An important stage when planning your marketplace is to figure out the best revenue stream - how you’re going to make money. You want it to be sustainable and reliable.
When considering revenue streams you’ll need to ask yourself the following:
- Who will you charge? (Customers, suppliers or both)
- When will you charge them? (When they join the platform or when they transact)
- How will you charge them? (Fixed fee or a percentage)?
In this post I’m going to explain the five most common revenue streams for marketplaces, their pros and cons and how to design each of them to create a good user experience.
Commissions
Commission based pricing means that you, the marketplace owner, earn a fixed or proportional fee for each sale.
It is the most common business model and the one I would encourage most early-stage marketplaces to start with. However, it requires that you own the transaction process, where the buyer pays for the goods/services via your platform.
There are three ways you can earn commission:
- Charge the supplier
- Charge the customer
- Charge both the customer and the supplier
Charging the supplier means you would charge each supplier a percentage of every sale they make through the platform. To illustrate this, let’s suppose we have a marketplace where our commission is 15% and one of our suppliers sets their price at $500. In this case, we would take $75 (our commission) and the supplier would get $425. I recommend that you use this revenue model when customers are highly price sensitive and want to get the best price possible.
On the other hand, charging the customer is where you add your commission on top of the price set by the supplier. Using the same example, this time the customer would pay $575 and the supplier would keep the full $500. Our commission would remain the same at $75. This is the business model I used for my own marketplace because we wanted our supply side to keep 100% of their earnings.
Alternatively, you can charge both sides. For example, Airbnb charges their suppliers (hosts) 3% and their customers 6-12%. So for a $500 booking, the supplier would receive $485 and the customer would pay between $530 - $560. I like this model as it means neither customers nor suppliers bear the full cost of the commission, so neither lose out too heavily. If I was to run my marketplace again, I would probably opt for something like this.
By now you might be wondering how much commission you should charge. Well, this depends on a couple of different factors. First, take a look at your competitors. If there are other companies operating in the same vertical as you, find out what the industry standard is. For example, in real estate, brokers usually charge 3% commission so you probably wouldn’t want to dive in at 10% commission because no one will pay it. However, you might want to use the industry standard as a benchmark to see if you can offer more favourable terms for your customers and/or suppliers.
Secondly, it will depend on how “managed” your marketplace is. If you are doing a lot of work behind the scenes (for example, verifying identities, authenticating goods etc.) then you can typically charge a higher rate of commission. Sellers and customers usually acknowledge that you’re providing more value and are therefore willing to pay a premium for those additional services.
Finally, the size of your commission might depend on the average order value (AOV) that is transacted through your marketplace. Generally, the higher the AOV, the lower your commission is. For example a 10% commission on a $1million sale is going to be a much harder sell than 10% of a $10 transaction.
To give you an idea what other marketplaces charge, take a look at the table below by Bill Gurley:
As you can see, commissions vary wildly from industry to industry.
The main advantage of commission-based pricing is that there’s lower risk from the suppliers perspective. Suppliers do not have to pay any money to the marketplace until they receive value from it (a sale). This makes it easier to convince suppliers to sign up and create listings on your marketplace, which in turn will help you to grow your supply-side.
However, one of the biggest problems with commission based pricing is disintermediation - taking the transaction off the platform. If it’s more expensive to buy via the platform than to go directly to the seller, then customers might try to bypass the platform to avoid paying commission fees. Similarly, if you take too much commission off suppliers, they might encourage customers to bypass the platform so they can make more money.
The second disadvantage of commission-based pricing occurs where a customer is likely to transact with the same supplier repeatedly in the future. For example, let’s suppose we have a marketplace for students to find and book school tutors. If the student and tutor get on well, the student will probably want to book the same tutor over and over again, and eventually the payment will be taken off the platform because it’s easier (and cheaper) to do it directly.
Commission based pricing works well for marketplaces like Airbnb because customers are unlikely to book the same accommodation regularly, but if customers and suppliers build a relationship off the platform, chances are the business will eventually be taken off the platform.
