10 Marketplace

Business Models
To Generate Revenue

Martin Boss
Founder at MultiMerch Systems

martin@multimerch.com
https://twitter.com/imMartinBoss
https://www.linkedin.com/in/martn/
 Introduction
This article is part of a series on starting an online marketplace business.

Starting an online marketplace with no revenue model is not the way you launch a successful
marketplace business.

In this post I will cover 10 different marketplace business models that will help make
your marketplace profitable.

I’ve seen a lot of two-sided marketplace platforms fail to generate revenues during my time
here at MultiMerch.

Let me tell you – it’s not pretty. You can have the best marketplace in the world and still go
bust if you don’t find the right business model.

These are the online marketplace business models you can try to generate steady revenues:

1. Sign up fees
2. Subscription business model
3. Product listing or insertion fees
4. Selling fees
5. Transaction or payment processing fees
6. Sponsored products and stores
7. Ads from third party advertisers
8. Pay per lead or lead fees
9. Bidding fees for auction marketplaces
10. Grow your marketplace through affiliates and referrals
Bonus: designing a tiered marketplace membership system
Conclusion: which marketplace business model is right for you?

Let’s jump right in:

2 10 Marketplace Business Models To Generate Revenue

 1. Sign up fees
Sign up fees are simple – a sign up 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.

You’ve seen it, you know it. 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 sign up fee business model work, especially in the early
stages:

make sure the sign up 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

It’s also possible to defer the sign up fee payment – for example, ClickBank charges you a
$49.95 «activation charge» only after your first product is approved. While still essentially
a sign up fee, it gives vendors a bit of assurance they’ll only pay when they’re ready to start
selling.

If implemented properly, sign up fees can be a motivator for legit vendors and a safeguard
against dummy signups.

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

The takeaway?

3 10 Marketplace Business Models To Generate Revenue

The takeaway?

Sign up fees are a decent marketplace business model in the early stages of your business
when selling fees aren’t feasible due to low sales volumes.

However, you will have to combine them with a different revenue model to make it work in
the long run.

4 10 Marketplace Business Models To Generate Revenue

 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 (think leases and installments), subscriptions rule the world – and for a reason.

First, subscriptions make it possible to split a large payments 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. Selling it for one time
payments? Good luck surviving the first few years.

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.

While implementing subscriptions is a more complex feat than collecting one time sign up
payments, you’ll usually find many popular payment solutions like Stripe that are offering
them out of the box. You can combine them, too.

5 10 Marketplace Business Models To Generate Revenue

If you’re considering the subscription marketplace business model, here are a 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 (more on this below)
have a plan to keep your vendors engaged
offer incentives for larger payments at once (e.g. 15% off for a yearly vs monthly plan)

The actual payment periods and subscription rates will depend on the industry and the
products or services you’re offering, but weekly, monthly or yearly payments are the most
common ones.

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

If you can find a way to successfully implement this business model in your marketplace and
make sure your sellers gain value out of their subscriptions – you’ll do great!

6 10 Marketplace Business Models To Generate Revenue

 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
any combination of the above

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 when implementing listing fees as your marketplace
business model:

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.

Insertion fees will work great for marketplaces offering handmade items where vendors sell
one-of-a-kind-products, but they may not work as well in regular retail online malls.

7 10 Marketplace Business Models To Generate Revenue

This business model is also popular among classified and ad platforms that don’t process
transactions and thus can’t collect selling fees.

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

Before implementing listing fees, make sure it’s a viable strategy in your industry. (If none of
your competitors are doing it, perhaps it’s not.)

8 10 Marketplace Business Models To Generate Revenue

 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

With direct payments, you have no way of collecting the selling fee at the time of payment as
the payment is made exclusively between the customer and the seller. You can still collect the
selling fee as a reverse payment by invoicing your seller – either automatically at the time of
sale or at regular intervals, e.g. monthly.

In case of aggregated payments, you’ll keep track of the selling fees owed by the sellers, but
collect them at the time of your payout to the seller. Depending on the amount of business
your platform gets and the payment methods used you can either track the fee amounts
manually or via toools designed to make it easier, such as seller transactions and balances.

Split or parallel payments usually take more time and technical skills to implement, but then
make the process of collecting selling fees simpler than the rest of payment flows. In most
cases, the payment processor you’ll use to process split payments will let you handle selling
fee collection automatically at checkout.

9 10 Marketplace Business Models To Generate Revenue

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

If you’re building a marketplace platform with a tiered membership system, you’ll have
greated flexibility when planning your selling fees.

When considering whether or not to implement selling fees in your online marketplace,
remember the following things:

selling fees scale well as your sales grow, but don’t work as great in the early stages of the
project
low selling fee rates may be enticing to your vendors, but might not be sustainable
for yourself
when implementing selling fees, don’t forget to take your own processing fees into account

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

Selling fees will get your online marketplace platform to success in the long run – just make
sure you have other revenue streams to rely on while you grow (or just get some VC funding!)

10 10 Marketplace Business Models To Generate Revenue

 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

It’s a difficult business model to pull off, but it’s the one you should be aiming for when
building your online marketplace.

11 10 Marketplace Business Models To Generate Revenue

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

If you decide to include paid featured listings and promotions in your marketplace business
model, here are a few tips by MultiMerch:

make sure your offer to sellers is clear and makes sense for them – if it doesn’t pay
off, they’ll be reluctant to do it in the future
consider the shopping experience of your customers who may be wary of
sponsored products – will you promote everything or have some kind of validation
in place?
don’t forget about the technical part of implementing sponsored listings – can your
current system handle them out of the box or will you need to have it developed first?
don’t overdo sponsored listings so as to make your marketplace unusable for the
organic purchase flow

12 10 Marketplace Business Models To Generate Revenue

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

You can implement paid sponsorships and product promotions in virtually any industry and
marketplace type – just make sure you do it the right way!

