Marketplace monetization methods (2020 edition)
Our investment strategy at Market One Capital concentrates on early stage marketplaces and network effects platforms across Europe. As we’re reviewing hundreds of marketplace projects every quarter, below I’m sharing my findings and thoughts on monetization methods used by marketplaces as well as the current trends we’re observing in that respect.
A. Monetization methods
Marketplaces evolved in the last 25 years from being light horizontal platforms at the beginning to smart comprehensive products integrating additional value including payments, reviews, curation, smart matching, communication, complete value chain coverage and so much more. The plurality of marketplace types gave rise to proliferation of various monetization methods. Let’s start with a summary of all the methods we’re observing.
1. Commission on all transactions
This is the most popular method — by providing value as the middle-man, the marketplace gets a commission. The commission as percentage value of GMV (Gross Merchandise Value) is usually called take rate or rake.
The range for take rate is enormous — it can vary from below 1% to above 50% — and it depends on numerous factors, including:
· What value is delivered by marketplace — the higher and broader the value provided, the higher the justifiable rake is. For managed marketplaces like for example Packhelp*, custom packaging platform, or Welcome Pickups*, in-destination travel marketplace, which take responsibility for the whole process, product and quality, usually the rake is 20–50%. For low-touch, lightly managed marketplaces this is usually below 10%.
· How much money suppliers make — it is rare that a marketplace makes more money on a transaction than a supplier. If suppliers make a single digit or low double-digit return on a transaction, which is for example the case for many fintech marketplaces like EstateGuru, than marketplace cut is usually low single digit.
· Cost of providing the product / service by supplier — Shutterstock, Fotolia or other marketplaces of digital products usually have a very high rake, as there are practically no variable additional costs of selling a photo or a font to an additional buyer, so any additional revenue will be welcome by a supplier.
· Set of services provided — for example Lunching*, a B2B food ordering marketplace, has one rake set for orders which are delivered by food providers and another higher one for orders which are delivered by Lunching.
· Different rake for different products — CGTrader, a 3D model marketplace, takes a different cut on readily available stock models (zero marginal cost) than on custom models requested by demand side (additional value of matching sides).
· Competition — as everywhere, competition puts pressure on the margins — lower take rate means that a marketplace is more attractive for the ones paying a commission. That was one of the several reasons why Booking.com famously grew so significantly at the expense of Expedia (12–15% vs 25–30% commission) — it attracted more accommodation providers, which attracted more demand side (crucial factor for marketplace success), created more liquidity and ultimately increased the value of their marketplace.
Usually the commission is paid by a supplier, who gets additional revenue from a marketplace, but this is not always the case. For example Collection Hub, a debt collection marketplace, is taking a cut from both debt collection agency (a bigger part) as well as from the client (smaller part). The reasoning is that without Collection Hub, it would be much more difficult for vast majority of businesses to find a debt collection agency in a remote country they don’t deal with on a regular basis (for example Czech company trying to collect receivables from a Mexican counterparty). Also Agriniser, grain marketplace, is introducing a commission from both sides of the transaction, as they replace “offline” middlemen who do the same and take a bigger cut.
We see cases where a commission takes a form of pre-defined transaction fixed fee. This is usually the case where the transaction GMV does not vary a lot and the logic is to simplify the settlements. Baculum, marketplace for caregivers and nursing homes, gets a fixed fee for bringing a patient. Viantro, recruitment marketplace for doctors, had a fixed fee for placement, but later changed it to a percentage of annual salary. Agriniser’s pricing is based on a fixed fee per tonne of grain.
There are also marketplaces where a commission has a floor in the form of a fixed minimum fee. This is usually used in microtransactions to preserve the unit economics of a transaction for a marketplace. For example Symmetrical.ai*, a fintech marketplace and salary finance provider, charges a small commission on employee cash advance, but has a minimum amount fee on a transaction due to costs associated with it.
Some full-stack marketplaces like Sonar Home*, dealing with residential real estate, or Spot a Wheel, dealing with used cars, complete the transaction in two separate steps — first they buy the asset from the previous owner and later they sell it to a new one. Therefore, the take rate is not known until an asset finds a new buyer — marketplace takes full risk and full reward on making the arbitrage. By providing value for both previous sellers and new buyers these marketplaces are able to monetize it and make attractive APRs (Annual Percentage Rates) on capital.
Generally, commission is the most popular and the most attractive monetization method in terms of absolute dollars a marketplace can get from a transaction.
2. Commission on transactions generated through the marketplace
There are cases where a marketplace is not able to generate a commission on all of the transactions. Imagine you’re a hairdresser and you invite all your existing clients to book appointments through a new app — why would you let a marketplace get a commission from transactions with your clients? But on the other hand, if a marketplace brings you a new client, which discovered your salon through the platform, a cut is understandable — this is simply your marketing cost. This is the case for the likes of Eversports*, a sport and fitness booking platform, Freidesk, freight marketplace, or for Versum, a beauty marketplace.
