How to choose the business model of your service marketplace?

Why deciding on the business model is a must to build a successful marketplace?

Airbnb, Upwork, Fiverr, Treatwell, Uber, … Service marketplaces are booming in every industry and If you are interested in launching your marketplace business you are probably facing a few challenging decisions. Which marketplace software to use? How to build a good user experience and search engine? What are the main elements to consider if you want to create a B2B marketplace? or build a C2C marketplace? or launch a B2C marketplace?

Building a marketplace with an existing SaaS solution is usually the fastest and most cost-efficient way to do so, especially if you are launching your minimum viable product (MVP) or if you want to avoid coding or developing an entire platform from scratch. The way in which you use your resources during the early stages can be decisive for your success so if you combine a powerful software with personalized expert support as we do with our Second solution, you are already on the right path.

However, all service marketplaces do not operate in the same way and the same marketplace business model and features will not fit them all. This is why it is very important for you to define your goals, the type of marketplace which you want to build, the type of services which you will offer and the type of users which you will onboard. Understanding this will allow you to tailor your entire platform to your specific needs and choose the right software and marketplace business model for your project.

 

An overview of marketplace business models

The marketplace business model you choose for your project will depend on many factors, such as the industry, your business goals and even the stage in which your project is at. Although there are many types of business models, we will focus on the most used ones:

 

Commission per transaction

This is the business model chosen by most main service marketplaces such as Airbnb, Uber and Fiverr. When transactions are done in these platforms, an additional percentage or fixed fee will be charged to the client, the seller or both. This is the platform’s revenue stream it is directly related to the number of completed bookings.

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Subscription

Another popular choice is to charge users a recurring fee in order to be able to access the platform. This is sometimes used as a strategy to control the quality of the active users and listings, and it can be useful for marketplace owners who already have a user source which they can tap into.

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Listing fees

This model is based on charging sellers platform fees for every listing which they publish, the same way as Craiglist does. Since the charge is applied per listing and not in a recurrent manner, this business model can be more attractive for users than a subscription-based one. However, it still requires sellers to make a payment before doing any sales through the platform. Marketplace owners also need to consider that this model is only profitable when the number of listings is high, which is not usually the case for most new online businesses.

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Lead fees

This model is similar to the commission model and the listing fee, in the sense that users are not charged upfront. Instead, clients will publish their jobs, projects or needs, and sellers who pay a platform fee will be able to bid on them. This means that the lead needs to be valuable enough to be worth it and, at the same time, the fees need to be reasonable in order to not discourage sellers. Given the need to create valuable leads, this model is generally limited to B2B and B2C marketplaces.

Freemium

The idea behind this marketplace business model is that users can sign up, publish listings, place bookings and perform any other basic actions for free, but they have to pay extra to access special features or platform services. Although it can be an interesting approach to attract your first users, it can be a challenging business model to sustain on its own, since it only works if these extra features are good enough to be worth the extra cost, and if a significant number of users pay for them. This is why this model is sometimes combined with others such as listing fees or ads.

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Featured listings and advertising

As can be seen on online platforms like Gumtree or Leboncoin, in this marketplace business model sellers can publish their listings without any charges but they need to pay extra to have them displayed in the homepage or highlighted in some way. Similarly to listing fees, this model is only profitable when the marketplace has a significant number of listings, yet it is still an interesting model to keep most of the user’s activities free. Including ads is also a way to generate revenue but it can sometimes hinder UX.

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