The Marketplace Business Model – What is It and How Does It Work?

A marketplace is where sellers and buyers connect at the same place. Online marketplace businesses work similarly too. Buyers are sellers are connected through a shared platform. The marketplace charges against services rendered to both parties.

There are different types of marketplace business models. Each one comes with its benefits and risks. The pricing strategy would also be different with each type of marketplace business model.

An online marketplace business model is a difficult idea to execute. It requires substantial resources in terms of finances, technology, skills, and human resources. However, online marketplaces are the future of e-commerce. Most of the e-commerce is already taking place through marketplace businesses.

What is a Marketplace Business Model?

A marketplace business is a place to connect buyers and sellers without selling directly. Traditionally, these are physical outlets where buyers would walk up to the sellers. Online marketplaces work with the same idea of bringing together buyers and sellers.

The marketplace does not involve the direct selling of services or products. It only provides a platform to both parties. Thus, it acts as a facilitator to both parties in the trading of products or services. Thus, an online marketplace can exist for products as well as services.

So, what is the business model of a marketplace then?

The business model of a marketplace is to take a proportion of revenues generated by sellers/service providers through the platform. It can be taken in the form of a percentage as commission, flat fee such as subscriptions, or percentage of sales, etc.

Here are a few characteristics of a marketplace business model.

  • The marketplace does not need to sell products or services directly.
  • The marketplace doesn’t hold inventory or merchandise unless for doing business directly through the platform as well.
  • The marketplace needs to attract both groups involved in trading; the buyers and the sellers.
  • Ultimately it is the marketplace that is responsible for all legal and regulatory matters.
  • A marketplace can offer products in several categories called a horizontal marketplace or one product in a single category with variations in types called a vertical marketplace.

Thus, a marketplace would offer some value to sellers and buyers to attract them. However, it would also need to manage the trade relations between both parties. Although a marketplace doesn’t need to sell directly often, it adds value to the platform. Amazon is a prime example of a successful marketplace that sells and offers a shared platform to buyers and sellers.

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How Does a Marketplace Business Model Work?

If you want to adopt an online marketplace business, you should plan for the long term. A marketplace business model wouldn’t succeed in a short time. Attracting both sides of trade is harder than conventional commerce.

Attracting buyers and sellers at the same time is a difficult task. In the beginning, it gets even harder to win the trust of both parties. Also, it is an important and difficult decision to make in the beginning whether to charge only sellers or buyers or both parties.

Sellers would join a marketplace to increase sales. That’s the prime motive to attract sellers to join your platform. In addition, a wide customer reach, brand recognition, competition, and profitability are key motives to attract sellers to an online platform. Thus, sellers would seek the growth of their business by joining your platform.

Similarly, buyers would seek quality and pricing benefits. Buyers look for specialty platforms to find their ideal products as well. For instance, buyers seeking art or vintage products would prefer Etsy and retail customers would look towards Amazon.

Here is a brief outline of how a marketplace would work.

  • The idea turns into a marketplace business inception with specific goals.
  • The first step is to attract buyers and sellers to join the platform.
  • The platform would offer incentives to attract both buyers and sellers.
  • Once a network effect is created, both parties would help the platform grow as both parties would attract each other.
  • Then, the platform offers a shared network and services to both parties to offer services/products to each other.
  • Sellers and buyers trade under their brand names.
  • The platform would charge one or both parties for offering the shared network.

Types of Marketplace Business Model

A marketplace business model can be categorized in terms of the fee structure charged to sellers and buyers.

Let us briefly talk about the commonly used marketplace business models.

Subscription or Membership Fee

Buyers and sellers pay a recurring fee to access the marketplace in this model. The platform can charge the subscription or membership fee to one or both parties. The platform needs to offer valuable services and growth opportunities to both parties to charge recurring fees.

This type of model is more common with business-to-business or service-based businesses. LinkedIn, Bayt.com, Indeed, and Glassdoor are prime examples of subscription or membership fee business models.

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Commission Model

It is probably one of the most widely and popularly used marketplace business models. The marketplace charges a percentage of sales or profits as a commission to sellers or buyers. This model is equally popular amongst the product and service business platforms.

