eCommerce Gone Wild: Marketplace Business Model Boom

The eCommerce world is disrupted — small online stores are replaced with big marketplaces. The marketplace business model brings together supply and demand and provides a centralized space for both buyers and sellers. Isn’t it great?

The owner of such a platform can make a profit in different ways. In this post, we discuss all possible monetization methods of the marketplace business models and their benefits.

Definition of the Business Model

What is a marketplace business model? The marketplace model in eCommerce comes out as an intermediary between sellers and buyers bringing them together to make a transaction. An online platform sets the workflow and displays vendors’ products for customers to pick and purchase.

A marketplace owner is responsible for logistics, attracting vendors and buyers, marketing strategies, payments, and, of course, making a profit.

When you choose the model of the marketplace for business, there are some things to know about the marketplace workflow. You will need a WMS — warehouse management system. It will help to handle the inventory processes and manage the purchase funnel. An inventory management system should align with the features of the marketplace to manage the platform most efficiently and provide the best user experience.

The eCommerce platform gives sellers the ability to manage inventory and scale the business.

Marketplaces tend to make transactions easier, faster, and more convenient. And in exchange for providing a placement for business, they receive compensation. The revenue model for your eCommerce business is what we are going to focus on, as this is one of the most significant parts.

Best Business Models for Online Marketplaces

What are the basic revenue models for online business and what is their major challenge?

We can divide marketplace online revenue models into two most popular models: commission and transaction-based revenue models which include: subscriptions, listing fees, freemium, and featured listings.

The commission model is used by most marketplaces. Well-known Amazon and Airbnb also follow this marketplace modeling. Transaction-based revenue models are a classic way to earn money. You generate revenue by selling goods or services directly to the customers.

Let’s review every model in detail.

Commission

The commission revenue model is one of the best online marketplace business models. It is practically a transaction fee revenue model. That means that the marketplaces charge users for each transaction.

For instance, a customer pays a percentage of the total price they spend on a purchase.

You can charge both suppliers and buyers.

This one is the most beneficial marketplace model for all parties. It allows using the platform for free, and only pay upon receiving some value. At the same time, the marketplace generates revenue by receiving profit from each transaction.

Subscription

Another marketplace platform business model that is commonly used is a subscription model.

This business platform requires users to pay a regular fee so they can access the platform.

It is typical for service marketplaces to use this business model. Subscriptions help build the database of actual customers. It is highly valuable for further promotional campaigns. Those customers will be available for direct contact which is effective in terms of repeat purchases.

The subscription revenue model will be suitable for your online marketplace in case there is no necessity for users to exchange money between them. For example, streaming services ask customers to pay a certain fee and grant access to items stored on the platform.

Listing Fee

The listing fee model is a great option for multi-vendor marketplace businesses. As the name suggests, marketplace owners charge users for every listing they submit on the platform.

This approach allows for generating profit even from the items that are not selling. The revenue is generated from each ad ever posted on the marketplace.

Etsy is a good example of a listing fee marketplace business model. For every listing, it charges sellers $0.20. There are also several ways you can follow either to charge everyone the same fee or create various plans depending on the product type or any other criteria.

Freemium

This business model for two-sided marketplaces is a bit tricky. In the freemium model, customers can use both free and premium features of your platform. However, it is a little hard to provide value and make users pay for premium features.

The thing is you can not limit customers with free versions of the marketplace. They need to receive some value at the free stage and so they want to expand the functional capability with premium features.

So if you are not sure you can provide this value, probably the freemium business model is not a sustainable revenue model for you.

Featured Listings

Using this marketplace business model means providing sellers the possibility to boost items on the platform by buying the featured listings.

According to this model, listings should appear at the top of the category. For vendors to be willing to pay for ads there should be a good flow of paying customers. So make sure your marketplace attracts enough users for sellers to compete for their attention.

Featured listings are a good option when there are many similar products displayed in the store. Buying an advertising space will help sellers to promote their items.

How To Choose The Correct Marketplace Business Model

Now that you know a little more about different marketplace business models, it is time to select the appropriate one for your platform.

As experience suggests, one of the best ways to generate revenue in the eCommerce field is going with the commission business model. It is scalable and lucrative and is definitely the perfect option for product online marketplaces.

However, for service-based platforms, it can be not so profitable. In this specific case, you can go with subscription or freemium models.

Everything depends on the specifics of each marketplace and its requirements. Here’s what will help you choose the right business model:

• Consider your customers’ needs. The model must align with their needs, so it will be convenient and simple for them to make transactions on the platform.
• Learn your competitors. Analyzing the market and similar businesses may help find that one working option and replicate it.
• Know your value proposition. What makes your marketplace outstanding? Maybe the platform generates great traffic so sellers find it effective to place featured listings there.

In the early stages of running an online marketplace, it is all about experimenting. Try different approaches to see what works for you. Combine several revenue streams. Look at the revenue model of Amazon. The popular and one of the largest commerce platforms uses a commission model along with the advertising space that it sells to vendors. Besides this, Amazon drives revenue from affiliate programs. For such a big enterprise, a combination of different website revenue models allows for generating more profit through various channels.

The Marketplace Chicken and Egg Problem

The main problem that can come in the way while developing the marketplace and choosing a business model is a so-called marketplace chicken and egg problem.

When starting the project you don’t have any buyers or sellers and don’t know whom to attract first. From one point of view, the more sellers you have, the more products and services they can offer. A good assortment in this case will attract customers. On the other hand, while there are no paying customers, vendors may not be interested in working with you.

