Choosing which revenue model to implement may be the most relevant business decision marketplace owners need to address before launching, and one that must be reviewed continuously. Indeed, the chosen revenue model has a strong impact across the business, from the capacity to onboard sellers and convert visitors into paying customers, to supporting the business' cash flow.
Every marketplace owner must reflect on the value it creates for both the buyer side and the seller before deciding on their revenue streams. Not only this, but marketplaces need to ensure that the value they create for both sides is greater than the associated costs. Of course, the more value they generate, the more successful the revenue stream of their marketplace. The most successful marketplace managers will take this decision seriously and allocate time to deciding on their marketplace revenue model before they launch.
Benchmarking other marketplaces might give ideas regarding how to monetise your marketplaces. However, each marketplace is unique and therefore, it must build a revenue stream that is based on its specific niche, user base, and the values it provides.
In this article, we’ll discuss the various methods a marketplace platform can use to successfully monetise:
The Commission Model
Rakuten charges vendors a fixed fee plus a commission percentage per item sold
A commission model is the most common revenue model. It is often used by newer and larger marketplaces. This model allows marketplace owners to capture value by taking a percentage of every sale made through the marketplace. Finding the correct percentage here is vital and depends on the value added to the seller. For example, some marketplaces like Etsy charge a single-digit percentage while sites that sell stock photography could charge upwards of 50%. New marketplaces tend to simplify the commission model by establishing a single commission across the marketplace (independent of product categories, or individual seller agreements).
However, as the marketplace consolidates and understands its value to its clients, it might introduce different commission models across different product categories, based on what these categories bring to the marketplace and their position to negotiate higher commissions. Rakuten, eBay and Walmart, all follow this latter scheme. As for Amazon, they determine pricing depending on how many products the seller lists on the marketplace.
It facilitates the onboarding of new vendors because there’s no risk for them in listing their products, since they only pay once they make a successful sale.
It scales very well. That’s because the higher the value of the items sold on a marketplace, the higher the revenue for the marketplace itself.
There’s typically a lower value capture during initial stages of the marketplace, where Gross Merchandise Value remains minimal.
Takeaway: The commission model could be a great fit for new and large marketplaces.
Zibbet charges vendors a monthly fee in return for access to their platform and marketplace
Another option for marketplace monetisation is to charge sellers a monthly or annual flat fee to use the marketplace. These membership fees can be charged to all or some sellers, depending on the model. For instance, new sellers with a relatively low number of transactions might not be charged a fee, but if they sell more or want to enjoy superior benefits, they can become a member in return for a monthly fee.
For instance, Zibbet offers vendors three different subscription models that cost between $4 and $16 per month, depending on how many items they sell and how many additional benefits they want to have. Another example is Amazon, which combines the subscription model with other types of monetisation strategies. It charges a $0.99 listing fee, but members who pay the subscription fee can forgo this, in addition to receiving other advantages for being a member, like facilitating customer acquisition. However, it does also, like most online marketplaces, offer a “no-monthly fee” option.
This approach provides consistent income and helps long-term financial sustainability.
I can be difficult to implement the subscription model for smaller marketplaces that lack a strong seller incentive.
Takeaway: The subscription model works effectively for marketplaces that are already established, and looking to grow their pre-existing community.
Etsy’s pattern service allows sellers to customise their profile within the store
This model is referred to by a number of different names: freemium, enhanced seller services, or additional services. Essentially, it means that the marketplace generates income by offering additional benefits to sellers in exchange for a fee.
For example, the marketplace can offer sellers additional features or increased customisation of their vendor profile and product pages. Etsy has done this effectively with its Pattern service, where marketplace sellers can launch a SaaS online store that’s fully synced with the Etsy marketplace for a fee of $15/month. This proved a profitable choice, given that Etsy made more money in its premium seller services than in its base transactions in total.
Marketplaces like Amazon offer ads to sellers to help their products stand out even more
The advertising model is another interesting marketplace monetisation strategy which could help a marketplace ensure a steady revenue stream. With in-marketplace ads, sellers can place an ad on the site on a CPC or CPM basis. This model works best with marketplaces that have a lot of users or target a specific niche. For instance, in 2018, Etsy’s services revenue grew by 35%, due mainly to increased promoted listings. According to Mayaba, Amazon also made over $2 billion last in Q2 of 2018 by selling ad space. Most of it was sponsored products -- a total 5% of its GMV.
Platforms with a lot of daily visitors such as Facebook and LinkedIn monetise using ads alone and over the last few years, marketplaces have also started to generate more revenue through in-marketplace ads as well. However, marketplaces need to make sure the listings are relevant to the buyer's history or intention on the marketplace in regards to product categories, price ranges and other factors.
The advertising approach creates a steady stream of additional revenue.
This is also an excellent way to promote sellers’ products at the same time.
Ads can disturb the buyer’s shopping experience and alienate customers.
This approach might not work well for marketplaces with low traffic. It works best when the marketplace has heavy traffic that will ultimately convert and click on the placed ads, making it worthwhile for the seller to pay for the added visibility.
Takeaway: In-marketplace ads are better suited as an additional revenue stream for large marketplaces, layered on top of other monetisation options.
Some marketplaces like eBay opt against listing fees
A further marketplace monetisation option is to charge sellers to list on the marketplace. The listing fee model often helps ensure a higher quality of products being displayed on the marketplace. This is because sellers are forced to be more selective about which products they insert and will usually choose their best-performing ones. However, some argue that the listing fee model is risky for marketplaces and, like many models, works best as an additional revenue stream, not a sole source of marketplace income. Therefore, it may be worth experimenting with combinations of monetisation models to build a monetisation strategy that works for your marketplace and it’s sellers.
Listing fees allow marketplace owners to generate revenues regardless of how products perform.
There’s the possibility that listing fees could discourage sellers from adding more of their products.
Takeaway: Listing fees are another interesting option for monetisation that works best in combination with other revenue models (i.e. commissions).
The Combined Approach
Amazon uses a variety of different monetisation models for its marketplace
Most leading marketplaces leverage a combination of marketplace revenue models to guarantee them the highest profit possible. For instance, Amazon actually utilises all the models we have looked at here in order to cover all bases, offer a variety of price points and seller experiences, and of course bring in a steady income stream. However, when deciding how to monetise a marketplace, we can conclude that a combination of a few models tends to perform best, especially if a marketplace is still finding its feet and growing a customer base.
At the end of the day, there’s no one-size-fits-all solution, and the revenue model will depend heavily on the unique character of the marketplace: the niche, sector, AOV (Average Order Value), the number of products listed, and the average customer base. Through a combined approach and a willingness to be flexible over time, marketplaces can find the optimal monetisation strategy for their unique marketplace.
Monetisation Models Evolve Over Time
Furthermore, revenue models can, and need to, change as a marketplace matures. The marketplace’s revenue model is a clear indication of its high-level business objectives, which will vary along its lifecycle. Upon launch, where the focus is on traction and market validation, marketplaces might choose revenue models like sales commissions to make it as easy as possible for sellers and buyers. As the marketplace matures and builds momentum and reputability, owners might then be in a stronger negotiating position to introduce higher and steadier value-capturing streams, such as increasing commissions or introducing recurring fees (i.e. member fees).