The marketplace offers a shared platform and regulates the payment between both parties. Often, the platform is involved in direct sales as well. Amazon, eBay, Etsy, and Alibaba are all prime examples of commission-based business models.

Freemium Model

The platform offers “Free + Premium” services to sellers and buyers in this model, hence the term freemium. First, the platform offers some basic services or features for free to attract customers. Then, it charges the premium fee for offering premium features of the platform.

Technology and service businesses commonly use the freemium model. Rakuten, Unsplash, Zoom, and Skype are good examples of the Freemium business model.

Listing Fee

A listing fee model offers a wide audience network to the sellers where they can list their products or services. The network charges a listing fee per item to the sellers. The platform can combine listing fees with membership or commission fees as well.

Amazon, eBay, Airbnb, and Etsy are good examples of listing fee business models.

Some platforms leverage the power of their wider network ranges to attract sellers. For example, they charge for paid advertisements on their platforms to sellers for using their network space. The paid advertisements can be arranged on a pay-per-click or pay-per-conversion basis.

Facebook, Etsy, and OLX are good examples of online marketplaces using paid advertisements as revenue sources.

Challenges with Marketplace Business Models

Each marketplace model offers unique challenges. For instance, a marketplace using the paid advertisement model would only succeed with wide customer outreach. The sellers will pay for promotions if they face stern competition on the platform.

Similarly, a network offering a freemium model must ensure its premium services are of high quality. The subscribers must receive premium quality services for additional costs incurred.

Here are a few challenges that most of the online marketplace networks face.

  • Creating a network and a wide audience reach is challenging.
  • The Pricing strategy for each type of marketplace model varies.
  • The marketplace requires substantial resources in terms of finance, technology, and skills.
  • Attracting buyers and sellers, in the beginning, is challenging.
  • Offering competitive pricing and value addition is difficult.

Advantages of Marketplace Business Model

A marketplace business model requires significant efforts and resources to get things going. Creating a network effect and pooling quality customers from both sides is a complex task. However, once a marketplace makes a mark, it can offer several advantages in the long run.

  • The marketplace does not need to offer products or services directly.
  • A network effect keeps running the business, and growth is easier to achieve once settled in the beginning.
  • The business model is difficult to replicate, hence offers limited competition.
  • The marketplace can charge high margins to both parties.
  • A marketplace can combine different pricing strategies under the same platform, for instance, by combining a listing fee with a commission on sales.
  • Once a network of buyers and sellers is created, it is easier to retain customers from both sides.
  • Customers (buyers and sellers) of a marketplace acts as advertisement tools for the platform.
  • The marketplace can introduce different services by utilizing large data coverage. For instance, it can start selling directly in the most widely traded categories.
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Disadvantages of Marketplace Business Model

Creating a marketplace is a challenging task in many ways. Moreover, as it becomes a new normal in the current e-commerce market, it gets difficult to differentiate even as a marketplace. Hence, a marketplace business model offers a few disadvantages as well.

  • The marketplace business model requires a substantial initial investment. It requires high startup costs to create a large network of buyers and sellers.
  • It isn’t easy to attract buyers and sellers in the beginning.
  • Pricing strategy can affect the success of the platform significantly.
  • Inevitably, the platform would seek help from other networks, especially for marketing campaigns in the beginning.
  • It’s hard to scrutinize a large number of sellers and buyers for spam activities.
  • Customers may not find the quality of services or products they expect.
  • Some marketplace business models are difficult to monetize without a large network of customers.

How Could You Choose the Right Marketplace Business Model?

Before deciding on choosing the right marketplace business model, you should consider adopting a marketplace model at all. It is a challenging task to begin and run a network of buyers and sellers at any stage.

Each online marketplace model offers unique challenges and benefits. Commission-based business models are the most widely used ones in the marketplace networks. However, it doesn’t suit every platform. Similarly, choosing the right side to charge is a critical decision. For instance, BlaBlaCar charges buyers for using its services. Airbnb charges sellers and buyers alike.

Thus, choosing the right marketplace business model would require considering several questions. The pricing strategy, target audience, and type of services are key metrics for deciding the right marketplace business model.

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