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When building your marketplace, it's crucial to determine the best way to make money. You want your revenue to be sustainable and reliable.
You should define:
- Who will you charge?
- When will you charge them?
- How will you charge them?
In this post, we'll explore different types of revenue streams as well as the benefits and drawbacks of each.
Commissions
Commission based pricing means that the marketplace earns a fixed or proportional fee for each sale.
This is a popular business model. However, you must have control over the transaction process. There are three ways you can earn commission:
Charge the supplier
Here we charge suppliers a percentage of every sale they make through the platform. Let's say we run a marketplace with a 15% supplier commission. If a supplier charges $500 for a product, we would retain $75 and the supplier would earn $425.
Charge the customer
Here we adding our commission on top of the supplier's price. If a supplier prices their product at $500, the customer actually pays $575.
Charge both
Alternatively, you can charge both customers and suppliers. For example, Airbnb charges their suppliers (hosts) 3% and their customers 6-12%. For a $500 booking, the supplier would receive $485 and the customer would pay between $530 - $560.
I personally like the latter model because neither the customer nor supplier pays the entire commission. How much commission you charge will depends on a few different factors.
Marketplace Features
If your marketplace performs verification checks, or has other premium features, you can usually charge a higher commission rate. Sellers and customers usually agree that extra services are valuable and worth paying more for.
Average Order Value
The size of your commission may depend on the average size of your marketplace transactions. Generally, the higher the amount, the lower your commission is. For example, 10% commission on a $1million purchase is a lot more than 10% commission on a $10 transaction.
Competition
If there are other companies operating in the same vertical as you, find out what the industry standard is. In real estate, brokers usually charge 3% commission. If you tried charging 10%, customers would probably choose a cheaper competitor.
To give you an idea what other marketplaces charge, take a look at the table below by Bill Gurley:
Commission-based pricing convinces suppliers to join and list their goods/services on your marketplace, which is its main advantage.
However, one of the biggest drawbacks is disintermediation. This is where the buyer and seller take the transaction off the platform to avoid commission fees. For this reason, marketplace often hide the contact details for suppliers/customers until after the transaction is complete.
When you anticipate that the buyer and seller will have multiple transactions, a commission model may not be ideal. In this instance, buyers and sellers often form a relationship and will inevitably take future bookings offline.
I suggest marketplaces always show the total price (with commission) and provide a breakdown of all fees, like Airbnb.
Airbnb shows the total price on their search page, and a full breakdown of the fees on their listing page.
For more information on commissions, read "A rake too far: Optimal platform pricing strategy" by Bill Gurley.
Subscriptions
Subscription-based pricing is where you charge users a monthly or annual fee. For example, Classpass charges customers a monthly fee to attend fitness classes.
Subscriptions are usually a good option for marketplaces that don’t facilitate the transaction between the buyer and the seller. In order to succeed, you need to offer unique and valuable benefits that are hard to find elsewhere. These benefits can include things like insurance, training, or a sense of community.
It can be hard for early-stage marketplaces to convince people to pay the initial subscription fee. People generally don't like paying for something before they receive any value, especially if you haven't built up a reputation yet.
One way around this is to offer heavy discounts (or even free lifetime access) for early adopters. You can create a sense of urgency by telling them that you’ll raise your prices in 30 days. This should help you to build up an initial base. In fact, this is exactly what Zillow, a real estate and rental marketplace, did when they were starting out.
We wanted to show new users the quality of our connections and give them a risk-free way to get started. We would then slowly turn on pricing as we proved the value. This helped us build supply in the early days.
- Nate Moch, VP Product Teams at Zillow
Alternatively, you could implement a freemium model. This is where you have different pricing tiers, with the lowest one being free.
Gumroad provides two options for creators: a free option for new creators and a paid option starting at $10 per month. The paid option offers additional features such as the ability to remove Gumroad branding and use a custom domain name.
Listing fees
Marketplaces can charge suppliers a fixed fee for each listing they add. This approach works well when the supply-side wants to create multiple listings.
Etsy charges sellers a flat fee of $0.20 for each item they list for sale. However, you may consider implementing varying fees for different types of listings. For example, on Craigslist, most listings are free, but they do charge for certain categories.
It’s important that your listing fees are clear to your suppliers at all times. Notify suppliers before they sign up, and again whenever they create a new listing. Many marketplaces rely on word of mouth and network effects. If suppliers have a bad experience, word will quickly spread to other suppliers.
My advice for early-stage businesses is don’t introduce listings fees right away. Instead, wait until you gain traction from early adopters and have built a positive reputation in the supplier community. Then, introduce a low listing fee and see how willing suppliers are to pay it.
Pay per lead
A pay-per-lead is where suppliers pay a fee in order to respond to a lead. This usually works best for marketplaces offering professional services, like Bark.
Here, customers create job requests (e.g. fix my leaky tap). Suitable suppliers (e.g. plumbers) receive the job request and pay a fee to the platform to respond. The supplier then waits to find out whether they’ve got the job.
Often, these types of platforms require suppliers to purchase non-refundable packs of credits. Each job request costs a specific number of credits. The supplier must use their credits to respond to a job. Bark calculates the cost of a job request based on service type, job value, and supply and demand in the area.
Credit packs often cost over £100 (excluding VAT) so they require upfront investment from the supplier.
The advantage of this revenue model is that you can earn revenue from suppliers quickly. It’s up-front cash for your marketplace.
However, suppliers do not favour this model. Investing £100 is a big request, especially without knowing if it will result in any paid work. If they invest but don't get any jobs, they probably won't spend another £100 on credits. So the lifetime value (LTV) of a supplier will only be high if suppliers frequently get the jobs they apply for.
Another issue is where the same suppliers and customers are likely to work together regularly. If they form a professional relationship after the first job, they will continue to communicate outside the platform. As a result, the marketplace won't earn any more money from them.
Premium listings
You can earn money by offering premium listings. Suppliers will receive extra advantages like better search rankings, credibility badges, and a custom URL for their listing.
Begin by providing simple features that do not require extensive design or engineering. These could include things like a "premium" badge or featuring them on social media. As you grow and gain traction, gradually introduce more advanced features.
The key here is finding the benefits that your suppliers will value most. Don't waste time and money building features that they won't be willing to pay for. Speak to your suppliers and find out is important to them.
There are many different revenue streams you might want to consider for your marketplace. In fact, you might end up using a mix of the ones I’ve mentioned in this article. My recommendation is to experiment and see what works best for you. Your business model is likely to evolve as you grow and enter new markets.