10 marketplace monetisation strategies
This post is meant to list and briefly explain the successful marketplace monetisation strategies we have seen across our portfolio and beyond. Hopefully, it will inspire a few marketplace entrepreneurs out there to try new things, but also will trigger some feedback so that we can further improve (and share) our thinking.
Scaling activity on a marketplace is hard. Choosing and implementing the right business model to make it into a great franchise can be tricky too. No marketplace monetisation strategy is universally applicable and frequently unexpected combinations work well. As the scale and liquidity of a marketplace increase and with them the relevance of the marketplace to its participants, the ability to monetise and introduce multiple monetisation strategies increases too. Here is a list of ten most popular and successful monetisation strategies we have seen over the years.
If a marketplace enables commercial transactions to happen directly on the platform, then a commission, a %-age cut of the transaction, is the most straight-forward and popular way to monetise. Some of the most successful marketplace companies in the world, like Booking.com, Ebay, Etsy, Delivery Hero or Uber make an extensive use of this business model.
The right %-age to charge can vary a lot by type of product or service and industry. It can be anything between a low single digit % (Alibaba, Dawanda, Etsy) and low-mid double digit % (Lemoncat, Wyzzant, Uber) or even more than 50% for stock photography.
Commission on physical product sales will typically be much lower than commission on services, where inventory is lost entirely if not sold (e.g. a night at a hotel), or on digital products with no marginal costs to serve, like photo stock. As a rule of thumb, commision levels of more than 20% are considered high and raise the question whether one is not opening up an opportunity to competitors (like Fabrice) by over-monetising.
An advantage of a commission-based approach is that it can work already at a relatively low level of activity and scales very well. Boris of VersionOne and others recommend marketplaces to start with a commission based model and only pivot into other strategies if straight commission does not work at all or well enough.
2. Listing Fees
In addition to charging a transaction-based commission fee, many marketplaces (e.g. Ebay, Etsy, Delivery Hero) also charge listing fees. A listing fee is a simple fee for making your product / service available on the marketplace.
To be able to successfully charge listing fees, a marketplace needs to have a size that is significant and the suppliers have a hard time ignoring it.
A positive side-effect of charging listing fees should be an increase in the quality of listings, as sellers will put more thought into creating a listing if it costs them something. Also, spammers get discouraged with listing fees. A negative side-effect can be that users get discouraged from listing, especially if the fee seems too high, and growth slows down.
3. Premium listings
Some marketplaces charge fees for making vendors’ offerings more visible, most often through ranking them higher in search results. This is the main monetisation strategy behind most classifieds platforms. Craigslist and OLX make their money with this.
The classified strategy is to offer a totally free service initially, and to start charging for better visibility (in search results) once scale is reached. Famously, Google’s business model is all about premium listings — organic results being Google’s ‘free’ product.
Another example of a business for which premium listings are the key business model, are ‘yellow pages’. You can list for free, but if you pay, you get a nicer profile, potentially some additional trust generating badges, and a higher ranking.
In general, premium listings (and listing fees) are effective for marketplaces on which no transactions happen on the platform. Similar to listing fees, the ability to charge for premium listing increases with scale. Premium listings probably only make sense as the main element of a business model for large, horizontal marketplaces.
4. Variable commission and variable premium listing fees
It might be smart for a commission or premium listing fees on a marketplace to not be a fixed %-tage. Allowing for some variability and potentially bundling higher fees with extra services can be a good tactic.
For example, a seller might want to opt to pay a higher commission (e.g. 20% instead of 15%) or higher premium listing fees for an increased chance to make a transaction happen. In this case, a platform could list the seller higher or conduct additional marketing activities for the seller. Booking.com lets the suppliers override the regular commission (hence the name — commission override) and thus get a stronger presence on the platform.
Google was probably the first company to perfect the variable premium listing fees model. Google lets you bid for keywords and the more you pay, the higher you can rank for specific keywords. However, the position will also depend on the quality score of the advertised website. A bad performing site needs to pay more to rank higher. With a certain minimum quality score, a site can be shown directly on top of the search results, otherwise it will be shown on the right hand-side of the results, attracting less attention.
At scale, variable commission is probably the smartest and most optimal way of monetising a marketplace. It nicely reflects the realities of the market, as making providers of worse quality services pay more to reach an audience seems like a sensible thing to do. However, it is also a model that might not work everywhere and is hard to explain. MyTaxi, the taxi hailing app popular in the German speaking region, experienced this first hand and switched backed from variable to regular commission following a backlash from the drivers community.
