Tiered fees - A growth-friendly monetization model for two-sided marketplaces

Jesper Vestergaard

How a marketplace platform can serve a long tail of shops for free and make money on just the shops that make money.

Any new digital platform wants user growth. Free can be key in attracting and growing new users to an unknown platform. And for a new user trying a new platform, or for someone who’s in the business of trying to sell something and building a business on their own for the first time, free could mean everything. But how would a platform ever start making money if everything is for free? The answer, in a perfect world, is obvious. Let just the ones who can afford to pay, pay, and keep everything free for the rest. Then you can grow with people testing your platform without taking any risks, and when they have grown into viable business on their own, you can start charging them.

But how do you know, who can afford to pay and when? And how do you preserve fairness and transparency for all involved?

Two-sided marketplaces

A two-sided marketplace consists of shops who utilize the platform to get revenue from their customers. The platform can charge the shops for using the platform a fixed fee to enter or a license fee on a subscription basis. Subscription currently seems to be the favored model for most platforms.

In many cases new shops on a platform will be unsure whether or not they would make money selling their stuff, so paying for a service upfront, even though it enables you to maybe eventually make money is, in many cases too risky. So the platform would want to offer the shops the option of ‘no cure, no pay’ or some other way of allowing them to get started for free, eg. a 30-day free trial. The free trial solution doesn’t solve the risk issue though. It simply eases a shop into getting started and pushes the point of the risk kicking in. A trial model offers the option for shops to get a proof of concept, and see if selling their stuff is an option at all. But it does not remove the risk factor.
A system with tiered fees is a way to remove the risk completely and keep the potential of growth, based on inviting new users to utilize a platform, and only start charging them, when they are certain, that they can afford it.

Neither number of items for sale, price pr. item or even the multiplication of the two will tell the platform the whole story about the economy of a shop. One shop can have 10 items for sale at 10,000 USD, and another could have 10,000 items for sale at 10 USD. The economy, the risks involved and the intricacies of timing and planning production for the two shops would be completely different.

Tiered fees

So, the idea of the tiered fee suggests looking at the general and realized economy of a shop over time, instead of fixed inputs like items for sales or price of the items.

Simple charging eg. 0% up to $10,000, and 2% for any sales beyond $10,000. This will help new shops getting started for free and not requiring them to pay before they’ve started making money. A milestone that can be reached in 30 days for some, but more often much less or much more for others. So, the method suggests a more fine-grained way of setting fees, that are more closely related to the reality of a shop, than to the reality of the platform.

Options for variants of the model are plenty. Some platforms might want to discount high revenue clients, eg. offering a 1% fee after reaching a $100.000 threshold. It’s clear and transparent for both platform and shops, and very accessible for anyone.
It can be combined with a subscription model too, securing the platform a more predictable source of revenue, and eg. securing a shop a discount of the fees on certain or all tiers.

In any case. If a platform starts to look at the shop’s economy in a more general way, the potential for revenue in more nuanced ways will soon appear.

Jesper Vestergaard

Written by

Curious explorer of digital design, media and content. Consultant and digital product designer. https://www.jespervega.dk

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