13 10 Marketplace Business Models To Generate Revenue

 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.

A few of the different ad types and placements you may consider:

display advertising, such as graphics and banners

text advertising, e.g. blog posts or newsletter mentions
mixed advertising, such as sponsored third party product listings

When considering third party ads to generate a revenue stream from your online
marketplace, keep the following things in mind:

ads essentially drive visitors away from your website – is it worth it for your platform?
you don’t always control the content promoted by third party ads – how will it affect
the overall experience of your marketplace members?
if you don’t have a built-in ad system, implementing one will require some technical
skills – can your team handle it?

14 10 Marketplace Business Models To Generate Revenue

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

Advertisement is a huge, but often controversial industry – if you go with monetizing your
marketplace through ads, make sure you know what you’re doing.

15 10 Marketplace Business Models To Generate Revenue

 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.

16 10 Marketplace Business Models To Generate Revenue

 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.

If you’re considering implementing a referral or an affiliate system of your own, here are a
few things to consider:

while an affiliate system may be a good idea for larger marketplace, an organic
referral system is great from the start as long as your existing users are happy
don’t forget about fees and revenue sharing – if you sell products by third party
vendors, who’ll pay the affiliate/referral commission?
building your own referral system from scratch will be a complex endeavor – can you
handle it?

17 10 Marketplace Business Models To Generate Revenue

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

Referral programs will usually work well as a marketplace business model in most industries,
affiliate systems are a bit more difficult – in any case, do your homework before rushing to
implement these.

Bonus: designing a tiered marketplace

membership system

If you’re going to implement sign up, recurring, listing and selling fees in your online
marketplace, you’ll usually want to create a few different tiers for your marketplace
members.

In this section, I’d like to share a few helpful tips on designing a tiered membership system.

There are a few differentiators you can use when designing your plans.

Fee rates and selling restrictions:

different sign up fee rates for different plans

lower product listing fees for higher tier plans
more expensive recurring plans with more features
lower selling fees for power sellers
maximum orders or maximum revenue per plan, possibly with automatic tier switching
18 10 Marketplace Business Models To Generate Revenue
While you’re here, you’ll also need to consider whether or not to offer free and freemium
plans, as well as free trials.

When it comes to product listing, there are a few product publishing restrictions (or
benefits) you can use to differentiate your plans:

allow a maximum number of product listings per plan, e.g. 15 listings per week
specify the maximum number of categories sellers can list to, e.g. one category
per product at the lowest plan
restrict product publishing to specific categories only and unlock the rest at higher plans
allow sellers to upload up to a maximum number of product images and charge
for additional images
specify minimum and/or maximum prices sellers can define for their products, e.g.
only premium plan members can list expensive products

You’ll need to be careful here, though – restrict your plans too much and watch members
leave to a more open competitor.

In addition or instead to product listing restrictions, you can grant or restrict access to
whole features depending on your seller’s plan, such as:

limits on storage space, e.g. 200 MB on image storage for sellers on the free plan
discount codes and gift cards, e.g. only paid members are allowed to configure
coupon codes and create gift cards
staff accounts, e.g. allow team access to seller control panels on higher tiers
advanced analytics, reporting and sales tools – free members only get basic reporting
and no access to advanced marketing tools
manual order creation – allow premium plan subscribers to manually create orders
for their customers
automatic fraud analysis – grant premium sellers access to your platform’s fraud tools
for their peace of mind
integrations with third party solutions – restrict free members to basic tools and
enable integrations with custom tools for paid sellers only
support level by your company – provide personal, live support to sellers subscribed
to higher tier plans

Basically, there’s quite a lot of possible features you can use as a differentiator when
designing the membership system for your online marketplace.

The main thing I’d recommend keeping in mind here is not to go overboard with restrictions
and end up with a system that’s unusable for your sellers.

As long as you don’t forget about your sellers and keep your membership levels feasible for
them, they’ll be happy to switch to the next level when they’re ready.

19 10 Marketplace Business Models To Generate Revenue

 Conclusion: which marketplace business
model is right for you?

When it comes to marketplace business models, there’s no «one size fits all» approach.

So, when designing a revenue model for your online marketplace platform, keep the
following factors in mind:

your industry and the competitors – if nobody else is doing what you have in mind,
you could be wrong (or a visionary)
the size and life cycle of your marketplace – some business models work well in the
early stages, for others you’ll need large selling and traffic volumes
the nuances of your target market, geographical location and culture – what works great
in one region, may not turn out so well somewhere else

In most cases, I’d recommend starting your revenue generation journey with exploring
sign up fees, product listing fees, selling fees and featured listings before going deeper into
advanced monetization.

Why use MultiMerch for your marketplace business?

A few reasons marketplace owners choose MultiMerch

Lifetime support and updates. Your project gets a lifetime of software updates
and technical support with MultiMerch.
Built with quality in mind. We focus on code quality, user experience and the
marketplace owners when designing MultiMerch.
Designed for rapid onboarding. MultiMerch will ensure your marketplace project gets
from idea to launch as swiftly as possible.
A decade in marketplace commerce. We’ve been with OpenCart and online
marketplaces for over a decade and know it to the core.
Your personal team you can trust. We’re your personal marketplace team invested in
your success – talk to our founder directly at any time.-
Global partner community. We’ll connect you with implementation partners and
fellow entrepreneurs to help you get started.

Get in touch with us today and let’s discuss your next marketplace project!

20 10 Marketplace Business Models To Generate Revenue