Холмс, кажется, вы в России...
Imagine two people meeting at your house. One of them sells something to another, and their deal suddenly brings you some money — although you were barely involved. Sounds nice. And what if there were a hundred, a thousand, ten thousand of such trades? Wouldn’t it be great to earn money like that? Of course, in reality, nobody will pay you just because. However, you can organize something similar by launching an online marketplace. No, it won’t be as easy as our fictional example. Still, if you sort out how to monetize an intermediary platform, you can become comfortably well off. What are marketplaces, marketplace business models, and what else should you know before you launch a marketplace app development? We are here to explain.
Reading time: 11 minutes
Looking for a development team?
We can help with design and development of apps for businesses and startups
An online marketplace is a platform that connects vendors and their customers. In simple words, it works like this — a vendor displays its goods at a third-party platform (a marketplace) and a customer purchases these goods.
The first thing that usually pops into mind is a large Amazon-like hypermarket that allows you to save time on shopping and get any goods you can think of. Yes, such venues are marketplaces, too, but in fact, a marketplace is a much more global term. It is not only about some tangible goods: a marketplace can display services or digital products. Let’s look at the top famous marketplaces (and their revenues) to expand your view of the overall idea.
As you see, all these marketplaces generate enormous revenues, although they don’t produce or sell anything themselves. One of the keys to their success was the right marketplace business model — the way they monetized their services.
For example, Design.Inc, a US startup marketplace shut down within a single year after the launch. The point of the Design.Inc was to connect freelance designers to customers, but soon it became clear that there were more designers than jobs for them. In other words, the marketplace turned out to be too niche to bring regular large profits. Besides, some freelancers just happily partnered up with the clients directly and left the marketplace, and it all brought the service to failure in the end.
So, how do you find the best suitable marketplace business model for a particular startup and avoid risks?
Start at the beginning: before you monetize anything, you need to know what the product will be like. Everyone has their own approach to a business plan, but the basics always remain the same. You must know who will use your marketplace app, and what will make users choose it over and over again, and pay for your services. Another essential question: who will be responsible for your marketplace development? Will it be your in-house team or an outsourcing agency?
Some of these points might give you a hint regarding the suitable marketplace business model and overall simplify the marketplace app development. So, let’s give them a closer look.
When you are thinking of marketplace development, you basically want people to pay you for being a mediator. Pretty obviously, you must know who will find enough value in your marketplace. Note: it’s not always some business (say, a clothing shop) and its customer (say, a woman who needs to dress up). A marketplace can target only businesses, or only individuals, depending on its nature. Here are the most widespread types:
Here are some examples to make it clearer:
Note: when you get a closer view of the most famous marketplaces, you’ll see they successfully mix B2B, B2C, and C2C models. For instance, Aliexpress sellers work with businesses, too, and Airbnb accommodation options include hotels, not only individual rent. Many C2C platforms begin attracting businesses when they become popular enough, for instance, Uber started offering special packages for corporate travel.
So, why do you need to know who will use your marketplace? The main reason is that you need to know who will pay for your services.
It’s essential to consider who will find more value in your platform: a vendor or a buyer, and understand who a vendor or a buyer is.
For instance, Booking.com charges vendors, while buyers don’t pay anything for hotel reservations. Thus, their monetization model is based on vendors, who are businesses, and it perfectly works for both sides.
What will make your marketplace app different and will it be convenient enough for both vendors and buyers? App features might include calendars (for booking apps), listings, various search filters, payment gateways, and many more.
However, it’s not always a good idea to put them all in the very first version of your product.
The MVP is the minimal viable product, e.g., an app with only the core features. It might be hard to outline what the core functions should be as a product owner, you definitely admire all of them. Still, your main goal in the first stage is to collect customer feedback, and you need exactly the basic app version for it. In other words, you need to test your idea: if it doesn’t work out, you won’t regret spending a fortune on a complicated super expensive development.
We shared two best ways to select the MVP core features in a dedicated article: read how to keep your first product version simple, attractive, and viable.
So, we are coming to the main point: marketplace business models. We will touch on the top popular ones and show examples of how brands mix them. Don’t lose your nerve now, you don’t choose a model once and forever and can change it or combine it with another one.
Testing is our king: check your ideas, track results, analyze, and start all over again with another plan if it doesn’t work out. This is why it makes sense to entrust marketplace app development to a team that will be engaged in your product and help alter some features or add new ones in the post-release stage.
Here is an overview of the most widespread models we prepared to explain which of them work best for different goals.
The commission revenue model implies fees charged for every transaction. For instance, when you order food from a meal delivery marketplace, a restaurant will pay a commission from your order amount. It can be a flat rate, a fixed percentage, or a float commission that depends on the transaction’s sum.
Who uses this model?
Will it do for me?
