The Marketplace Business Model: Online Marketplace Advice for 2024

The Commission Model: The Most Common Way to Make Money

While Amazon is a huge retailer, they're also one of the largest online marketplaces in the world. The company houses less than half of the products it sells in its own warehouses; the other half is sold and shipped by its marketplace partners, and Amazon takes a cut as the middleman—a commission. Other companies that utilize this include Etsy, Alibaba, eBay, Uber, Airbnb, and Angi (formerly Angie's List).

A commission revenue model is a system in which an organization receives payment for the goods and services it provides by taking a percentage of sales or commissions. This monetization model is often used by companies that offer products or services through third-party providers, such as affiliates or agents.

This type of model allows companies to save on overhead costs while still making money from the sales they generate. The commission rate is usually a percentage of each sale made.

Listing Model: Paying a Listing Fee Per Offering

A listing model often accompanies the commission model. Sellers agree to pay a listing fee for every item they upload to the platform.

The listing model is an attractive option for sellers offering high-ticket items; vehicle marketplaces and real estate marketplaces, for example. With scarce resources, this method allows them to maximize profitability by having multiple product listings.

Listing marketplaces are an attractive option for providers seeking greater visibility. However, pricing the listing fee appropriately is critical to ensure sellers will list on their platform.

Featured Listings: Put a Spotlight on Items

In addition to basic listing fees, sellers have the option of paying extra to feature their listings in various marketplaces as a way to stand out from similar products and services. Featured listings could be in banner ads on the marketplace platform, ads placed off-site, "customers also purchased" links on other product pages, and even in emails that the marketplace business sends out.

Featured listings are an excellent add-on to the marketplace model and can easily be incorporated at launch of the online marketplace. Clarity Ventures can help you make it happen.

Subscription/Membership Fee: Regular Income

With the subscription model—also known as a membership fee model—businesses can provide users with an enduring value proposition. Not only does their monthly subscription fee get them access to tools that help draw in new clients, but they also offer an opportunity for cost savings and unique experiences.

The subscription model can also offer a free trial period as part of their business model. The customer pays only if they continue using the services and loses it if they fail to renew. Of course, there's also the monetization model requiring a credit card on file so they can be charged automatically if they don't cancel.

Freemium Model: Only Give Some of It Away

A marketplace freemium model is a pricing strategy used by companies to entice users to use their products and services. This model allows basic versions of their products and services to be offered for free, while more advanced features are available for a fee. Many users pay because they see the value proposition of the software/services you offer.

By offering this type of pricing, companies can acquire new customers quickly and easily, as well as generate revenue from those who want access to more advanced features. The freemium model can then turn into a subscription model and offer premium features.

Lead Fee: Finding Others What They Need

A lead fee business model is a type of commission-based business where the marketplaces generate revenue by charging third parties for leads. This can include paying per-click rates or paying a one-time flat fee for each sale they refer to the third party.

Third parties can also be charged fees for extra services such as analytics and customer support. In some cases, marketplace platforms may even offer deals and discounts with third parties to incentivize them to join their platform.

A Marketplace Business Doesn't Keep Inventory

A business that has no inventory but still makes money? Sounds pretty good to us.

With the traditional eCommerce business model, the business must have inventory on hand to sell to customers and have a CRM/ERP that can deal with intake and warehousing.

There's also the cost of the warehouse itself to keep this inventory, whether it's a rented space or purchased outright. Dealing with overstock or expired products (whether expired food products or items that have gone out of fashion) is also eliminated.

Shipping is another aspect the online marketplace business model doesn't have to deal with. No inventory means no shipping, no shipping staff, and no returns. The only aspect of shipping a marketplace business has to deal with is the shipping software that helps your users ship to each other.

Excellent (and Safe) Profit Margins

Would you rather buy something for $90 and sell it for $100, or let someone else sell something for $100 and take $10 as your commission?

The answer is obvious. If you are buying and selling items yourself, you have to deal with all of those inventory and shipping issues we mentioned above. But if someone is on your marketplace and (essentially) selling for you, you don't assume the risk.

Business models like the commission model make profit margins safe, and when you add additional selling fees like listing fees and other paid services, it's a better value proposition than many traditional eCommerce website businesses.

Focus on the Customers

When you don't have to deal with inventory and shipping, those resources can be focused on other important aspects of running the online marketplace. A primary goal of any marketplace is to improve customer satisfaction at every opportunity.

When developing online marketplaces, owners put considerable effort into researching the needs of the customers they will serve—both buyers and sellers. But no amount of research will give you the information that you'll have once you launch and start dealing with users in real-world situations.

Once you have this information, the marketplace business model lets you put your resources into changing the platform to meet these needs. Many traditional B2C and B2B eCommerce platforms stumble because they can't re-invest in their platform; so much money is tied up in inventory.

