Marketplace Business Model – Best Detailed Guide

Monetizing the Marketplace with the Right Business Model

Marketplace eCommerce platforms monetize the business at different phases in the business’s life cycle. It can be a challenge to determine what users will support more until the marketplace is established and functional.

This makes matters difficult if the business needs the cash flow. For developing online marketplaces there needs to be an analysis and upfront pro and con review of the different monetization types that are available. Then the option with the best functionality and support for monetization can be chosen.

We encourage you to work with a marketplace eCommerce platform development team that can deliver on the standard monetization models, including combinations of different components. Let's go over the different marketplace business models so you can get an idea of what might be best for your organization.

Subscription Model

A type of recurring revenue model is a subscription model, which can also be part of a membership model, where different membership or subscription levels provide different roles and access to various capabilities and data.

The first level usually has a few base benefits at a lower cost; the next level up costs more but has more advantages and access; and so on. The idea is that you pay for what features you want, and on an ongoing basis, usually for a yearly or monthly subscription fee.

Subscription models are useful for generating a constant stream of revenue for the online marketplace business, and can be added to almost any marketplace platform, making them an ideal candidate for any eCommerce business.

Freemium Model

A freemium model is usually another part to a subscription model, where users can use the platform with some or all of the membership benefits for free for a limited time or with limited access.

There could be some free and premium features, and the idea is that you can promote users from a free-use model up to a paid subscription model with all the premium features for as long as they're willing to pay the subscription fee. Or you can offer additional features or cross sell other services.

While using the platform for free (perhaps as part of a free trial), the user can try everything out and see if it’s something they want to pay for. Another method is to have a time period where if they don’t engage with the paid membership version of the site, they'd be able to downgrade to a free account.

Commission Model

With a commission model, the sellers and/or buyers pay for their usage of your marketplace platform by paying a percentage of each transaction. A commission model is a type of revenue model that doesn't include regular fees but is entirely based on the actual transactions made on the platform.

This type of marketplace business model is scalable as the more your marketplace grows, the more transactions are made, and the more commission you earn.

Commission-based models may be more inviting to new users, since they don't pay anything upfront or have to worry about cancelling before a trial period is up if they decide they don't want to continue with the marketplace. Typically, the easier it is for users to back out, the more willing they are to join in the first place. And once they join, they're more willing to continue engaging with the marketplace.

Listing Model

In a listing model, also called a listing fee model, sellers pay to upload their offers onto the marketplace platform. Typically, sellers are charged different amounts based on the type of offer they list or what category their offer is in. The prices depend on the amount of volume and demand a category has; higher demand will mean that category will be pricier to list in, and categories with lower volume and demand will be cheaper to list in.

This marketplace business model is most often used when sellers are listing expensive items such as houses or cars; it's often used for real estate marketplaces. Oftentimes, transactions take place off the marketplace platform after the buyer has examined the object for sale, meaning the marketplace platform doesn't facilitate the transaction. That's why having sellers pay for listings, rather than having sellers pay for transactions, makes more sense for this type of marketplace business.

Featured Ad Placement Model

A common marketplace business model is the featured ad placement model, which is where sellers pay for the ability to advertise and promote their products on the marketplace platform.

Featured ads include pay-per-click ads, where sellers pay a certain amount every time someone clicks on their advertisement. There's also banner advertisements (a big banner across the webpage, usually at the top) and embedded ads within search results (i.e., when you do a search and see that the top few results say "sponsored" next to them).

Featured ads are useful for letting customers know about products and giving them a way to engage and buy through the ad.

Lead Fee Model

In a lead fee model, basically, sellers pay a fee to gain leads. How this model works is that customers post requests for goods or services and suppliers pay a fee to the marketplace to make bids for the contract with the customer. The customer then chooses which seller they want to work with.

This type of marketplace business model overlaps with a type of auction because sellers are making bids for a buyer contract.

