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If you look at the best-known marketplaces such as Amazon, eBay, Airbnb, or Uber, you quickly notice one thing they all have in common.

They are giant and profitable companies, well-known all around the world and gathering hundreds of thousands of vendors as well as customers or users. But if you think about marketplace development, you don’t necessarily set these brands as your benchmark.

You would instead seek smaller marketplaces, much closer to your business capabilities and ambitions. Yet, when you analyze their financial model, you conclude that no matter the scale, all (or the overwhelming majority) marketplaces have implemented very similar solutions.

  • What is an Online Marketplace?
  • Why Should you Create an Online Marketplace?
  • What are the Different Types of Online Marketplaces?
  • How do I Start an Online Marketplace Business?
  • How are Online Marketplaces Generating Profit?

What is an Online Marketplace?

An online marketplace is an ecommerce store where multiple merchants can sell goods or services to customers. Examples of online marketplaces include Amazon, Etsy, Airbnb, and eBay.

Read Also: How to Earn Income With Digital Games Distribution Marketplace

These online stores are considered to be online marketplaces because there are many merchants (hundreds of thousands, in fact) who can sell their products to the customers that browse the website.

Traditional ecommerce stores sell the goods and services of one brand, but not online marketplaces. Since an online marketplace has many merchants selling their products on the store, they have a greater product offering which can draw more visitors to browse the website.

One of the main advantages of online marketplaces is that they draw in lots of digital foot-traffic, which can mean greater exposure for the merchants who sell on the online marketplace.

What unites all the sellers on an online marketplace together is that there’s one checkout process. When customers shop on an online marketplace, they don’t need to click away to different websites to complete the transaction, they can purchase from many different merchants on the marketplace at once, even if the merchants aren’t associated with one another.

When customers make purchases from online marketplaces, the merchants they purchase from get a notification that someone has purchased their product, and then each merchant can individually ship and send the customer the products that were ordered from them.

This means that although a customer can complete just one transaction on an online marketplace when purchasing from multiple different sellers, their products will be shipped from each seller individually meaning they’ll receive a shipping package from each merchant they ordered a product from.

Essentially, for consumers, shopping on an online marketplace is like shopping from several different ecommerce merchants at once, while being able to pay all the merchants in one transaction rather than in many transactions.

Another thing that unites online marketplaces together is that they usually are focused around one particular niche. Amazon, for example, started as an online marketplace of booksellers. Airbnb started as an online marketplace to rent rooms in San Francisco.

Online marketplaces are generally more successful when they center around one niche because it gives consumers a reason to shop there and when they do shop there, they know what to expect from the merchants selling on the marketplace.

An online marketplace can also be referred to as a “Collaborative Economy” or a “Sharing Economy” because it’s usually made up of merchants who work together to share or sell their idle assets on a community-accessible marketplace.

Online marketplaces are becoming more mainstream for several reasons: First, consumers are more willing to trust online marketplace platforms to protect them from fraudulent merchants.

Second, online marketplaces are a convenient way for merchants to earn revenue on goods or services they may have sitting idle, and finally, online marketplaces generate a sense of community where both merchants and consumers can support one another in niche markets that are important to them.

We see this, in particular, on the online marketplace Etsy where merchants and consumers alike believe in supporting hand-crafted, small-batch, homemade and artisan products.

Why Should you Create an Online Marketplace?

One of the main reasons to start an online marketplace is to either help merchants sell goods or services they don’t have a use for anymore—or don’t have a use for at certain points of the year—or to help consumers get access to goods or services more easily.

By creating an online marketplace, you create a place where users can rent or sell goods, spaces or services online at a cheaper price, better quality, or in a more convenient way. Every successful online marketplace does this in a way big-box retailers can’t, which is what makes them competitive players in the ecommerce industry.

Creating an online marketplace is also an ideal option because you don’t have to own any inventory to run one. This makes them an attractive option for entrepreneurs who want to provide a service or solve a pain point without investing a lot of their own capital into the business.

Online marketplaces acquire inventory from the merchants who sell or rent their goods or services on the marketplace, so it’s not solely up to the founder of the marketplace to source inventory.

If there’s a niche that exists where all the products or services can be sold or rented online from merchants to customers in a way where big-box retailers can’t provide the same service at a cheaper price, more conveniently or in better quality, then you should start an online marketplace that can supply this to consumers.

Marketplaces don’t always work, but there are likely still many circumstances that exist today where the online marketplace business model can still succeed.

What are the Different Types of Online Marketplaces?

There are several different types of online marketplaces, and although they all run in a similar fashion, there are slight differences to them which can impact the shopping experience, the types of products that are sold, the customers that shop there and the service that the online marketplace promises to fulfill.

These are the different types of online marketplaces that exist:

Physical product online marketplaces

Some online marketplaces focus on selling physical products only. This means that the merchants create or supply physical products that must be shipped to the customers who purchase them.

When you have an online marketplace that sells physical products, customers will receive shipping packages from each merchant they order a product from, which can impact their user experience. It means that they’ll be receiving multiple different packages, which can be confusing for them if they don’t know to expect that.

Be upfront with customers who shop on your online marketplace—if it’s a physical product online marketplace—that even though they may be completing one transaction, the products are sourced from individual merchants and the products they’ve ordered will be arriving individually from each separate merchant.

