What is SaaS?

Software as a Service, also known as SaaS, is a cloud-based service where instead of

downloading software your desktop PC or business network to run and update, you instead
access an application via an internet browser. The software application could be anything from
office software to unified communications among a wide range of other business apps that are
available.
This offers a variety of advantages and disadvantages. Key advantages of SaaS include
accessibility, compatibility, and operational management. Additionally, SaaS models offer lower
upfront costs than traditional software download and installation, making them more available
to a wider range of businesses, making it easier for smaller companies to disrupt existing
markets while empowering suppliers.
The major disadvantage of SaaS applications is that they ordinarily require an internet
connection to function. However, the increasing wide availability of broadband deals and high-
speed phone networks such as 5G makes this less of an issue. Additionally, some SaaS
applications have an offline mode that allows basic functionality.

What is Online Marketplace?

An online marketplace is a website that falls under the ecommerce umbrella as a site that
aggregates curated goods or services from numerous third-party suppliers. The marketplace
operator, the entity which controls the site, is then responsible for facilitating the transactions
that occur through the online marketplace, including making mass payments to the supplier, as
well as providing services through the marketplace.

Why being a Marketplace is attractive?

Marketplaces have strong network effects and if you manage to put together a successful
marketplace, then it is hard pretty hard to beat. Because power law applies to marketplaces,
being the top marketplace means that you can totally dominate your market. That is not true
for SaaS products and the market for a SaaS product can be relatively quite fragmented. The
other advantage of being a marketplace is its longevity.

Benefits of Marketplaces to Buyers and Sellers

1. Unprecedented access
Sure, the internet breaks down geographical boundaries, and a seller in Australia can reach a
buyer in the UK. But given the way search engines work, how likely are they to really find each
other among the billions of websites that exist? An online marketplace puts the right buyers in
touch with the right sellers with far better accuracy than a simple web search will ever achieve.
2. Great ROI for sellers
Most online marketplaces provide inexpensive annual membership deals. Where else can a
company achieve that sort of reach for such a small investment? Compared to other types of
business development activities, the ROI is absolutely breathtaking .

3. Simplified sales process

According to the old saying, there’s many a slip twixt cup and lip. A significant proportion of
potential buyers are still nervous about committing to a financial transaction online, particularly
when the payment platform is new to them. Using an online marketplace, they are in familiar
territory.
4. Boost your SEO
Every business wants to improve its search rankings, and many invest heavily in time and
money for limited returns. A recognized online marketplace will typically have done all the hard
work already, and will be ranking well for the most competitive keywords. Having your site
associated will give it a welcome boost in SEO.
5. Boost your branding
It is not just your SEO that will reap the benefits. Today, brand recognition and image are more
important than ever, and with online marketplaces, new entrants running on a shoestring
appear right alongside household names from the multinationals. What better way to get your
company noticed?

6. Gathering market research data

The competitive nature of the 21st century business environment makes it more important
than ever to have more than half an eye on your main competitors. An online marketplace gives
you the perfect opportunity to compare and contrast what they are doing and how they are
doing it.
7. Expand your network
Businesses spend more time and effort on networking that they have ever done before to
thrive in the modern business dynamic. An online marketplace provides the opportunity to do
so at practically no additional cost, by identifying the companies that can be most influential in
partnering you to the next level of success.
How SaaS Products Can Become Marketplace?
Most SaaS products are used by businesses for serving their users better. If your SaaS product
creates enough of a differentiating user experience to become the preferred way for consumers
to engage with a business, then your SaaS product can actually become a marketplace as well.

 This is of course pretty hard to do, but it is doable.

 Wordpress is a SaaS product. Medium is a Marketplace.
 Shopify is a SaaS product. Amazon is a Marketplace.
 Stripe is a SaaS product. Apple Pay is a Marketplace.
 Jira is a SaaS product. Upwork is a Marketplace.
 Some SaaS product for managing a taxi service. Uber is a Marketplace.
Some of the above examples may not be exactly suitable or comparable, but they should give
an idea of what could a SaaS product evolve into to become a marketplace.