The best way to avoid disintermediation is to provide a significant amount of value to each party. You need to make the experience so good and so valuable that they prefer to make transactions through the platform. I’ll be discussing this in more detail in a future article.
The main design consideration for commission-based pricing is how you display prices to customers. You can either exclude commission from the displayed price, or include it. If you exclude it, prices will appear lower and more competitive, however, customers might get a shock when commission is added at checkout - this is known as “sticker shock”. If you include the commission in the displayed price, prices will appear higher but it sets the right expectation.
Sticker shock can seriously harm your conversion rate, as I found out when I built my own marketplace for booking local photographers. Just imagine being one of our early customers - you’ve found your dream photographer, you’re happy to spend £250 on a photoshoot, you go to checkout and suddenly the price goes up by 15% to £288! It’s no wonder people abandoned the purchase. As soon as we switched to including the commission in the displayed price, our conversion rates increased.
Therefore my advice is to always include the commission in the displayed price. However, I also think it’s imperative that you’re transparent with customers about commissions and other fees by providing a price breakdown listing all costs that contribute to the final price.
And that’s exactly what Airbnb does. On the search results page they show the total price per night (including the commission and fees). On the listing page itself, they show the basic cost per night (minus any fees) but in the breakdown they list all additional fees and the total price.
My final price of design advice is to round up the prices to the nearest whole number as it makes prices earlier for customers to read and understand.
If you’d like any further reading about commissions, I recommend “A rake too far: Optimal platform pricing strategy” by Bill Gurley.
Subscriptions
Subscription-based pricing is where you charge users a monthly or annual fee to be part of the platform. You can either charge customers to access suppliers (like Classpass - a marketplace for fitness classes) or you can charge suppliers to access customers (like Studiotime - a marketplace for recording studios). However, it’s most common to charge the supply-side.
Subscriptions are usually a good option for marketplaces that don’t facilitate the transaction between the buyer and the seller. However, to be successful, you must provide paying users with a lot of value that would be difficult, expensive or inconvenient to get elsewhere (e.g. insurance, training or community).
It’s also much harder for early-stage marketplaces to convince people to pay the initial subscription fee. They’ll see it as an upfront cost - paying for something before they receive any value. As you’re new in the market, chances are you haven’t built up much of a reputation just yet. So to them, a subscription presents a risk - they could pay for something that never pays-off.
One way around this is to offer heavy discounts (or even free lifetime access) for early adopters. Create a sense of urgency by telling them that you’ll raise your prices in 30 days. This should help you to build up an initial base. In fact, this is exactly what Zillow, a real estate and rental marketplace, did when they were starting out.
We wanted to show new users the quality of our connections and give them a risk-free way to get started. We would then slowly turn on pricing as we proved the value. This helped us build supply in the early days.
- Nate Moch, VP Product Teams at Zillow
Alternatively, you could implement a freemium subscription model. This is where you have different pricing tiers, with the lowest one being free. A good example of a freemium model is Gumroad. They have a free tier for creators who are just starting out, and a paid tier starting from $10 per month for creators who would like to access premium features such as removing the Gumroad branding and using their own domain name.
Listing fees
A listing fee revenue model is where a marketplace charges suppliers a fixed fee for each listing they add. For example, sellers on Etsy are charged $0.20 for each item they list for sale. This approach works well when the supply-side wants to create multiple listings.
Although Etsy has kept things simple by charging everyone the same fee, you might want to consider charging different amounts for different types of listings, like Craigslist, a classified ads marketplace. On Craigslist, most people can publish an ad for free, but they do charge for certain categories. For example, job listings can cost anywhere between $10-75, whereas Commercial real estate costs $5 per ad. You’ll need to study your market and test different price points with users to find the most appropriate fees to apply to your categories.
Listing fees don’t have to be your only source of revenue. Marketplaces like Etsy charge a listing fee in addition to commissions. This enables them to generate revenue from items regardless of how popular they are with customers.