5. Subscription/SaaS fees
SaaS enabled marketplaces are a relatively recent phenomenon. The most pronounced and established example of this business model in our portfolio is Docplanner. Eversports and Styleseat are further examples. Docplanner offers an international review, search and booking platform for doctors. Docplanner monetises primarily by charging doctors a monthly fee for using the software solutions integrated with the platform.
Larger transactional marketplaces, like Ebay, can be able to charge sellers subscription fees for the mere fact of being present on the marketplace. Ebay is a great example of combining, in a somewhat complex way, commission, listing fees, subscription fees and premium listings in its business model. This seems very rare to me, and only works well for marketplaces commanding very large market power.
6. Charging the demand side
Fees on marketplaces are typically applied to the supply side, i.e. the merchant is charged for offering and selling his or her products and services. However, sometimes the opposite strategy can make sense too.
For example, in the care industry (Care.com, Niania.pl), it is much more effective to charge the demand side, i.e. the parents, for access to the service providers, than the care providers. This is counter-intuitive, especially in situations when there is an oversupply of care providers. The gravity of ‘which transaction side has the money’ dictates how monetisation works best.
Another example of charging the demand side would be Takeaway.com charging an extra fee to its users for online payments. This is rare, as most marketplaces see value in having users pay online (see below) and, not to discourage the demand side, push the costs of payment onto suppliers. But it seems that in the Netherlands consumers prefer paying online so much over paying with cash, that they are ready to pay a little extra for it — which Takeaway is taking advantage of.
There are also examples of platforms that charge both the supply and demand side upon a transactions happening — Airbnb and Catawiki come to mind.
An attentive reader will point out that the effect of charging the demand or supply side is the same — a platform takes a cut on the money that changes hands. However, it might make a huge difference in perception and thus in conversion rates, whether you ask the seller to pay you from the money they receive, or the buyer to pay you in addition to what they pay to the seller.
Enabling payments between parties to happen on a transactional marketplace is a great way to increase stickiness and offer a smooth experience. It also is a great way to limit leakage or fraud, or decrease no-shows on booking platforms.
Another nice feature of processing payments for your suppliers is that it can help you limit potential bad debt from suppliers and improve working capital cycles. This is especially the case when the marketplace becomes a net payer, i.e. the payouts from the marketplace to the supplier are higher than the fees that need to be paid by the supplier or, put differently, when the %-age of payments processed is higher than the effective take-rate.
However, offering payments can also be a good monetisation strategy. Making money on payments is great, but the margins are thin and it requires huge volumes to be meaningful.
If transactions happen outside of the platform, the pay-per-lead model might sometimes be the right one, as outlined in the post by Boris about Thumbtack. The most effective way in which I have seen it executed was when vendors can browse a list of potential customer job requests on a marketplace for free, but if they want to access the contact details of customers, they have to pay a fee per contact or introduction. Once the contact has been established, it is up to the vendor to convert the customer into accepting his offer, making him pay, selling him further services etc.
If individual transactions are relatively small (like e.g. at Thumbtack, StarOfService, Oferteo or LinkedIn) it might make sense for the platform to offer a credits system to its users in which they pre-pay usage and then spend the credits on specific services within the platform. Interestingly, dating sites, being marketplaces for relationships, fit this monetisation scheme well — they offer free discovery and monetise on enabling introductions.
9. Additional products and services
Once a marketplace has a large pool of participants, it might be wise to offer them further products. They may or may not be directly related to the core offering of the platform.
Examples would include Uber providing financing to car drivers to buy cars, Amazon providing financing to its sellers, or food delivery platforms selling supplies to and negotiating discounts for restaurants (here is the landing page of Just Eat for this).
These further services do not only offer additional monetisation opportunities, but also increase the perception of the breadth of the value a marketplace can provide and thus improve customer experience and increase loyalty.
Selling ads targeted at your users can also be a successful way to monetise, but it requires big scale to be meaningful.
Large social platforms, like Facebook, LinkedIn, Snap and Twitter monetize with ads exclusively. For other marketplaces, ads can be a nice additional revenue stream and even Amazon is experimenting with ads.
And one more thing
I have heard of further monetisation strategies, such as selling marketplace data or marketplaces taking positions on the platform itself — early, to improve liquidity, and later, to boost profits with superior access to information. I do not have enough insights into those to be able to say more, but the examples only confirm that marketplaces at scale offer plenty of opportunities to monetise, some of which I probably missed on the list.
I hope you enjoyed going through the list. If you have any feedback or comments, please share them.
Many thanks to Arthur, Christoph, Clement, Kolja, Mariusz and Rodrigo for reviewing early versions of this blog post and providing ideas for making it better.