Types of Market Places

Marketplaces fall into three main categories when grouped by their target audience:
Business-to-Business (B2B)
Business-to-Customer (B2C)
Peer-to-Peer (P2P) sometimes referred to as customer-to-customer (C2C)
Business-to-Business (B2B)
B2B marketplace is a website where wholesale suppliers sell their products or services to
buyers in bulk. This type of marketplace is usually operated by a third party, allowing businesses
to use it on beneficial terms. Using a marketplace brings sellers the following benefits:

 Ability to distribute products and services to more customers

 Expanded sales channels
 No need to create their own ecommerce platform
 Can start selling quickly
 No huge upfront investment required
The idea of an online B2B marketplace lies in automating the selling and buying process,
providing a great customer experience, and improving transparency of financial deals. Among
the top B2B marketplaces are Alibaba, Made-in-China, Amazon, and eWorldTrade.

Business-to-Customer (B2C)
The B2C marketplace model involves two types of users: businesse and customers. In this
model, businesses sell their products and services not to other businesses but directly to
customers. Many B2C marketplaces are one-stop shops where customers can buy a variety of
goods online. As this model is one of the most popular today, there are lots of famous B2C
marketplaces. For example, AliExpress is a huge online B2C marketplace that includes
thousands of vendors offering products from clothes to vehicles. Booking.com is an online
travel marketplace connecting hoteliers with travelers and featuring an impressive list of
properties. To learn more about B2C marketplaces, let’s look at their business models.
Peer-to-Peer (P2P)
A peer-to-peer (P2P) or customer-to-customer (C2C) marketplace connects individuals with
similar needs, tastes, and incomes to share products and services with each other. The concept
of this type of marketplace is the following: peers can share products (like on Etsy) or services
(like on Uber or Airbnb) in exchange for money or other products and services. P2P
marketplaces are part of the sharing economy, helping people make optimal use of resources
through renting, not buying. The most important thing about this type of marketplace is that
today one person can be a consumer but tomorrow they can become a service provider

Marketplaces by focus
 1. Vertical Marketplace
2. Horizontal Marketplace

Vertical marketplaces
As the name suggests, vertical marketplaces focus on a particular area or niche. Instead of
selling everything to everyone, they offer a narrow segment of services and goods. Having a
website dedicated to a specific niche allows you to stand out among competitors, offer higher-
quality products and services, and increase personalization. The most prominent example of a
vertical marketplace is Etsy. This platform focuses on craft supplies and handmade and vintage
goods. The StockX marketplace only sells authentic sneakers.

Horizontal marketplaces
A horizontal marketplace, on the contrary, offers products and services in various industries to
different customers in different regions. This type of marketplace is considered a one-stop
shop, fulfilling various customer needs in one place. It can be compared to walking in a mall
with lots of stores, only online. Most famous marketplaces such as eBay, AliExpress, and
Amazon are horizontal and offer a large variety of goods.

Marketplaces by management approach

1. Unmanaged
2. Lightly Managed
3. Fully Managed

1. Unmanaged
Unmanaged marketplaces are usually peer-to-peer, where customers look at ratings and
reviews when considering a purchase. The marketplace owners don’t invest in background
checks, quality assurance, or feedback analysis. In general, the less a marketplace manages by
itself, the lower the fees it charges.
2. Lightly Managed
Marketplaces like Uber, Airbnb invest somewhat in quality control and background checks. For
Airbnb, these investments are for customer service and user verification. For Uber, costs
include verifying drivers and ratings.
3. Fully Managed
Fully managed marketplaces cover the whole sales process for sellers. For example, Opendoor,
a marketplace for real estate, buys properties from sellers and puts them on the market. The
only thing sellers need to do is confirm the offer. The fee is usually much higher with fully
managed marketplaces, but the service quality and customer experience are better too.

Revenue Model of Online Marketplaces

These are the online marketplace business models used to generate steady revenues:

 Sign up fees
 Subscription business model
 Product listing or insertion fees
 Selling fees
 Transaction or payment processing fees
 Sponsored products and stores
  Ads from third party advertisers
 Pay per lead or lead fees
 Bidding fees for auction marketplaces
 Grow your marketplace through affiliates and referrals

1. Sign up fees
Sign up fees are simple – a signup fee is a flat payment collected from your sellers when they
apply to sell through your marketplace platform. Collecting a sign up or registration fee is one
of the most straight forward marketplace business models.
Sign up fees are simple; you don't need complex payment gateways and your sellers pay you
upfront. If you're brave enough you can charge sign up fees even before you have a thriving
two-sided marketplace. You only need to sell your idea to your vendors and convince them to
pay to join your platform early.
And it's a business model that makes sense to your sellers, too – paying a small amount to join
a budding marketplace platform isn't a bad deal (if you have a valid business idea and can
convince your sellers).
Here are a few tips for making the signup fee business model work, especially in the early
stages:

 Make sure the signup fee is affordable and feasible for your vendors
 Think of the benefits your vendors will gain by signing up with your platform – and make
an emphasis on the benefits!
 Create an incentive for early bird sign ups – make your vendors want to sign up early
 Offer a personal approach to vendors signing up – after all, they're investing in your idea
Pros of sign up fees:

 Feasible in the early stages

 Simple implementation
Cons of sign up fees:

 Doesn't scale well in the long run

 You'll need to be really convincing

2. Subscription business model with recurring payments

Subscription is king in 2019 – you know it, everyone knows it. The global sharing economy is
powered by subscription businesses generating huge recurring revenues. Over the past decade,
businesses have been actively shifting from selling products and services to offering them as
subscriptions.
Why? Because recurring revenue is the lifeline of any business, including online marketplaces.
You can call subscriptions the ultimate marketplace business model. From digital products such
as software, books, music and movies to services and even regular sales, subscriptions rule the
world – and for a reason.
First, subscriptions make it possible to split a large payment into multiple smaller ones, which
are affordable. Shelling out $700 for a copy of Adobe Lightroom for personal use? Probably not.
Subscribing to use Lightroom for $10 a month? Sounds like a bargain. Second, recurring
payments are a great way to help keep your business funded and evolving over the longer
period of time. Doesn't matter if you're building an online marketplace platform or a mobile
app – charging a subscription will let you keep your product maintained and improving as long
as your users think it's worth paying for.
The most important rule of the subscriptions is simple – as long as your users are getting more
value out of your services than it costs them keep being subscribed, they'll keep paying. The
same applies to online marketplaces – your vendors won't mind paying $10 per month if this
brings them 10x more. Here are Few Tips

 Make sure your vendors are be getting more value than it costs to keep being
subscribed
 Offer a free trial if technically possible
 Describe exactly what is included and how you'll collect payments
 Try offering a few different plans with different options and a way to seamlessly switch
between them
 Have a plan to keep your vendors engaged
 Offer incentives for larger payments at once
Pros of subscription payments:

 Great revenue model in the long run

 In many cases more affordable than one-off payments
Cons of subscription payments:

 More complex to implement than one-off payments

 Difficult to implement in specific industries

3. Product listing or publishing fees

Product listing fees are one of the most common marketplace business models among two-
sided marketplace platforms. When you're just starting out with your online marketplace you'll
consider listing or insertion fees as it's one of the easier revenue models to implement.
A listing fee is a flat or a variable amount collected from the vendor when they list their
products for sale. There's a number of different ways for a marketplace platform to calculate
product listing fees:

 Flat amount, e.g. $0.35 per product listing

 Price-based amount, e.g. 5% of product's listing price
 Category-based fee calculation, e.g. $25 to list a product in the Automotive category
 Feature-based calculation, e.g. +$5 for each additional product category
Listing fees can be collected at once for each individual product or combined into a single
invoice covering multiple products. Here are a few tips to consider:

 Make it easy for sellers to pay the fees – especially if you want to encourage them to list
lots of products
 Provide the sellers with a convincing argument why it pays off to list on your platform –
via statistics, for example
 If you use price-based calculations and work with expensive products, consider
maximum fee caps
Pros of listing fees:
  Straight forward approach that is clear to sellers
 Will work great for one-off, unique and handmade marketplaces as well as classified
platforms
 The way to go if you don't process transactions and can't collect selling fees
Cons of listing fees:

 Won't work as well in the early stages while the platform is still gaining traction
 Not suitable for all industries
 No products = no revenues