This method is very often combined with monetization of software tools in SaaS-enabled marketplaces, which I describe below.
3. Recurring fee for tools provided (SaaS-enabled marketplace)
Monetization of tools provided is also among the most popular monetization methods for marketplaces overall. Usually these are essential workflow management and CRM tools which are making the lives of suppliers a whole lot easier. With the companies mentioned above — Eversports is using this method with sport venues, Versum does so with beauty salons. All relevant SaaS pricing considerations, which I won’t get into details in this place, apply here to optimize revenue per account and LTV.
Cohosting.io offers a cross-selling travel and tourism tool for hospitality professionals like B&B hosts or hotels for a monthly fee. The professionals can then increase their cross selling revenue by using the tool to sell tours and experiences, car rentals, luggage transfers or any of their own services to their guests. ClickClickDrive, marketplace for driving lessons, provides a tool for the management of driving schools, including CRM, calendar etc.
4. Payment fee
If a marketplace is not taking a commission on a transaction due to some reason, it can still provide the possibility to pay for a product or service and charge a fee for it. For example Eversports charges a payment fee if someone books a sports venue or a spot in a class and pays directly through the platform. It’s a convenient method of payment for some people, which streamlines operations of providers as well, thus getting a fee for this (which also covers the costs of a payment provider) makes sense.
5. Subscription fee
Subscription fee in a marketplace means that one of the sides pays a fixed monthly fee, sometimes simply to be on the platform and sometimes for the “full experience”.
In some cases, a subscription fee is used if there is a disintermediation risk and it’s difficult for a marketplace to take a commission out of a transaction. This is the case with Niania, marketplace for childcare, which charges users looking for a babysitter a fee for a premium account which gives you unlimited access, contact details of all the babysitters etc.
It’s a similar story with Dobry Mechanik*, a car repair and maintenance marketplace. Although they are taking a commission on part of the transactions, they are also offering premium cards to car mechanics paid as a subscription fee. With premium card mechanics get a neat organized website with contact details, photos, appointment application form, premium visibility on the platform etc.
Dobry Mechanik introduced also a very interesting tiered pricing mechanism. Based on the number of leads they send to mechanics via telephone, estimated conversion rate from a phone call to a visit at the mechanic based on their experience and the average value of “order” (visit) on the marketplace, they estimate GMV generated for a mechanic and apply one of the tiered pricing packages based on the value of estimated GMV.
Subscription fees are also used by some of the peer-to-peer marketplaces. On Brainly, an edtech P2P marketplace, heavy users can get a premium account where they get unlimited access to the platform, including expert-verified answers, faster answers to their questions and no ad interruptions.
Some marketplaces, especially “bits” marketplaces (the ones focused on digital products), use subscription fee as a retention driver. That is the case with previously mentioned Shutterstock or Crella. Above a certain usage frequency it is cheaper for the demand side users to pay a subscription fee rather than purchase many single items. Since the marginal cost of selling an additional unit of a font or a business card template is nearly zero, this is still a very profitable model for these marketplaces.
Meanwhile Fachmistrz, a handyman services marketplace, sells a monthly subscription fee to businesses which includes a package of services to be used within a month. Some companies on the demand side with certain frequency of demand simply prefer this option to typical pay-per-use model.
Wagestream, a salary finance provider, is charging companies a monthly recurring fee based on the number of employees that are enrolled into the system.
6. Fee for additional services provided by marketplace or by third parties
Many marketplaces make money by offering additional complementary paid products or services which are provided by the platform itself or by third-party providers. Marketplaces gather a lot of data about its users and are able to offer additional tailored products or services addressing their specific needs.
Boxmotions, a managed marketplace for storage, and Liki24, a marketplace of medicines and other pharmacy products, offer delivery services for a fee. Boxmotions sells also packing materials and other add-on services such as insurance and movings. Spotawheel provides bank financing and insurance. Clients of Shypple, a digital freight forwarder, can buy an insurance of a container which is provided by an insurance company. Dot Residential, a managed residential real estate investment platform, gets inter alia a fee for the arrangement of financing.
7. Listing fee
Fee for a listing is usually used by low-touch old-generation marketplaces and classifieds. If you want to sell your car on OtoMoto or your real estate on Gratka, you have to pay for your listing to be visible on the platform.
But also other marketplaces, like for example Allegro, are using this method as an additional revenue source along with others.
8. Advertising revenue
Advertising revenue is another method used by some marketplaces as complementary one, for example by Brainly. Also, driving schools buy ads on Super Prawo Jazdy. Pharma companies, which have difficulties with advertising on Google and Facebook, are happy to buy ads on Liki24.
