs if an item is actually sold (if no other fees are in place). This creates several benefits: Vendors are more likely to sell their products on the marketplace as there is no risk involved for them listing their products. The price of doing business is transparent to each party. Finally, the commission model scales really well and works for both small and large marketplaces.
However, it is not just about setting the right percentage fee, but rather to develop a smart marketplace commission pricing model that helps owners to maximise profits and business growth across key metrics. With that in mind, let us evaluate the different marketplace commission model types and how to pick the right model:
How to set the right marketplace commission fee
First off, there is not a generic commission level that works best for all marketplaces. As regards the optimal commission fee to charge, it always comes down to marketplace and industry context, but most importantly how much value the marketplace creates for vendors. The higher the value offered, the higher the commission fees the vendors will be willing to pay. Sellers will be particularly interested in the average customer base of your site, their AOV (Average Order Value) and how aligned your marketplace brand is with their product.
A common practice for new marketplaces is to alter commission rates based on the maturity of their business. Hence, marketplaces would typically apply a lower commission rate to attract more sellers in the launch stage while increasing fees later on, when the marketplace is more mature, has a stronger brand and the amount of transactions is higher. In this case, it is important to make it clear from the beginning that the lower rates represent a discount from a higher range (so that the price anchor becomes clear to sellers) and that they are time-bound (i.e. only valid for a year). Otherwise, the marketplace may lose leverage to raise rates later on.
Finally, once the marketplace expands its customer base, the number of vendors and the product inventory, it might make sense to switch to a more sophisticated commission model type, such as introducing different rates based on product categories, and to adjust rates to reflect the increased value proposition and boost profits.
Amazon changes their marketplace commission fees in 2019
Marketplace commission fee types
The commission to be paid by the vendor is a specific percentage of the price of the product sold. In some cases, the percentage is based on the final price (product price plus shipping fees). For instance, a 10% commission on a 10€ T-shirt with 2€ shipping costs will result in total costs of 1,20€ for the vendor. The percentage commission is the most common type found in marketplaces.
The commission to be paid is a specific fixed amount (i.e. 0,99€) per item sold. Minimum-fees are usually used in combination with percentage fees, with only the higher amount coming into effect. In that case, if you sell a €5 T-Shirt at a 10% commission rate and a 1€ minimum fee, the costs would be 1€, not 1.50€.
Marketplace commission model types
Etsy charges the same transaction fee to all products and sellers
Marketplace owners can choose from a set of different commission models as they develop their business model. The one-size-fits-all model charges the same rate to all vendors and product types. It is used by marketplaces like Etsy and Artfinder and, in general, works best for smaller marketplaces with few vendors and inventories. The category-based model applies different rates based on product category and is commonly found by large marketplaces like Amazon, Ebay and Rakuten. The product-based model is based on introducing different rates for a specific product, which is why it is usually reserved for unique campaigns and exclusive products. Finally, the vendor-performance-based model uses distinct rates for vendors based on their performance (a few sellers, called power sellers, often make up most of the marketplaces' sales so it might be a good strategy to incentivize them to boost their sales) or based on exclusive commercial agreements with specific sellers (i.e. established brands or operators that bring added value to buyers).
To develop a smart marketplace commission pricing model, owners must consider the unique environment of their marketplace, analyze their competitors and pick the most adequate commission type. Additionally, the selected model should be reviewed over time as the marketplace evolves and grows. Finally, it is important to note that most marketplaces apply several other revenue models in addition to commissions.