4. Selling Fees
Selling or sales fees is pretty much the most popular marketplace business model among online
store and marketplace owners. It is also one of the most difficult revenue models to implement
correctly, in my personal opinion. When you run a marketplace with selling fees enabled, you
have a revenue stream that brings you a small share of each sale, usually before the payment
reaches the vendor.
Both flat selling fees and percentage-based fees (or a combination of both types) are common.
The exact way you'll collect selling fees from the vendors in your marketplace will depend on
the payment flow you're using.
There are three common payment flows in an online marketplace:

 direct payments, where customer's payment goes directly to vendor's account

 aggregated payments, where your platform collects payments from your customers and
then distributes them to vendors in the form of payouts
 split or parallel payments, where the payment processor splits customer's payment
between your vendors and your platform at checkout
There are a few different levels you can apply different fee rates to when building your revenue
model:
 Marketplace-wide fees, e.g. $0.35 + 3% on each sale
 Different rates based on plans or performance, e.g. 1.5% for power sellers, 3% for
everyone else
 Individual rates for individual sellers – consider this if you're running a smaller niche
marketplace
 Different selling fee rates for different product categories or even individual products
Pros of selling fees:

 They're great when scaling – 3% of $100 is $3, but 3% of $1,000,000 is $30,000

  They'll work well in large retail online malls where quantity is more important, than
quality
Cons of selling fees:

 They're more difficult to implement compared to other marketplace business models

 They won't work well in the early stages when your two-sided platform doesn't have
many sales yet

5. Payment Processing or Transaction Fees

This marketplace business model is similar to sales fees, but charging payment processing or
transaction fees brings your revenue generation to the next level. If you only charge selling
fees, you only get a cut of the order at the time of the sale. However, there are many more
payment types that will happen in a regular online marketplace in addition to order payments:

 Sign up and listing payments from vendors

 Recurring membership payments
 Payments for promotions and featured listings
 Earning payouts to vendors, referrals and affiliates
 Payments from advertisers
With transaction fees, you get a small share of ALL payments that happen on your marketplace.
You've heard the term "own the transaction". That's exactly what you're doing with this
marketplace business model. While the payment processing rates differ between companies
and industries, even a 1% fee makes difference when you're processing millions in transactions.

Pros of charging your own payment processing fees:

 Earns your marketplace a great amount of money when scaling up

 The more payments you're processing, the better off you are
Cons of charging your own payment processing fees:

 Difficult to implement from the technical perspective

 Shifting your processing fees to vendors will make them unhappy

6. Sponsored products and stores

Promoting products and profiles is a great way to give your vendors that extra exposure after
you've gotten your marketplace platform going. It's a business model most of the popular
marketplaces out there use to generate revenues.
Marketplace promotions can come in a few different forms, such as:

 Sponsored products on other product pages and in categories

 Promoted products in cart and at checkout
 Featured vendor profiles and products on the main page
 Promoted blog posts and newsletter mentions
Sponsored products will usually work best in product-focused marketplaces such as eBay or
Amazon, where the product is more important than the vendor, while featured vendor profiles
are a great way to engage customers in vendor-centric marketplaces where vendors sell unique
or handmade products and build relationships with your customers.
When it comes to collecting payments for promotions, you can choose a few different
approaches:

 Have vendors pay for individual product and profile promotions (and set different rates
for different promotion periods and locations)
 Include product promotions in a higher-priced membership plan
Implement a credit system to let vendors purchase credit in bulk and use it for
promotions at their discretion
 Offer free promotions as part of a wider marketing campaign to attract new customers

Pros of sponsored listings and promotions:

 Sponsored listings scale well as your marketplace grows – the more exposure, the higher
price that your vendors will be ready to pay
 Promotions are a flexible monetization strategy – the more placements you can arrange,
the more combinations you'll be able to offer to your vendors
Cons of sponsored listings and promotions:

 Allowing promotions of low-quality products may negatively affect your customers'

experience
 Implementing featured listings may require custom development if your system doesn't
support it
  You'll need to convince your sellers that it's worth for them before they'll be ready to
pay for it

7. Ads from third party advertisers

This business model is a little different from promoted products or sellers – in contrast to your
marketplace members, here you allow third party advertisers to promote their products,
services or websites. In general, the approach to ads is similar to the previous case – you have a
number of ad placements and charge advertisers to publish their ads.
There are a few ways you can implement ads in your online marketplace:

 Using in-house ad software

 Using third party services, such as AdSense
 Manage ads manually
Depending on your requirements and your platform capabilities, you'll use one or more of the
advertising models to collect payments from your advertisers:

 CPI/CPM (cost per impression)