In terms of design considerations, it’s really important that your listing fees are clear to your suppliers at all times. Make them aware before they sign up and each time they create a listing so that they’re not hit with a nasty surprise and abandon your marketplace for good. A lot of marketplaces are built on word of mouth and network effects so if your suppliers have a bad experience, word will soon spread to other suppliers.
My advice for early-stage businesses is don’t introduce listings fees right away. Instead, wait until you’re gaining traction from early adopters and have built a positive reputation in the supplier community. Then, introduce a relatively low listing fee and see how willing suppliers are to pay it.
Pay per lead
A pay-per-lead business model means suppliers pay to respond to customer requests. This usually works best for marketplaces offering professional services, like Bark. Here, customers create a job request (e.g. fix my leaky tap) which gets sent to suppliers who are best matched to fulfil the job request (e.g. plumbers). A supplier receives the request and if they like the sound of the job, they pay the platform to respond to the customer. Then they wait to find out if they’ve got the job or not.
Often, these types of platforms require suppliers to purchase non-refundable packs of credits. Each job request is assigned a number of credits (e.g. 10 credits) and the supplier has to use their credits to respond to a job. According to Bark, they “calculate the costs of contacting a customer based on the service, the value of the job, and the supply and demand in the area.”.
Credit packs often cost over £100 (excluding VAT) so they’re not cheap!
The advantage of this revenue model is that you’re effectively earning revenue from suppliers before you’ve provided any service. It’s up-front cash for your marketplace. Secondly, you don’t need to own the transaction (which could be complicated) and you don’t need to rely on the buyer and seller to successfully transact.
However, I’ve found this approach to be a real turn-off for suppliers. At this stage they don’t know how likely they are to win any business from the marketplace, so to invest £100 in it is a big ask. If they do decide to join and spend all their credits but don’t win any jobs, they’re unlikely to splash out another £100 on more credits. So the lifetime value (LTV) of a supplier will only be high if suppliers frequently get the jobs they apply for.
The other problem with this type of marketplace is that you can’t completely escape from disintermediation - the business being taken off the platform. Suppliers and a customer might meet on the platform, but if they want to do regular work together, the customer won’t need to create another listing on the platform, meaning that the supplier won’t spend any credits to apply for the job. In other words, the marketplace will not gain any further revenue from this relationship.
If you do choose a pay-per-lead business model, think carefully about the design of the form that customers fill in when they create a job request. It’s important that you make the form quick and simple so that it’s easy for them to complete. Remove any questions that are not absolutely critical. However, make sure the supplier receives enough information to assess the job and make a decision on the price they want to quote.
I also recommend that you focus on just one vertical (e.g. photographers) to start with. The advantage being that you’ll only need one form for all customers. However, if your marketplace spans multiple verticals (e.g. plumbers, electricians, gardeners) you’re going to need to create multiple forms, which will add another layer of complexity to your design and build.
Premium listings
Premium listings are where suppliers can pay for additional benefits for their listings such as ranking higher in the search results so customers see them first, getting a “premium badge” added to their listing for added authority and adding a custom domain to their listing URL. You can get really creative with this list!
I personally really like this approach and think it’s a fantastic revenue stream for early-stage marketplaces. At first you can offer simple features that don’t require a lot of design or engineering effort (e.g. a “premium” badge or promising to feature them on your social media channels) and then you can work your way up to more complex features (e.g. ranking higher in the search results) as you grow and gain traction.
The key here is finding the benefits that your suppliers will value most. If they’re features that don’t interest them, they won’t be so willing to pay for the premium features. Speak to your suppliers and find out what features they would be willing to pay more for.
There are many different revenue streams you might want to consider for your marketplace. In fact, you might end up using a mix of the ones I’ve mentioned in this article. My recommendation is to experiment and see what works best for your particular market. Your business model is likely to evolve and change as your marketplace grows and you enter new markets.
However, commission is usually a good one to start with, especially if you own the transaction process. But think about adding additional revenue streams later, once you’re providing more value to your users.