No matter who you decide to get first, there are some tactics you can follow. For instance, to encourage potential buyers you can provide a discount to them, free delivery, or any other incentive. For sellers, the best idea is to simplify the onboarding process and make it as easy as possible to set up a store on your platform.

Depending on the buyer-to-seller ratio you may jiggle with different revenue models to satisfy the first or the latter. If you are experiencing trouble acquiring users, you can spark their interest with the freemium business model. After testing the platform, they may stick around and opt for more.

Marketplace Metrics and KPIs

There are an enormous number of marketplaces. They come in different shapes, suit different segments, and operate on various levels. For an owner of the marketplace, it is always a challenge to know whether they are on the right path.

To evaluate the success of your marketplace and the business model, you need to conduct timely estimations and fulfill KPIs. To set those KPIs according to the capabilities of the marketplace, you should know key eCommerce metrics.

All metrics can be divided into groups.

Business Metrics

These metrics will help you understand the questions related to revenue and profitability. One of the most important figures is Gross Merchandise Value (GMV).

GMV reflects the total value of services and goods sold on your marketplace in a particular period. Don’t include cancellations and returns, to get more accurate results on transactions that occurred.

How to calculate: multiply the average value of the order by the number of sales

GMV = Average Order Value x Total Sales

Next is Customer Acquisition Cost (CAC) or the price you spend to get a new customer. Although all the users interacting with your platform in any way are supposed to be potential customers, not all of them end up being them or find the marketplace organically. Some of them are driven by paid marketing and promotional campaigns. To measure the effectiveness of these campaigns you need to calculate CAC. You simply divide the total cost spent on acquiring new customers by the actual number of acquired customers.

It’s better to count CAC without taking into account the users who came organically. In this case, it will be easier for you to understand the effectiveness of different channels and whether the marketing costs of acquisition pay off.

Metrics About Usage

Usage metrics are important for any website and are not specific to eCommerce. They help calculate the number of people visiting your site and understand how they spend time on it.

As follows, the key metrics are bounce rate, monthly active users, and time spent on site.

Monthly Active Users (MAU) is the way to count active users, namely unique users who have visited your site once during a given period of time (in one month).

Your aim is to increase this number constantly, otherwise, it means you are not growing or losing old customers faster than acquiring new ones.

Bounce rate. Even if your MUA rate is good enough, it does not mean that all these visitors are active on the site. The bounce rate is here to prove this. It is the percentage of users who have landed the page but left without performing an action. You should receive some engagement, if there is none, that means your website doesn’t bring value to your visitors.

Aim for as low a bounce rate as possible. The average rate is between 26% and 70%, and the optimal range is between 26% and 40%.

Page bounce rate (%) = single-page visit/total visit

Time spent on site. The next step is to measure how much time exactly users spend on your website. Spending much time on the platform is not always a good indicator. People simply may not find what they are looking for.

It is the best metric to determine whether visitors find your marketplace useful. To find the number you can use such tools as Google Analytics.

Marketplace Transaction Metrics

There are users on your platform, they seem to like it and spend time on it, now what? How to understand that a sufficient number of transactions are being made?

Transactions metrics focus on the number of sales made. Among them is liquidity and repeat purchase ratio.

Liquidity is a percentage that shows how active the platform is in a specific period of time. To measure the liquidity you need to track the percentage of goods and services sold within a particular period. The percentage here should be higher, and the time period shorter. This will indicate your marketplace is doing really well. To measure the liquidity more accurately you may want to calculate other ratios such as buyer-to-supplier ratio and CAC.

Repeat purchase ratio. A useful ratio that allows you to understand what percentage of transactions are repeat purchases. If people are coming back to your marketplace to make another purchase, they must have liked the platform. The high percentage of the repeat purchase means you can spend more resources to attract new customers as they tend to spend more buying products from you.

Average Order Value (AOV) allows us to know how much the marketplace earns in terms of transactions.

To calculate AOV you need to divide the total value of transactions by the amount of sales on the platform:

AOV = Total Transaction Value ÷ Total Sales

This will indicate the average value of the transaction. If the indicator is high, most likely buyers will not want to spend money on your platform. You can use this to evaluate how hard it is to acquire new customers and improve some of the bottlenecks.

This list of metrics is not even half of all possible options. Which of them to accommodate depends on the nature of the marketplace.

Our Expertise in Developing Online Marketplaces

Simtech Development has been working with eCommerce projects, namely marketplaces, for over 17 years. In the last couple of years, we have received more and more requests related to marketplace development.

Our clients come to us with different queries related to their platform modifications: develop a multi-profile website for more accurate monitoring of vendors, simplify the onboarding process for sellers, integrate different payment methods including cryptosystems, customize the storefront, and build the platform from scratch.

From our experience, we can surely tell, every single case has its specifications. It is almost impossible to tell right away which model will suit your business. Therefore, we advise you to conduct thorough analyses, study the market and competitors, and choose reliable and professional service providers.

Key Takeaways

There are dozens of marketplace business models available. To choose the right one for your platform, consider the following:

• Your customers’ needs
• Your value proposition
• Market’s best practices

At the launching point try to experiment more to understand the best working pattern. Combining different revenue streams is effective when the project starts to grow.

To evaluate the marketplace performance use key metrics. Timely reports will allow you to track costs and profits, which is significant for steady growth.

Learn more about Marketplace Development on our website