Online marketplaces are becoming more and more popular. In 2022, consumers spent about USD 3.2 trillion shopping on these websites, with about USD 17 million splashed on Amazon every hour, and over 150 million people accessing these marketplaces from their mobile phones. 

The compelling thing about marketplaces is that they allow quick and easy access to a variety of products and services. Consumers are also falling for the simplicity of these platforms as they can jump between their favorite stores at the click of a button. 

Definition of the Marketplace Business Model 

The marketplace business model embodies the idea of creating a digital marketplace and operating it using one or more existing “marketplace” methods. 

A marketplace or otherwise an “online marketplace” refers to websites and other digital businesses that fulfill buyer and seller interactions over the internet - leading to a transaction. 

These unique businesses apply digital technologies and operate remotely. They enable both sides of a market to connect, bargain, pay, and exchange products or services, without meeting in person or leaving the comfort of their home. 

Retail vs Marketplace Business Model

The retail business model underlines the economic activity of providing products directly to customers. Under these circumstances, the seller or business owner is in full control of everything from the availability of commodities to their prices, and the overall experience of customers.

Dissimilarly, the marketplace business model promotes the idea of connecting vendors or retailers (retail-operating businesses) with buyers/customers. Employing this model in business means being responsible for attracting, retaining, and linking both product owners and buyers. 

Retailers would have control over pricing, supply, and other critical market conditions like they typically do, but the marketplace owner facilitates financial transactions and resolves any crisis between both parties.  

Types of Marketplace Business Model 

In this section, we take a look at the seven different types of marketplace business models, including their pros and cons. 

Commission Model:

A commission-based marketplace business model entails earning a commission from every transaction on the marketplace. The revenue generated is known as a commission fee and it is charged either as a percentage of a transaction amount or as a flat fee. 

The commission model is an interesting one since owners do not earn any revenue when users onboard or use the marketplace, or when retailers enlist their products for sale. They depend solely on the purchase of a retailer's products and services. 

Such a market can also be described as a product-based business. This is because the marketplace thrives when retailers have highly valuable or attractive products on display; products which customers desire and actually purchase.  

Pros

Users will likely pay the commission fees just to get products they desire or deeply value. 

Cons

The business’s revenue ultimately depends on the value of products and on the bargaining power of retailers to generate revenue. 

Subscription Model: 

In the subscription model, the business owner does not charge fees for transactions that occur on the platform. Instead, buyers and retailers pay a recurring fee to have access to the marketplace, and or upgrade their access.

Running a subscription marketplace model means that a business is confident in its value to customers. They must be offering services that are worth paying for. In addition, they must also be able to maintain their value as a brand. A situation where customers begin to lose trust in the brand and unsubscribe from their services. 

Pros

The subscription model presents a rather steady source of revenue. 

Cons

High churn rate. A large number of subscribers could suddenly cancel their subscriptions putting the company in financial distress. 

Listing Fee: 

Now to something more different from both the commission and subscription marketplace models; the listing fee model. As the name describes, the listing fee model is one in which vendors or retailers are charged for each product they list on the marketplace. Every other thing from transactions to users’ access to the platform remains free and does not attract any fee.

There are two ways in which the listing fee model could be implemented. One is by charging a flat rate fee and the second is by charging a fee that corresponds to the price of the product being listed. In the first instance, vendors all pay the same amount in fees when they bring a new product to the marketplace. However, the second instance would see vendors pay fees that vary based on the price of the product they are listing. 

Pros

The business generates revenue for every single item listed on the site, whether it is later purchased or not. 

Revenue is quickly generated since the business does not have to wait until products are purchased. 

Cons

The business might struggle to break even if there aren't enough products listed on the platform. 

Featured Listings and Ads: 

Featured listings and ads comfortably fit as an advanced version of the listing fee marketplace model. That is because, while the listing fee model charges a fee for each item listed on the marketplace, the featured listing model charges a fee to display a vendor’s already listed item as a special or “featured” item on the marketplace. 

This kind of placement catches the attention of potential buyers and builds their interest in the product. Marketplaces that operate the featured listings and ads model must understand how to make such listings appear spectacular. Also, they often make use of sophisticated software algorithms to decide which buyer to display featured listings to, and when. 

Pros

Sellers of high-value items often want to promote or advertise their products. This creates a revenue potential for the business.  

‍Cons

The business will not generate revenue if there is little or no demand for a featured listing. 

Freemium: 

A freemium refers to a business model in which basic services/features are offered free of charge, while more advanced services are offered at a fee. The word “freemium” stems from a combination of the words “free” and “premium” indicating the availability of both service options. 

Marketplaces that operate a freemium should know how to influence the loyalty and retention of both vendors and buyers. This ensures that these users are around long enough to desire the more advanced features. Moreover, there must be a clear-cut benefit of the advanced features, otherwise, customers would comfortably stick to using the free version without ever needing to purchase the premium.      

Pros

Paying customers are usually very loyal to the brand.  

Cons

Revenue generation might take a while as customers have to progress from using basic features to paying for premiums. 

Lead Fee:

The lead fee marketplace business model charges vendors for leads. A business lead is a person who is interested in products being sold; and has the potential to make a purchase. That being said, businesses that operate the lead fee model will charge a retailer or vendor for introducing them to a potential customer. 

Lead fee charges could take place in two forms. One is that the lead fee is paid upon introducing the vendor to the lead. In this instance, the business begins to know if a sale goes through, or whether or not a transaction occurs. They simply connect vendors with leads, and then go on to charge them for the opportunity. 

It is the responsibility of sellers - in this type of market - to make good use of every opportunity, especially since they are charged even before they can make a sale. Alternatively, vendors are charged a lead fee only when the lead makes a purchase. This method takes into account the value of the purchase in determining what the vendor pays. 

Pros

The marketplace generates revenue with or without a transaction between seller and buyer.

Cons

Conflicts arise if a vendor pays the lead fee charge for multiple leads that do not convert.

Mixed Marketplace Model:

This model involves operating two or more different marketplace models at the same time. This could be simple or complex, depending on the number and type of models being put together and the market in which the business exists. Achieving profitability or falling into loss with this model is dicey. 

Pros

The most obvious advantage of the mixed marketplace model is the resulting multiple streams of revenue. 

Cons

It is difficult to effectively manage a mixed marketplace business. 

What to consider when choosing a Marketplace Business Model 

Most marketplace businesses take the form of a C2C (that is, a customer-to-customer model in which third-party sellers meet buyers). When building, owners have to choose between this, or a B2C (in which they directly sell items to buyers through the marketplace), or a combination of both. 

They also have to consider their online marketplace usage and UI/UX characteristics, sales and payment features, help and support options, buyer and seller identification/verification, as well as ratings and feedback mechanisms. 

They must forecast how many buyers and retailers they can attract, what kind of products or services would be supported, how they want to earn revenue, and whether the cumulation of their idea is sustainable or not. 

Let me leave you with this;

Starting an online marketplace can be done in three simple steps: 

Start Small: Avoid the temptation to build a complex marketplace right away. It is always better to start small, get acquainted with a specific niche, and gradually grow a community of buyers and sellers.  

Be Patient: Establishing a successful marketplace takes time. Do not rush it. Follow the process and make sure to learn about your users and the market while you’re at it. 

Be Flexible: Identify the latest marketplace trends and be prepared to adjust accordingly. 

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