A brokerage firm’s prime objective is to act as a middleman and bring together buyers and sellers. Brokerage firms act as the facilitator for both parties in successful transaction completion.
A brokerage business charges a commission, fee, or membership fee to one or both parties. In some cases, brokers do not charge for commission directly. However, the prime revenue source for brokerage businesses remains the commission from both parties.
What is the Brokerage Business Model?
A brokerage business generates revenue through commissions charged to the buyers and sellers for facilitating their trade transactions. The prime job of the brokerage business is to match the buyers and sellers.
Depending on the market or trade type, there exist several forms of brokerage services. Real estate, stock exchange, investment banks, and e-commerce platforms are the most common brokerage business models.
Brokerage business aims to bridge the gap of information from the buyers’ and sellers’ perspectives. Brokers may work independently or in the form of a registered firm. Many modern brokerage firms have adopted the zero-commission policy to attract more customers. Their source of revenue remains investments and the difference in prices they charge to the sellers and buyers.
How Does the Brokerage Business Model Work?
In a perfect economical world, everyone would have access to the right information timely. However, efficient markets do not exist practically. From stock investors to business evaluators and real estate investors, everyone lacks the information or lacks access.
Brokerage firms gather information on the sellers in their preferred industry. They then advertise the sellers’ products (or services) through their networks. The buyers approach the brokerage firms to show interest in the asset for sale by the sellers. The brokerage firm then dispenses the full information and prices. Since the brokers facilitate the trade transaction, they demand compensation from both parties. This commission structure varies significantly by the broker industry.
Modern brokerage firms and online platforms acting as brokerage have automated the process. The transactions between the buyers and sellers through a third-party broker have become seamless. Most modern e-commerce platforms like Amazon or eBay work as a middleman (broker) between the sellers and the buyers.
Here are some of the common brokerage business models depending on the brokerage services and industry.
These are the financial brokers who provide full services in the stock markets. They offer full services from stock research, technical analysis tools, economic and stock trends to their clients. Their services range from stock brokerage, money management, investment, and tax advisory.
These are individual brokers working on a commission for the sellers. They aim to find the right buyers and make revenue on successful transactions. Usually, they do not have a formal business registration.
Physical or Traditional Brokers
These are the traditional types of brokers that cover the industries involving physical assets. Real estate brokers are a prime example of traditional brokers. Their services can include property research, advisory, and tax consultations.
Human Resource Brokers
Some of the modern platforms have adopted the human resource industry as brokerage services. These internet-based platforms bring together the sellers (candidates) and the buyers (recruiters) together. Some common examples are LinkedIn, Odesk, etc.
The brokerage business model also works on B2B, B2C, and C2C basis. Investment banks facilitating the business valuation and Mergers and Acquisitions are the prime examples of B2B brokerage firms.
Advantages of Brokerage Business Model
Since three parties are involved in a brokerage business model, there are discrete benefits for each with a brokerage business.
For Brokerage firms:
- The startup costs are lower than traditional businesses.
- The revenue streams are flexible with multiple commission structures.
- Wider access to the target markets for sellers and buyers alike.
- Requires low running expenses.
For buyers and sellers:
- It reduces trade costs through savings in distribution and marketing expenses.
- It bridges the trust deficit gap between the buyers and sellers.
- Both parties have wider access to their respective choices.
- Brokers offer special skills and industry knowledge to both parties.
- Brokers may represent both parties legally.
- Brokers facilitate the right pricing for both parties.
In a broader sense, the brokerage business model is the facilitator of buyers and sellers in any marketplace.
Disadvantages of Brokerage Business Model
The brokerage business model also comes with its shortcomings.
- It is difficult for brokerage firms to maintain access to their customers.
- Brokers require extensive market research and knowledge.
- Brokers’ sales heavily depend on the sellers’ products that may depreciate in perceived value over time.
- The commission-based business has intense competition.
Large investment banks like Goldman Sachs, Charles Schwab, and Chase are examples of investment brokers. Amazon, eBay, and Alibaba are e-commerce brokers. Airbnb and Century21 are physical brokers. CMC Markets, IG, and eToro are stock brokerage firms.