Whether starting up your own ecommerce website, running a small one that you wish to grow or opening up shop within one, it’s always a good thing to gain a better grasp of your surrounding environment. Knowing how others make money will help you apply these methods to your own personal benefit. If you’re not planning on basing your business’s activity on income generated from donations and crowdfunding, then you should take a moment to determine how you are going to create a steady cash flow. cIt is crucially important to choose a good revenue model from the get go. Of course you can always change the plan along the way and tweak it for efficiency, but it is the starting point and foundation which will determine if and for how long your business will thrive.
In this post we’re going to review the different options for marketplace monetization and hopefully give you a better idea on how to choose the right ones.
Types of Revenue Streams
- Commission – probably the most common one, that’s why we put it first. Basically the marketplace will charge a small amount (usually from the seller) from each transaction, in the form of percentage of the sale or a flat fee.
The upside to this method is that the vendors are not charged anything until they make a sale. From the marketplaces point of view, they get a piece from every sale made on their platform, and that’s huge.
- Subscription – A recurring membership fee is charged from the users, mostly vendors but sometimes also customers. This plan is beneficial when the marketplace can provide a high value for its’ users such as lower costs or a unique experience, which will give them a reason to sign up and cause them to engage in several transactions.
The advantage to this model is that the marketplace gets revenue upfront, without relying on volume of transactions within, so this might be best used immediately after launching until reaching a critical mass, then in time perhaps shifting to a commission model.
- Listing Fee – A marketplace can charge a fee from shop owners for posting new listings. Quite common with classified ads such as Craigslist, where posting most listings is free (this is how they reached a critical user mass), but posting a job or real estate costs money.
The downside to this plan is that it doesn’t guarantee to pay off for the vendors, and the marketplace can capture only a small relative portion of the capital being transferred through their site.
- Lead Fees – Somewhere between listing fees and commission. Customers post a request and providers pay in order to make a bid for these customers. A good value proposition seeing that a provider only pays when put in touch with a potential buyer. Thumbtack uses this method and it seems to be working for them.
The downside here is if a direct connection is made between the buyer and seller. The party that is charged is naturally motivated to abandon the platform and conduct the transaction independently, losing you your profit.
- Freemium – Access to your platform is provided for free, monetization occurs by offering paid premium services. The core concept is to get your users hooked, then offer them value-adding features for a small fee.
The difficulty of this model is to find a service that is interesting enough for others to pay for. Because of this, many simply integrate this revenue stream in addition to commission, thus creating another source of income.
- Featured Listings – A way for providers to buy more exposure for their shop. Listing is usually free but providers can pay extra to have theirs bumped up, be displayed on the homepage, highlighted in a certain color or bold text and so forth.
- Ad Placement – if you have enough traffic in your marketplace, you can sell “advertising real estate” on your site, but be warned, placing ads in an ecommerce surrounding may service 2 different providers and create a conflict of interest. Furthermore, from a user’s point of view, ads are a nuisance, most would prefer an ad free experience.
- Apps – this case fits a marketplace that wants to give more features and value to its users but can’t or won’t invest the resources for development. Apps will mostly be on a subscription basis with a relatively low monthly fee. A very good example for such apps is Malabi Background Remover – saving sellers valuable time and money in creating and uploading professional looking product packshots.
Our example of a winning online marketplace that integrates several of these methods is Etsy. They are a commission based website that charges per sale, yet they also use listing fees, charging money to post anything new. This way Etsy ensures they obtain revenue from both popular and not so popular items. They also utilize the freemium model by offering services like direct checkout, listing promotion and shipping labels, oh and featured listings, another premium service that also makes them money.
A few extra tips to help you survive
Where do you want to be in 6 months? If you don’t know then you’re probably not going to be there. Set a goal. How big you want your business to be? A large VC funded global marketplace, or a small local business? There is no right or wrong, but choose now so you have a target to shoot for.
Actually VC funding and high growth can be a double-edged sword for marketplace startups. Building a big business involves tough decisions which may sometimes conflict with the core values of your concept merely to please the investors. Choosing not to be big doesn’t mean you’re settling for less. Aiming for moderate success may be the smart choice in the long run. The beauty of a collaborative economy is that it allows small, highly focused marketplaces to thrive alongside their bigger companions.
Some more good news for small business owners is that the cost of online marketplace technology has gone down significantly over the years. Full turnkey solutions offer the ability to set up an online marketplace in minutes for a fraction of the cost, allowing you to bootstrap (develop and fund on your own), instead of relying on investor money.
In fact, one of the best ways to get funded or bought out is to start a business with your own capital and build a sustainable and stable model, thus proving its’ value and success.
Change is good, don’t fear it. In business, pivoting is a planned course correction in order to test out a different approach for the product or service. One of the best tales of a successful pivot belongs to Groupon. They started out as an online activism platform called The Point. It wasn’t picking up, so the founders opened up a WordPress blog selling coupons to the pizza place in the lobby of their building. Although not very successful, this made them realize the potential of their idea: harnessing the power of group action. So they pivoted, and since then have grown into a monster worth over a billion and a half last time we checked.
In many cases we plan better for failure than we do for success, but it’s the success that can cause our failure. Be prepared for success: make sure to work in the scalability factor (the ability of a business to cope with an increased workload). Develop a system that will be able to maintain or improve its’ level of performance and efficiency as you grow. In an online marketplace this means boosting profit margins while sales volume increases, without negatively affecting company structure or available resources.
We can go on with these tips for days, but let’s leave it at that for the time being.
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