It might seem a perfect solution for everyone, especially in the B2C segment: a vendor gets free listings and pays only after they profit from a buyer. However, it won’t work if a marketplace stores overpriced items or, on the contrary, focuses on non-commerce relationships.
What can go wrong?
The commission fee business model implies two main challenges. The first one is actually the fee amount: what should it be not to drive the customers away but still bring you a stable income? The best option is to look at the opponent marketplace fees and suggest a competitive one. Many platforms change commissions depending on the business size or sales amount and thus, create an image of a fair, flexible, logical pricing plan.
Another challenge is how you charge fees. Think of Booking.com, it doesn’t always make travelers pay for accommodation in advance. Thus, the transaction is done off the marketplace — a customer pays at the hotel upon arrival. Some hotels try to work the system and cancel Booking.com’s reservation when the client arrives: no reservation — no commission. To avoid such cheating, Booking.com calls or sends emails to guests, asking them if they really stayed. If it finds out a hotel broke the agreement, it applies particular fines. Of course, it doesn’t always work out, but you still need to think over the system so as not to miss profit.
The subscription marketplace business model implies that a seller, a buyer, or both pay a regular fee to use the marketplace. Obviously, such a marketplace must look worth paying for daily, monthly, or annually.
This model is not really universal: it will be suitable for platforms selling products or services people need and are ready to pay for regularly.
The major challenge of this revenue model is to prove your platform is really worth paying fees. Many marketplaces solve this issue by giving a free trial period to let people get used to a site or an app and become kind of addicted to it 😉 For example, Apple Music provides new users free access for the first three months. Shutterstock’s unique selling point is based on copyright law: you simply can’t use any images without an owner’s approval so you need to purchase them anyway.
Another important note: if users tend to opt out of subscription, vendors won’t see the point in using it, too. Thus, losing buyers’ loyalty is another big risk for this business model. One of the solutions is various subscription levels allowing people to get discounts or share the fees. For instance, you can select between Standard, Student, and Family memberships in Apple Music, while Shutterstock offers a discount when you pay a year in advance.
Freemium is Free+Premium. It is a model of a marketplace that offers its basic features for free but also has a premium paid plan with extra options.
As a startup, you don’t have enough trust to make people pay for your services. Besides, most of them won’t do it just because they can use your platform for free. The main challenge is to motivate users to purchase premium features and find the ones that will be really worth it in your customers’ eyes. Let’s say, Spotify’s free plan is not the most convenient way to listen to music, so its premium version becomes the only way to get rid of annoying ads and various limitations.
Another big challenge is to track your customers’ behavior. What are the main triggers making them opt for the premium? It’s pretty hard to understand and predict users’ decisions in this revenue model, so such a startup usually implies investing in a seasoned marketer (or a whole marketing team).
The listing fee revenue model is when vendors pay to a marketplace for every listing they create on the platform. In other words, they have to pay every time they post a new item.
What can go wrong? As a brand-new platform, your marketplace will barely have enough trust to pay for listings. Thus, you might need to wait until you have your first income. In fact, this model rarely works independently, so we recommend mixing it with the other monetization variants.
The lead fee marketplace business model is based on payments from vendors. They use a platform for free but pay only when they find buyers. The difference between the commission model is that there are usually no trades on a lead fee marketplace: it only gives vendors access to customer contacts. Still, sometimes a vendor pays for a lead only after the deal is done, but it’s usually a flat fee per lead, not a commission.
When you sell leads, your biggest risk is marketplace leakage. In other words, you will connect a buyer and a vendor, and even if their first deal will bring you some income, they may continue a partnership outside your platform in the future. To avoid it, a marketplace must find a reasonable price that won’t exceed a market average.
We already mentioned that you can switch up the model if you think you made a mistake. Besides, you can add another one, and mix various monetization options. In fact, it’s a very common practice among marketplaces:
We keep telling in our blog that Purrweb is not only about mobile app development. Our expertise allows us to guide you through the challenging steps, like choosing the best suitable marketplace business model or the app’s core features. And we can prove it!
We already shared this story in our blog: you can read it here in detail 👇
Our client asked us to create a video marketplace to connect video creators, businesses, and distributors on a single platform called Contentplace.
Feeling up to creating your digital marketplace? We are ready to help you, too. Maybe your marketplace will be our next top case? Contact us through the form below to start working: we will listen to your idea, give you tips on how to bring it about and come up with a high-quality MVP within three months.
How useful was this post?
Rate this article!
43 ratings, аverage 4.7 out of 5.
No votes so far! Be the first to rate this post.
As you found this post useful...
Follow us on social media!
Read more
Thanks for your inquiry. It usually take up to 24 hours to get back with reply.
Wanna schedule an online meeting?
Sorry, something went wrong with your request.
Please, try again later.