Data-as-a-Service Model

Data-as-a-service can be valuable for a marketplace. With this business model, you take anonymized data from the marketplace eCommerce platform and make it available to subscribers, who are usually other businesses or third-party businesses. As long as procedures for gathering and administering this data are within the marketplace terms, follows what members have agreed to, and anonymized and aggregated properly, that data can provide useful insights about trends and other things.

With a data-as-a-service model, users often get to use the marketplace platform for free in exchange for agreeing to allow the marketplace business to sell their data. This data often contains information about user behavior, such as what people search for and buy at different times of the year, and whether certain ads or listings attract more attention or clicks. It also lets businesses create targeted or personalized ads.

Data as a service can help organizations figure out ways to enhance certain aspects of the user experience, such as making it easier to find the right product by using an enhanced search algorithm or AI that's informed by actual user data. And, by staying informed on consumer trends, businesses can optimize their inventory strategy and avoid losing money from overstocking on a product at the wrong time.

Important Considerations for Marketplace Business Models

The key focus for developing an online marketplace is: How can I best monetize my marketplace eCommerce business? But to answer that question, you must ask another: What are the most important considerations for these different ways to monetize my marketplace? Let's go over what you ought to consider when choosing a business model for your marketplace eCommerce platform.

Benefit from Multiple Models

Sometimes it may be more beneficial to mix different marketplace models together. For example, a subscription model works well for building a steady cash flow in the long term, but how can you get users to subscribe before they know what your platform has to offer? That's where another type of business model might come in, such as a freemium model or an earning-access model.

Encourage Members Who Add Value

If your marketplace is already established, adding a membership or subscription model will be easier. And if you have a high-end marketplace, where only items of a certain caliber are listed, a subscription or membership can create a premium feel and ensure only serious participants will join; because while it's important to get as many users as possible into the marketplace, it's also important to have highly qualified sellers and buyers. Having qualified and reliable users on the platform (along with responsive customer service and understanding yet firm policies) ensures your marketplace's reputation as a reliable, reputable marketplace platform.

Provide Access to Subscription Levels

One of the most central aspects of a subscription model is having different membership levels or tiers that provide different benefits at different costs. Users should be able to upgrade or downgrade their membership to another level and review their membership status in a self-service way. It's also important to have the right marketplace software in place so that subscriptions automatically renew at expected regular intervals.

We recommend having a section of the user dashboard be designated for membership details. Users would be able to see how long they've been a member, what membership or subscription plan they have, past transactions, and details about each membership level and what they'd get if they upgraded or downgraded.

All of this should be presented in a clear, concise way. If it's too difficult for users to find out why they should pay for a subscription or participate in a membership, or too cumbersome to review their status, they'll go elsewhere.

In addition, it's important to let the user know what will happen to their current activity or listings within the platform if they were to upgrade or downgrade. Depending on how you want your marketplace configured and what a premium membership allows, it may not be possible for a seller to downgrade their membership level until they downgrade their ads or remove or deactivate a certain number of product listings, because those things are only available with the higher membership level. If there's an automatic process that happens, such as the system automatically takes off their last five listings, it needs to be made really clear to the user so they aren't surprised by this.

Notify Users in Advance

The ability to enable notifications for various factors is essential for maintaining engagement with the marketplace, not just for knowing when things go on sale or if there are items pending in the cart, but also for ensuring payments go through.

Users should be notified in advance of their payment method being charged for an automatic subscription renewal and when other transactions go through. With a subscription revenue model, the user's payment information is often pre-captured. This can mean better success with payment, but it can also mean the capture fails by the time the subscription renewal is authorized, since the user may have gotten a new credit card, for example. To increase chances of payment success, it’s important to notify the user well in advance, then when it's coming up soon, and again when it's being processed.

If there was a failure with the payment, it's crucial to notify them immediately. You can send a message or email that says something like, "Your payment for your subscription failed to process. We will retry three additional times. The next attempt will be in two days. Please click here if you need to update your payment information." Ideally, this triggers workflows internally, and someone would get in touch with the member if that’s needed to resolve the issue.