 PPC/CPC (pay-per-click/cost per click)
 cost per period, e.g. $125 daily or weekly for the homepage ad
 cost per post, e.g. $250 per blog post
If you don't use a dedicated advertising system, the last one will be the easiest one to begin
with – as long as you have at least some activity in your marketplace platform.
Pros of ads:

 If implemented properly, relevant native advertising may provide the extra value to your
marketplace members
 Monetization through ads scales well as long as you can reach the relevant advertisers
in your industry
 Unlike affiliate and referral systems, you don't have to implement revenue sharing with
vendors for advertisement
Cons of ads:

 Low quality non-native advertising will negatively affect the experience of your users
and visitors
 Successfully implementing and managing online marketplace advertising requires a
cooperation of multiple members of your team
 8. Pay per lead or lead fees
If you're running a contract-based or service-based marketplace and don't process orders
through your platform, charging lead fees might be a viable marketplace business model for
you. In this case, your vendors will be able to browse the list of potential clients or deals, but
will need to pay to view the details or an individual deal.
When it comes to charging the lead fee, you have two distinct options:

 Charge to access each lead

 Charge for successful deals only
In the first case, your vendors will have to pay to access the details of the lead or the deal,
whether or not the outcome is good for them.
With the latter option, you'll only charge your vendors if the deal with this particular lead goes
through – however, here you'll need to have some control over the deal flow.

9. Bidding fees for auction marketplaces

Bidding fees are similar to the pay per lead revenue model, but in this case, you charge the
other side – the customers. The most common case of bidding fees are penny auction type
marketplaces, where customers pay a small amount to bid on the product.
If you're running a penny auction marketplace, charging bidding fees will be a mandatory step
as it's the primary revenue model for penny auctions. In case you've got a different marketplace
- type bidding fees are probably not for you.

10.Grow your marketplace through affiliates and referrals

While not a business model per se, running affiliate and referral systems will increase your
marketplace customer and user base, thus driving sales. Depending on your marketplace
software capabilities and your requirements, you can choose either of these or run both at the
same time.
The main difference between affiliates and referrals is:

 In affiliate marketing, third party advertisers promote your marketplace products

without being members themselves
 In referral marketing, existing marketplace members refer new visitors to your
marketplace based on their own experience
While running an affiliate system will usually result in a greater reach, it won't necessarily
provide great results in terms of revenues.
Since affiliates are basically third-party advertisers, they have a relatively low trust score among
their audiences. On the other hand, allowing your existing members refer new users to your
marketplace will let you build an organic ecosystem and a community, provided you maintain
the quality of your marketplace at a proper level.
Pros of affiliate and referral systems:

 Rewarding happy users to refer their friends will help you build an ecosystem within
your marketplace organically
 Implementing an affiliate system may work good on larger marketplaces
Cons of affiliate and referral systems:

 Affiliates will often generate low quality traffic

 You'll need to consider revenue sharing if you're selling products by third party vendors
through affiliates

Key Challenges of becoming a Marketplace

Online marketplaces face some unique challenges as a business model. Because of their heavy
reliance on third-parties, the relationship with suppliers or providers is critical. They have the
same challenges as managing employees, but loyalty and control are considerably more difficult
because they are not fully managed human resources. Online marketplaces can also have
thinner margins because they must compete with traditional providers, yet they must still pay a
competitive rate to their network. Because of this, they need to operate their business as lean
as possible. In order to succeed, the ability to scale operations is also critical.
Other challenges are as follows:
Marketplaces are Transactional. There is no recurring revenue like in SaaS.
The challenge in the marketplace is the cost of retaining the user base. To get your existing user
back, you have to again spend some money acquiring your user. Till your user has so frequently
used your marketplace that it has become a habit for them. But till then, you have to continue
spending on acquiring your existing users. This can get quite expensive.
Marketplaces are winner take all competitions. And these competitions can get brutal, with
significant capital going towards providing discounts to users to make sure that they get
addicted to your marketplace and not the competition. A better funded SaaS company will try
to outsell you while taking losses, but you can still grow your customer base.
The two ways to become a successful marketplace is to:

 Provide a differentiated user experience. E.g. Airbnb

 Have a lock on one side of the marketplace. E.g. exclusive contracts with unique
suppliers, or strong access to a distribution channel.
A marketplace can give you a much bigger win, by taking on a lot more risk. But if you are still
trying to understand a new domain, the best way is to start off as a SaaS product and learn
more about your market and users.