What is the Marketplace Business Model: What Value does it Offer?

Authored by chintan on December 29, 2020

Keeping our hopes high and our focus aligned, we are all set to enter the first quarter of 2021. On the contrary, 2020 has been an unpredictable business year, and the ‘play it alone’ game hasn’t worked quite well for most businesses. The most common alternative that many businesses have opted for is the Marketplace Business Model, a popular subset of the Ecosystem Business Model.

Today, your business success depends upon your capability to innovate or disrupt. And the marketplace model is the most significant step ahead in the field of innovation and disruption.

What is the Marketplace Business Model?

The online marketplace model offers a proprietary platform where the sellers and buyers can connect and facilitate the transactions conveniently. Mostly the marketplace provider does not own any inventory and generates revenue only by offering its platform as a service.

Amazon, Airbnb and eBay are some of the most popular marketplace apps that are preferred by customers for the choice of shopping they offer and their shopping experience. A marketplace operator is responsible for managing the logistics as well as payments.

Owing to the marketplace model, the sellers find the right exposure for their business, can connect with the right set of customers and sell their products and services, without making a big investment in setting up their individual online platform or store. This model further saves a huge portion of their marketing investment as the marketplace provider is liable to promote its platform, thus attracting customers and sellers.

What Value Does Marketplaces Offer?

Disrupting the traditional ‘play it alone’ business models, marketplaces have picked the business sector by storm. Shopify reports that “Global marketplace platform provider revenues are expected to more than double from $18.7 billion in 2017 to $40.1 billion in 2022, driven by the sharing economy. Reflecting this is the fact that 30 niche marketplaces launched have received $2.3 billion in investment between 2012 and 2017.”

The Marketplace Business Model offers significant value for the marketplace providers, sellers as well as customers.

  • Marketplace providers generate revenue/value by earning commission from every seller, or for each sale that takes place through their platforms. This revenue is based on the revenue-generation model a provider chooses.
  • A seller generates revenue by selling its product or services to the right customers on the marketplace app platform.
  • A customer receives value by getting a choice of sellers or products and services. They can rely on a trusted marketplace, which is generally created to solve a mass problem. In return, more buyers on the platform attract more sellers.

Types of Marketplace Business Models

Be it Amazon, Airbnb, Uber, or Netflix, all are successful examples of the marketplace model. Each platform has its specific set of services and individual revenue-generation model, however they are all classified under the Marketplace Business Model. And therefore, marketplaces come in various shapes and innovations.

Here are 4 of the most common marketplace models:

Commission Model

One of the most popular marketplace models follow the commission approach, where the marketplace provider charges fixed or variable commission for every successful transaction on its platform.

In this approach, the operator generally offers free listing to the seller and only generates revenue through value-creation for the seller (i.e. through generating sales). The operator generally manages the logistics and payment processing, while the seller focusses on offering the best products.  

Amazon, Airbnb, and Fiverr are some marketplaces following this approach.

Listing Model

Another popular approach is the listing model, where marketplaces charge the seller for every offer or ad listing they add on the marketplace platform. This approach is followed by marketplaces that offer high-ticket products. For instance, marketplace to sell cars, real estate properties, etc.

In this approach, the marketplace platform only acts as a bridge to connect sellers to potential buyers and charge the sellers for the visibility of their offer/listing. Oftentimes the marketplace operator doesn’t handle the transactions and is responsible for attracting great customer traffic on the platform. The marketplace operator has to invest most of his efforts in building brand popularity and draw high-volume customer traffic for the sellers.

OLX, Realtor.com and Trulia.com are some marketplace apps operating on this model.  

Subscription Revenue Model

Some of the established marketplaces operate through subscription revenue approach. In this approach, either or both buyers and sellers pay a reoccurring subscription fee to access the marketplace platform or get access to the premium features of the platform. Where on one end, the sellers pay for the subscription to connect with the most ideal customers, the buyers on the other, buy the subscription to enjoy special features or uninterrupted services from the sellers.

This model is only possible when the marketplace operator is capable of establishing a high-traffic and high-value platform where both sellers and customers are willing to pay for the subscription on a reoccurring basis.

LinkedIn’s Premium Subscription is one example of this approach. Here the employers can find the best candidates for their job or companies can build an ideal network through the paid premium features. While, the job seekers can find the right employers through premium features. Another example is Netflix, where users pay a reoccurring subscription charge to enjoy uninterrupted entertainment services from the sellers and Netflix itself.  

Freemium Model

A strategic approach for the marketplace model is the freemium revenue approach. In this approach, the marketplace operator allows the sellers and buyers to access its platform free of charge for a limited set of features or a limited time. The idea is to get them hooked with your platform and convince them to continue with the paid premium features of your platform or opt for the paid subscription after the free period.

Here the marketplace operator has to find the right balance between the free and paid features. And should be able to retain more and more paid subscribers.

Freepik and Unsplash are two examples which offer limited access to free stock photos and the customers can get full access to all the available stock images by paying a monthly subscription charge.

The Tactics for Attracting Sellers and Buyers

A marketplace offers an extensive list of benefits to the provider that ranges from high growth margins, pricing monopoly, to higher stability, etc. However, most entrepreneurs shy away from the initial challenges they face to establish a successful marketplace application.