Make Good Use of Data

Your marketplace platform will generate a lot of data, and that data is valuable and can help you remain competitive. You'll learn about customer purchases, what makes them repeat purchases from a buyer, which sellers are selling the most, how buyers navigate your site, and hundreds more metrics that can be customized to your needs

You can make good use of this data by using artificial intelligence (AI) and machine learning to make your marketplace app and website better. You can even anonymize customer data and charge sellers a small fee to help them sell better.

More Money Into Marketing

Speaking of having money to improve the business, marketplace business models allow a marketplace to spend its money on marketing the platform. After all, the two primary jobs of such a marketplace are to a) provide the platform, and b) bring users to the platform.

In other words, you can't just launch a consumer-to-consumer site like a marketplace and expect people to show up. The main challenge of a successful marketplace is to bring customers to the site, both sellers and buyers. It's a business plan that works, but it must be followed so that the site doesn't flounder.

Marketplace Business Models Scale Easily

Plan for future growth when selecting your marketplace software platform. An investment in the right platform can make it easy to scale your business as it takes off, allowing you to quickly add thousands or even millions of listings with additional Cloud servers. When doing your research on marketplace eCommerce platforms, make sure you choose a platform that can scale with your needs.

With no money tied up in inventory, incoming funds can be reinvested back into the business and used to grow instead of renting more warehouse space and hiring more shipping staff. You'll be able to plan for 10X growth if your business takes off quickly, without outgrowing your platform before you know it.

Business Grows Business

You'll have to market throughout the life of the platform, but once you get going, some of the marketing takes care of itself: word of mouth.

A marketplace can reach its full potential through the power of increased user numbers. When users are satisfied with a platform and feel they are saving money, they will naturally spread the word to their network and draw fresh customers in.

By providing engaging content and relevant benefits, sellers on your platform can tap into an exponential growth cycle that brings new faces in droves!

If You're the First...

...people tend to stick with you.

Once a network is in place, it’s hard for competitors to make an impact and steal your business. They'll need to offer a superior business model or platform that draws your buyers and sellers away, and they'll have to spend money to outdo your marketing and branding as well. Achieving similar success requires immense resources and considerable time investment.

It's true, your new competition has the advantage of seeing what you've done, but you have the advantage of watching their mistakes—and drawing on your own—and addressing the needs of the community before they do.

Online Marketplaces Capital Costs

A main challenge in creating a marketplace are the start-up costs. These costs are common to most new eCommerce websites, but you can't ignore them all the same.

• Investing in the Platform — Getting the right marketplace platform is vital and will be a big part in determining your success. Do your research to ensure you find the one that meets your needs.
• Finding Sellers — You don't want to launch without a large selection of buyers and they items they sell, because you don't want buyers getting to your site and not finding anything that interests them. This will require research, marketing, and onboarding costs before you can even launch.
• Hiring Staff — While you don't have to worry about hiring anyone to manage or work a warehouse, you'll most likely need staff to manage the website, address problems with buyer/customer transactions, and market your marketplace.

An excellent way to alleviate some of this cost is to launch as soon as possible with a minimum viable product (MVP). So long as the core features are in place and you have many sellers on your site to satisfy buyers, you can launch and start making money. After that, you can add additional revenue strategies and several monetization channels.

Seller Problems

As we mentioned above, finding sellers can be difficult...which means that finding quality sellers is even more difficult.

The sellers on your website will be of varying quality; there's not much you can do about that. But you can put steps in place, such as a vetting process, before they're allowed to sell.

Another common method is to create a rating system, often a five-star system where buyers can rate sellers and vice-versa. Sellers that don't perform well or deliver lesser merchandise will often be weeded out by such a system.

Competition Grows With You

The more successful you are, the greater the competition will be. That's just a fact of business and affects business models like marketplaces as much as it does any company in the world.

How do you combat this? Be better than your competition. Be sure to address your customers' needs, constantly improve your marketplace platform, and innovate in every possible way.

Payment Processing Can Be Tricky

As the owner of the platform, you'll want a robust payment processing system in place to make sure every purchase is a successful transaction. Having one in place not only makes users confident in your platform, but also ensures that you get your cut.

When looking for a payment hub, be sure that it can handle the following:

Accept Multiple Payments

Customers may want to pay with a credit card, e-checks, crypto, or via invoicing. The payment system should also offer PCI DSS compliance to protect funds at every step.

Calculate Taxes/Duties

You'll need to collect taxes no matter what, and international buyers will be more likely to buy if they have a good idea of the duties that may be incurred.

Calculate Shipping Fees with Different Carriers

Whether shipping domestically or internationally, APIs can be added to your marketplace platform so that anyone—buyer or seller—can calculate what shipping will be. You can include as many shippers as you want, including UPS, USPS, DHL, FedEx, or freight.