Best Monetization Practices to Build a Successful Online Marketplace
The article was originally published on Codica Blog.
With a great idea of an online marketplace in mind, you have selected the business model, weighing all advantages and disadvantages. The next step is to choose the right revenue strategy, as it plays an important role in creating a profitable and scalable marketplace.
In this article, we will discuss the most popular monetization models to launch a successful platform. We will show how e-commerce giants like Amazon, eBay, Etsy, Airbnb, Upwork, and others integrated these strategies.
We hope that our tips will come in handy when choosing the right revenue model for your marketplace business.
Commission
The commission is used by both newcomers and existing platforms. With this revenue model, you get a part of each payment completed directly on the marketplace. Thanks to this, it has become the most profitable monetization strategy.
The commission amount depends on the item sold and may vary from 1% to 50% when it goes about an exclusive product, such as stock photography. There is one thing to remember: a commission on services is higher than the percentage on material products.
The types of commission fees are as follows:
- Charging a seller for each transaction completed on a marketplace.
- Charging a customer for each successful payment.
- Charging both for each transaction on a platform.
The main advantage of the commission monetization model is that it starts working immediately and scales perfectly. Still, to make your marketplace more profitable, you can successfully integrate several types of revenue strategies.
Example: eBay, Etsy, Airbnb, Uber, Booking.com, Rakuten, and other e-commerce platforms primarily use this model. The chart below shows that it works:
Source: Statista
Selling fees
Like with the commission, you get a piece from each transaction. The difference is that with selling fees you receive a percentage before a seller gets the payment.
There are three selling fees strategies:
- Direct payments. A buyer pays directly to a vendor’s profile.
- Collective payments. Your marketplace charges customers with fees and then sends the revenue to suppliers as redemption.
- Parallel payments. Your platform payment settings divide a customer’s paying between a vendor and the marketplace at the checkout stage.
The core point of this monetization strategy is that it does not bring you the desired result when you are just starting. It works in large retail platforms where quantity matters. So, first of all, you should acquire the audience and their trust.
Example: eBay charges two main types of selling fees, namely an insertion fee and a final fee. The digit of the fees depends on the item, its category, and format, etc.
Every year, eBay reports its revenue results. In 2018, the online marketplace earned $10.7 billion, including selling fees.
Listing fees and premium listings
A listing fee is a sum that a platform charges a vendor when they publish their goods and is used by two-sided e-commerce websites.
This strategy works well for handmade or slow-selling items, but it does not fit all types of online marketplaces. Why is it so? The reason is that platforms may offer goods that have never got a buyer’s attention. It is not reasonable to charge only a commission fee, as in this case, an e-commerce website would not gain profit from a number of transactions.
Still, with listing fees, a marketplace can get revenue from slow-selling products or even from items that might never be sold.
Besides, an e-commerce platform needs to be large and recognizable for consumers to be ready to pay listing fees.
Premium listings rank sellers’ offerings to the top so that the buyers could easily see them. As a rule, vendors start with listing fees. Afterward, they can upgrade to the premium option, when they reach the platform scale.
Example: Horizontal marketplaces use listing and premium listings most frequently, where Etsy can serve a great sample.
Subscription fees
A subscription or a membership fee is a model, where buyers are charged to access the marketplace. It contains fees for certain features paid monthly or yearly. Besides, if new vendors want to get benefits, they should pay this fee, too.
This revenue strategy is not widely applied. Before using a subscription fee, make sure that your platform provides buyers with exclusive goods or services. If you give the customers information or products that are difficult to find on other websites, this model will surely help you. Otherwise, you may lose your potential customers.
So, we recommend you to implement this monetization strategy when your e-commerce platform has reached the winning audience.
Example: eBay is a great sample of the subscription revenue model.
Advertising
This revenue model allows third-party advertisers to push forward their items. To make a long story short, they pay for publishing ads on your platform.
There are several ways to promote goods, including graphics and banners, text and mixed advertising. Do not overwhelm your marketplace with ads, as they can be annoying for your customers. Define certain positions on your website that third-party commercial offers can occupy.
There is one more thing to remember, namely the quality of third-party advertising. Pay special attention to this factor. It may cause the loss of potential customers, as ads drive buyers away from your platform.
Besides, using this model to marketplaces with low traffic will bring a little revenue.
Example: Facebook and LinkedIn are social platforms that profit from using this business model.
Facebook announced the full-year 2018 financial results, showing that the advertising revenue model works.
Lead fees
When transactions are completed outside the marketplace, lead fees may be the best solution for you. What is the core of the revenue model? Your customers have to pay to access detailed data about the item they are interested in. Thus, your platform leads a performer to a potential client.
Lead fees can help you if you are going to build an online marketplace with non-standard items, for example, various services: cleaning, design service, music teaching, dating sites, etc.
Remember that providers and buyers might work building their cooperation outside the platform. So, try to integrate different techniques to prevent this, including invoicing, payment tools, and others.
Example: On Upwork, a service provider pays to apply to a potential project.
Source: Statista.com
Conclusion
The proper monetization strategy plays a crucial role in generating a profit in the marketplace.
When choosing a revenue model, we recommend you to pay attention to the following points:
- Analyze the market and your competitors.
- Define the business model of your marketplace.
- Consider the location, culture, and habits of your target audience.
In short, it is a good idea to start with a single monetization way making it a priority. Later, as your marketplace grows, you can combine other models to learn what revenue strategies meet your business requirements and objectives the most perfect way.
Originally published on Codica Blog.
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