A marketplace is a network of sellers and buyers who together add value to and leverage value from the marketplace platform. More sellers you attract to the platform, the greater value they add to it, as a result more buyers are attracted to the platform. The regular value creation makes an established marketplace is a self-sustainable system.

So, below are some tactics to attract sellers and buyers for your marketplace.

Tactics to Attract Buyers

  • Start as a Seller: Many marketplaces list their proprietary products or services at the initial stage to attract the buyers. When the platform attracts decent footfalls, sellers join the platform to connect with their potential customers.
  • Offer Monetary Incentives: Many popular marketplaces including Amazon, Uber offer monetary benefits to users on their first purchase or first ride. Some marketplaces also offer sign-up and referral incentives for new users. This tactic has proven to be quite effective when establishing the initial customer base for your platform.
  • Solve a Common Problem: Marketplaces like Uber, Airbnb, etc. have taken a step ahead in the field of innovation by targeting a common problem and solving it through their platform. Booking a taxi from a trusted service provider at the right fare was an evident hassle for people all across the globe. Uber developed an aggregator platform where it provided hassle-free taxi booking on demand. And this attracted a huge customer base. Thus, attracting a large number of service providers. Airbnb did the same with hotel bookings, where now customers can check multiple stay options and book them easily through their smartphones.

Tactics to Attract Sellers

  • Seller Programs: One can create intuitive seller programs to help the sellers understand the onboarding process and make it easy for them to list their products/services on your platform. The more informed they feel, better are the chances of them joining the platform.
  • Free Listing Approach: Most marketplaces follow the free listing approach on the initial stages, where they allow the seller to list their products/services free of charge on their platform. Instead, they charge them a commission fee for every successful transaction, and this way the seller only pays if the platform helps them create some value.

Lucrative Advantages of Marketplace Business Model

A Forrester Report says, 95% of all consumers have already interacted or transacted over a marketplace and 50% of them believe it has influenced their shopping experience in a good way. This makes marketplaces a premier disruption in the global retail industry.

Marketplaces once scaled can bring great fortunes to their operators. Below are some perks of Marketplace business model:

Self-sustainable Business Model

Once your marketplace application scales with a good strength of buyers and sellers, the platform becomes self-sustainable and grows with its network. Whether it is sellers who provide best deals to grow their business, or buyers recommending the platform to their friends, the marketplace grows resultantly.

Moreover, your marketplace platform consistently performs better on the search engines as new content is updated regularly. Whether it is the sellers uploading new product details, or the customers adding reviews or feedbacks, your platform grows in terms of SEO.  

Humongous Growth

Startups and entrepreneurs generally shy away from the idea of building a marketplace just by estimating the initial challenges the model offers. However, once a marketplace is established it is capable of drawing huge profits. After a certain time, you don’t have to invest extensively in marketing as it becomes a self-growing platform. And once your platform starts attracting large traffic footfalls, you can grow your profit margins, ultimately multiplying your business revenue many folds.

Huge Advantage as an Early Starter

One of the biggest perks of a marketplace business is that it is hard to replicate. It takes a significant amount of effort, time and investment to establish a flourishing marketplace platform. And being an early adapter comes with a lot of advantage. Once your marketplace is established with a good number of sellers and regular buyer traffic, it is hard to dethrone you from your position. While in the case of traditional ‘play it alone’ business model, you are always at the risk of losing your premier position to new competitors.

Worthy Data

A marketplace akin to a search-engine, generates a huge amount of user data (both sellers and consumers). One can use this data to promote the platform itself, earn through selling this data, or leverage this data to set foot in other industries. For instance, most of the marketplaces leverage this data to boost their digital marketing activities, as well as establish their brand. With this, eCommerce giants like Amazon uses the data to sell their own products under ‘Amazon Basics’ category.

Challenges with the Marketplace Business Model

Substantial Amount of Investment

A marketplace business comes with a high setup cost. You need to invest in building a feature-rich platform, marketing your platform, attracting initial sellers and buyers, and building your workforce. Nevertheless, the investment is high, it takes a substantial amount of time to generate a comparable revenue.

However, most of the innovative marketplace ideas are successful and were able to attract good funding from investors. Moreover, once a marketplace is established it generates huge returns.

Hard to Deliver Consistent Quality with Different Sellers

Your marketplace will attract different sellers with varying product and service qualities. With this, the quality difference can be more evident when the sellers are responsible for the logistics and delivery. Inconsistent quality will defame your platform’s trust value and draw negative feedback. Therefore, you might need to invest in quality check and seller authentication. A substantial part of your investment needs to be dedicated towards logistics, where you uphold the entire logistics responsibilities to maintain a consistent service quality.

Wise Words

Today, the Marketplace Business Model is the primary disruption in the global business sector. The model offers an extensive set of advantages once executed prudently. However, you need an experienced technology partner to transform your innovative marketplace idea into a high-revenue business.

Stay tuned to understand how you can setup your marketplace business, the various KPIs of the marketplace ecosystem, and how to boost your platform’s value-creation efficiency. Feel free to connect with us for expert consultation.

Let's make a

with the hope that it lasts forever

What is micro delivery model? In detail