9. Pay per lead
Pay per lead is a method popular among marketplaces where disintermediation risk is high and usage is infrequent. This is the case for example with Fixly, B2C focused handyman services marketplace, where supply side providers pay a fee for a lead. Once you establish a connection with a plumber you are happy with, you don’t need to come back to a marketplace — that is why lead based model usually work for new connections only. Rynek Pierwotny, residential real estate aggregator, also charges a fee per each qualified lead passed to real estate developers.
We have seen this monetization method used also by some recruitment marketplaces, including GastroJob, which gets paid for an organized meeting with a candidate. This might make sense especially for temporary jobs with no significant qualifications required, when there is high volume of candidates and conversion from a meeting to recruitment is known and pretty stable. For more qualified jobs getting a commission as a percentage of annual salary might be more attractive and also better aligns the interests of the marketplace and the companies recruiting people.
10. Promotion fee per premium listing
Premium listing is sometimes offered within a premium account, but it can also be a separate monetization method, among other ones. The likes of OLX or Allegro are heavily reliant on monetizing this option, as suppliers want to stand out from the fierce competition and are often eager to pay for better visibility.
11. Data monetization fee
Although vast amounts of data collected by some marketplaces should be valuable to some businesses, we don’t see a lot of projects which use data monetization. In one example of a B2B marketplace working with CPG wholesalers and retailers the platform sells reports to CPG brands about market shares and sales potential of certain products based on aggregated and anonymized transactional data.
12. Asset management fee
For fintech marketplaces which support management of funds or financial assets, a typical management fee as a low percentage of Assets Under Management is usually applied. This is for example the case with Stableton Financial, a marketplace for alternative investments, which provides advisors and their high net worth investors with curated alternative investment products.
Summary of monetization methods
These are all the methods I came across when preparing this post. Now let’s summarize and compare them briefly.
On the chart above I put all the monetization methods mentioned and subjectively ranked them on two dimensions — attractiveness and popularity. We are most thrilled by marketplaces using monetization methods from the right-hand side of the chart. The general idea is that the higher the attractiveness measured as percentage of GMV of monetization methods used by a marketplace, the lower the GMV required to achieve a company of a certain size and valuation (measured by net revenues generated by a business).
Second point to mention is that it is possible to combine many monetization methods in one marketplace. Obviously it’s less so in case of marketplaces with high double-digit rakes, but especially if your total combined rake is below 10%, look for opportunities to combine less attractive methods.
Now let’s move on to the second part of the post where I share some of the recent trends we are currently observing with respect to monetization methods.
B. Current trends in marketplace monetization
Adding fintech capabilities
We see more and more signals that every software company becomes fintech-enabled. Basic financial product offering can be built in-house using integrations with financial services providers. Moreover, the dynamic proliferation and significant progress of fintech companies in the last 5 years, also at the infrastructure layer, will make it easier to integrate financial services and products into a tech company’s offering. What is more important is that these solutions should also be available for small and medium startups. Many marketplaces know a lot about their users — they gather thousands of data points about their situation in real-time. Especially in cases of frequent and heavy usage they can create a very detailed profile of users and their needs. By sharing this knowledge with fintech tubes in exchange for tailored financial products a win-win-win situation happens. Payments were the first step. Loans, factoring, bank accounts and other will come next as it will be easier to do tight integrations. As of now we see fully managed marketplaces like previously mentioned Spotawheel, Dot Residential and others integrating financial services offering to their product, but these are not fintech-enabled integrations yet.
Low or no initial monetization for B2B marketplaces in enormous old-school industries
B2B marketplaces are arguably one of the next waves. There are currently numerous B2B marketplaces changing the way communication and ordering is conducted between businesses and their suppliers (day 1 value). This includes the likes of Rekki, Choco and Katoo in the restaurants industry or Simplo, bex and Schüttflix in the construction industry. I don’t know about all of them, but at least a part of these are initially focusing on changing super old habits of how ordering happens and creating new ones — and the less friction the higher chances are to succeed with this. This usually means no / small monetization in the first place, and definitely not on the demand side. But the end game is that once you have the harder side of the marketplace onboarded (the demand side) with good stickiness and retention, then you will find ways to monetize the relationships, usually on the supply side. This strategy requires a lot of capital, but the processes in these industries are so old school and Total Addressable Markets are so enormous, that there’s a lot of great investors ready to deploy capital into many of these startups and take the risk, at least for now ;-).
Dynamic pricing
What was famously introduced by Uber in ride-hailing some time ago, becomes more popular among fully managed marketplaces. As marketplace gathers a lot of data and is confident to increase the price for some service by even a small bit, this usually translates into pure margin, as suppliers’ costs are kept the same. This is not possible in all industries, but it’s worth considering, especially in industries where prices fluctuate anyway, like for example travel and hospitality.
Many thanks to Ela, Piotr and Michał for reviewing draft versions of this post and providing feedback.
You can find me and reach out to me on Twitter.
* These companies are part of Market One Capital portfolio.
