Do you have an excellent idea for an online marketplace, but want to make sure that you got the pricing strategy right? Pricing can be tricky, both for the sellers and for the platform.
Since the competition is extremely high, setting the prices too high might make you prone to being outpriced by the competitors. On the other hand, setting the prices and commissions too low can make you lose a ton of potential revenue.
According to the Harvard Business Review, the number one reason for online marketplaces to fail is mispricing on one side of the market.
In this article, we are going to dive into some of the most popular revenue models, what are their advantages as well as challenges, to help you pick the one that is the most appropriate and profitable for your marketplace idea!
Commissions are one of the most universal and popular revenue strategies for online marketplaces. The commission fees are called differently among the big players in the online marketplace field, such as referral fees, final value fees, or transaction fees - they all have the same meaning. It is a fixed percentage or amount that the marketplace platform charges sellers who complete their sales.
This revenue model attracts many marketplaces with its simplicity. It can be applicable to both small startups and very popular marketplace giants. The owner of the marketplace receives a commission from each sale and the seller incurs a cost, in case of a sale.
The benefits of this revenue model include zero risk for the vendors, transparent pricing for the marketplace and the seller.
The challenge that comes with this revenue model is providing value. If the platform does not provide enough value, the sellers are going to find a way to communicate with a buyer directly, instead of using the intermediary platform.
Another popular revenue model is the subscription-based model. This pricing strategy is based on a fixed subscription fee, paid by the vendors on a monthly basis. One of the main advantages of this revenue model is consistency.
The vendors know exactly what to expect from the beginning and can budget accordingly prior to selling, without worrying about any hidden fees.
This model is very beneficial for a new online marketplace as well, since it allows a stable stream of revenue, regardless of how successful the listings turn out to be.
Similar to the other strategies, the challenge here is encouraging the users to pay upfront and convince them that they can expect a return on investment. You can overcome this challenge, by offering a free trial or offer discounts for first-time users.
Price per listing
This model is used by many big players in the industry, for example, Etsy. In this case, the vendors are paying a fixed fee per listing. This revenue model is beneficial for attracting sellers who do not have many listings but still want to be a part of an online marketplace and showcase their small businesses. It works perfectly for a marketplace like Etsy since a lot of the DIY sellers do not have a big budget to spend on a monthly subscription fee.
The challenges that come with this revenue model, include a risk for the seller. The vendors need to pay upfront and do not have a guarantee of a return on investment. The marketplace is also at risk since prices per listening are usually relatively low, making it difficult to secure a stable stream of revenue.
This Revenue model works by allowing by offering a free subscription with the option of upgrading to a premium version later on. As a new online marketplace, this revenue model is perfect for attracting a new base of customers. A free subscription is what grabs the user's attention first. It is a great way to build trust and start offering premium features to loyal customers.
The freemium model is a great start for a new platform. Similar to the commission-based model, the most challenging aspect of this strategy is providing enough value to ensure enough conversion from free users to paying ones.
Which model is right for my business?
Regardless of which model you are going to choose, the common denominator for all strategies is creating exceptional value for your customers and for the vendors that you are going to collaborate with.
Choosing the right software, design and excellent features for your online marketplace is going to encourage your partners to pay the set fees for subscription, upgrading features, and investing money upfront.
Once you have your platform set up, think about what is the priority for your marketplace:
Creating a large customer base?
Have a stable revenue stream, with little risk?
Offering premium services and having a very highly selected customer base?