As a Marketplace owner selecting a revenue or pricing model for the marketplace is one of the most important decisions. Marketplace businesses are long-term initiatives.
To build a sustainable and successful marketplace, you need to find a business model that can finance its operations.
Basically, there are two types of marketplaces –
Dropship based Marketplaces –
Dropshipping is an inventory management technique that enables a retailer to sell a product for which the retailer is not currently holding in the inventory. Dropship-based marketplaces are particularly used by small and mid-sized companies.
These companies do not have enough revenue to support their own shipping management and payment services. Hence, they use the Dropshipping model as their prime.
To know more about dropshipping you can check this article by Matthew Carrol.
There are three primary drivers for employing the drop shipping methodology:
- Cash Flow Cycle
When the dropship agreement is arranged, the retailer or the Marketplace owner has all the products to sell. To note, here the retailer does not have to make monetary purchases for these products.
When a customer places an order, the retailer receives the cash for the transaction and after that, the manufacturer will have to ship the product to the customer’s address and that’s it.
- Reduced Inventory Risk
Dropshipping provides the retailer with cash flow flexibility without the gyve of inventory from pre-packs. This allows the products to be sold without having the pre-defined assortments in stock. In other words, there is an elimination of upfront inventory.
- Reduced Transportation Costs
The dropshipping theory has a very large impact on the inbound shipping(the payoff cost from the manufacturer’s store to the retail shop) which is figured to be about 2.75% to 4.25% of Retail Price. Using the dropship model the costs can be cut down in transportation to generate revenues.
Standard Marketplaces –
These standard marketplaces are the ones having a very large amount of funding and centralized storage. These marketplaces have their own shipping and payment services, hence can manage everything on their own. One of the Standard marketplaces is – Amazon.
There are mainly three types of pricing models or schemas:
Let’s have a look on these pricing models –
- Commission Schema –
Charging a commission for each product/transaction is one of the popular business models for the marketplaces. When a customer pays the seller for the product, the marketplace facilitates the payment and charges a percentage or a fixed amount.
The benefit that this business model provides is that the sellers are not charged until they start earning from the marketplace and is definitely attractive to the sellers.
What actually happens is that for example, if there is a product P1 that has a set commission of 30% then the marketplace will receive the commission of 30% of the product price and the seller will receive the rest i.e 70%.
From the marketplace point of view, this will be producing great deals of profits in the long run. The big and best-known marketplace platforms like – Etsy, eBay, etc. use the commission schema as their business model.
You can check Webkul’s Opencart Marketplace Advanced Commission which allows you to set commissions for the products and the seller categories.
You can also set the commission for various categories as fixed or percentage. Apart from this, the commission can also be set on Per Product/Seller, Category based, and Commission Rules(For different product pricings and the commission applicable to them).
My recommendation will definitely be the use of commission-based pricing model which definitely is and will be the adopted one in the future.
- Membership / Subscription
A Membership/Subscription model is one where either some or all of the marketplace’s users are charged with a recurring fee to access the marketplace.
These Marketplaces help the sellers in finding new customers. For the customers, it helps them find low costs or find new experiences. You can check the Opencart Marketplace Membership module.
Memberships are usually applicable to digital and downloadable product types and some of the marketplaces utilizing this type of membership schema are – Amazon Prime Videos, Netflix, Itunes, Shutterstock, Audiojungle, LinkedIn etc.
These sites make a careful and critical examination of all the subscribers in order to guarantee quality matches and create a sense of exclusivity that justifies their fee.
Advertisements are a no good for an e-commerce site. But, by paying a little bit extra sellers and their products can get displayed on the homepage of the site. This, in turn, can provide a productive traffic to the sellers.
Some types of pricing models for the advertisements are –
Cost Per Click (CPC)
This model charges the advertiser for every click on their advertisement. The clicks usually take the customers to the advertiser’s website.
In this model, nothing else matters except that there were clicks on the advertisements which could lead the customers to the advertiser website. This could probably bring in traffic that can get converted into revenue generation. This model is best for response-oriented campaigns.
Cost Per Mille (CPM)
This model depends on how many times an advertisement is shown. it doesn’t matter if the advertisement is clicked or not or if it prompts any action from the users. This model is best for display and visual-based advertisements.
Cost Per Action (CPA)
In this model, the publisher charges an advertiser based on the action the visitor takes while encountering their advertisement. The action can be simple as – Signing up for a trial or downloading an application.
Here the advertisers can select which specific actions are to be charged. This model is somewhat risky for the publishers.
Let’s take a short brief on the factors affecting the Marketplace Pricing –
- Marginal Costs
One of the important things to consider is the marginal costs. Digital goods once produced, you can sell it an unlimited number of times for no extra cost.
The percentage of sales price here is a pure profit. If you sell many different products that are having different marginal costs, you should consider different commission rates for the different product categories.
Some examples that follow different commission rates for different categories include the giants like- Amazon and eBay.
Etsy set its fee to only 50% of what its competitors were charging and this was really helpful in putting Etsy as an attractive option for the sellers. This helped Etsy to take the market share from its big competitors in the early days.
Also, as Etsy once said that it can only succeed if its sellers succeed with their business, and this low take rate communicated this viewpoint effectively.
An example of how low prices can be used to get into the market and disrupt the market leader is how TaoBao beat eBay in China. To compete with the market leaders like eBay and Etsy you either need to provide more value for your customers and sellers, or charge a lower fee.
- Network Effect
A network effect is an effect that one user of a good or service has on the value of that product to other people. When this effect is present, the value of a product or service is dependent on the number of others using it.
A marketplace benefits from the network effect if having more sellers makes the marketplace more valuable for customers.
Note that the stock photo sites are keeping their commission high. A stock photo site becomes more useful to the customer when its selection increases because of the uniqueness of the offerings.
- Provider Differentiation
There are often two types of providers – Some with daily transactions and some with one or two transactions in a month. This poses an important pricing question, should we have the same pricing for all the providers?
Different marketplaces have taken different strategies for this. eBay offers benefits to people who sell a lot: while the base fee is not lower, power sellers enjoy cheaper shipping, unpaid item protection, and promotional offers.
Airbnb offers its super hosts perks like travel coupons and priority support. The reasoning behind these programs is clearly to encourage people to sell more and to retain the most successful providers on the platform.
- Transaction size & Volume
You need to build a sustainable business model by evaluating your market closely. How many transactions do you expect to get in a month, and what do you expect the total transaction size to be?
I suggest doing a little spreadsheet exercise by playing around with the different variables to find the optimal price point for your marketplace.
- Quality Vs Quantity
Altogether, modern marketplaces use many different revenue models. Trying out the different models to find out the best option for your concept might always be a good idea.
At the start, you should have a single stream of revenue in use at a time to avoid diverting your focus. After your website has grown up, it’s time to bring in and combine several revenue streams to build a business model that takes into account everything that’s happening on your website.