Prevent Payment Failures

Nowadays, there are tools that help prevent payment failures due to a debit or credit card expiring or otherwise becoming out of date.

One method involves automatically generating and sending an email that notifies the user of an upcoming card expiration date, for example. This prompts the user to go in and update their payment information. If they don't take within a certain period of time or after a few reminders, then it may be necessary to suspend their membership access until the payment can go through—and make sure you let them know beforehand.

Another method involves using an automatic function with integrated payment gateways to have card data update automatically if something changes (discussed in detail below). If you use this method, you should let the user know that their payment information was automatically updated and that you'll continue using the updated card information until further notice. Notifications like these are helpful to subscribers, so they know what's going on with their payment methods and subscription fees.

Automate Card Data Updates

As mentioned above, to prevent payment failures, one method involves automatically updating card data—meaning the user doesn't need to do anything, even when they receive a new card from the bank and the old one expires.

Automatic credit card updaters are programs provided by major card brands and payment gateways that periodically check for changes in cardholder data. When a change is detected, such as a card expiring and a new card being issued, they automatically update the payment card data in the appropriate systems.

By integrating your marketplace platform with a participating payment gateway, these updates would automatically transfer securely through the payment gateway and update the user's payment information in the marketplace platform. This mechanism frees your customers from having to do it manually, thus increasing the success of subscriber payments and lessening the burden on users and your staff.

Provide More Information

Also keep in mind, that as with any set-it-and-forget-it tool or method, it's important to make the terms and past transactions available and clear to the user. This is because sometimes customers don't recall signing up or what the terms of agreement were, or that it would be an automatic monthly payment, etc. Showing them the terms and transactions upfront can clear up any misunderstandings or confusion before they occur.

Support Members with Communication Tools

Live chat within the platform is another powerful tool for your marketplace. If someone has questions, getting those addressed and alleviating concerns or issues immediately has a drastic impact on a customer’s experience. The customer may go from being frustrated in that moment to being very happy. And whatever caused the frustration should be looked at to prevent it from happening in the future.

For example, there may have been an issue with the user interface, and the user thought they were going to be charged extra, even though they weren’t. Being able to clarify that immediately with someone using a live chat function can be a game changer for their satisfaction and how much they enjoy working with your company.

If chat isn't possible for you or you want to add another option, phone calls are also important for supporting memberships and customer experience. Regardless, you'll want to have a number of different ways users can get in touch with you. Some businesses use social media platforms or messaging apps to talk with customers. Most businesses also have an email address where customers can reach them.

Usually, though, live chat on the platform or private messaging through social media platforms tend to have faster response times than emails or even phone calls, and clients are often more comfortable reaching out using these methods. Whatever communication tools you choose, though, make sure you provide the best experience possible and get back to the customer as soon as possible or within a reasonable amount of time. How well you communicate and how quickly you respond to customer inquiries can make or break a customer's experience.

Incentivize Members to Upgrade

If you go with a freemium model or subscription model, users should be able to upgrade their membership level at any point. It's valuable to advertise and encourage these upgrades so users are aware of the additional features they could have and see the value in upgrading their subscription or membership level.

A common way to do this is to disable certain buttons and then have the rollover text change to “Available with a Premium Subscription” or something similar. It’s important not to be tacky about it, but if you don’t show that they need to upgrade to get access to something and that other features exist, it’s easy for the members to remain unaware or forget about the extra functionality they could have.

It’s often helpful to offer users a free trial or service so they can try it out, and then remind them of additional features that they can get as a premium member of the marketplace site. You could also offer limited-time sales prices for subscriptions or discounts for going to a higher level if they are already a paid member. Or you could offer a free year of premium features if a friend signs up with their referral code. This can be a great way to get someone invested in the full-featured premium membership, and if they like using the platform and think the premium features add enough value, they'll be more willing to pay the premium cost.