Digital product online marketplace

Another type of online marketplace that exists is digital product marketplaces. These online marketplaces sell digital products that can be downloaded to computers or smart devices immediately after purchase which means that customers don’t have to wait for their products to be shipped and they won’t be receiving products one-by-one from each separate merchant they order from.

An example of a digital marketplace is Creative Market, where designers and creators sell digital assets like stock photos, logo templates, graphic designs and more. We wrote a complete Creative Market Review, and we’ve even rounded up some of Creative Market’s Best Instagram Templates, which we highly recommend checking for your online marketplace.

Property & spaces online marketplace

Another type of online marketplace is one that rents or sells property, rooms, event spaces or locations to customers. A great example of this type of online marketplace is Airbnb, which is an online marketplace for property owners to rent out rooms, apartments, houses or properties all over the world.

This type of online marketplace comes with its own unique set of challenges, such as government regulations, property insurance, and booking confirmations that must be adhered to and organized in order to be viable and successful.

Managing these types of online marketplaces can be complex, so ensure that you know what you’re getting yourself into if you decide to start an online marketplace like this.

Services online marketplace

Other online marketplaces can sell services to their customers, where merchants can rent or sell their own specialties to the marketplace.

These types of online marketplaces can provide digital services that can be carried out online, such as website development services, or they can provide services that take place in-person, such as painting and restoration work, for example.

Just like all other marketplaces, online marketplaces that provide services aim to connect merchants who have a resource to offer to customers interested in acquiring an asset, so if you’re starting a service type of online marketplace, make sure you focus on building that connection.

How do I Start an Online Marketplace Business?

There’s plenty of online literature documenting how eCommerce entrepreneurs can start their own online businesses, but those online businesses tend to focus on solo entrepreneurs who are interested in selling their own products exclusively on their own websites. That’s not how online marketplaces work, so another approach must be taken.

Build your online marketplace website

First of all, the success of your online marketplace will be partly dependant on the actual online platform you use to create it. Fortunately, you don’t have to hire a web developer to create your online marketplace website as other options exist.

One of the best online marketplace platforms we’ve come across, and the one that we recommend building your own online marketplace on, is Sharetribe.

Sharetribe is well-recognized in the eCommerce industry as being the most reliable, user-friendly and cost-effective way for entrepreneurs to start their own online marketplace. With their software, any entrepreneur will be able to build a well-designed online marketplace in the most efficient and secure way possible.

If you were to create an online marketplace from scratch with a team of web developers it would cost you thousands of dollars to build your website, but Sharetribe doesn’t cost nearly as much and you’ll be able to have your online marketplace up and running faster than if you were to completely have it built from scratch.

There are many other aspects of building an online marketplace that is challenging so don’t make setting up your actual online marketplace website one of those things. Keep things simple, streamlined and efficient by starting your online marketplace on a hosted platform like Sharetribe.

Come up with an online marketplace niche

Successful online marketplaces are typically successful because they hone in on one particular niche to service the needs of the merchants and consumers within that niche. This means that in order to create an online marketplace, you’re going to have to select a niche market that your online marketplace will cater to.

This is an important step in the process of starting an online marketplace because it will impact what you sell on your online marketplace, the merchants who sell there, the customers who shop there, and the focus of your online marketplace as a whole.

Without a niche to target, your online marketplace will have no focus or direction so it’s very important to find your niche and stick to it throughout the online marketplace building process.

Focus on a minimum viable product for your online marketplace

With the Amazon’s, Etsy’s, Airbnb’s and eBay’s of the online marketplace world, it can be easy to get wrapped up in thinking about how you’ll scale your online marketplace to service millions of consumers right away.

We encourage you not to get caught up in this way of thinking, because it takes a long time to grow an online marketplace like the ones we just mentioned, and you can still build a successful online marketplace without being a giant in your industry.

When you’re just starting out building your online marketplace, we suggest focusing on your Minimum Viable Product and creating that.

Don’t get caught up in thinking about how you’ll create the perfect online marketplace within your niche, just focus on creating an online marketplace that a small subset of your niche market really believes in, and start from there.

By focusing on creating the perfect online marketplace you’ll likely cause yourself to feel overwhelmed in everything you have to do and accomplish to get there, but by zoning in on creating your Minimum Viable Product, you’ll be more likely to stick with your online marketplace idea and built it to fruition.

It’s okay not to create a perfect online marketplace right from the get-go. Create something that at least 10 or so users can be interested in and use their feedback and experiences to grow from there. Like we mentioned earlier, other online marketplaces started small too, and so can you.

Establish your budget to start an online marketplace

Just like any ecommerce business, starting an online marketplace will take some funds to get going. One of the main advantages of starting an online marketplace, however, is that you actually don’t have to purchase or create an inventory to sell which can be a huge relief off of your startup budget.

Although you likely won’t have to fork over any capital for inventory, there are other aspects of your online business that will require some budget. The main aspects of your online marketplace startup budget will likely include:

  • The Cost of the Platform: Using a hosted online marketplace platform like Sharetribe will require monthly or yearly payments, so factor that into your budget.
  • The Cost of Advertising for Merchants: Even though you don’t provide any inventory to sell on your online marketplace, someone else does! This means you’ll need merchants with products to sell to set up shop on your online marketplace, and when you’re just starting you’re going to need to reach out to a lot of merchants to get some to actually start selling on your site. This means plenty of outreach which likely means you’ll need some cash to spend on advertising. Whether it’s Facebook Ads, Google Ads, ads on platforms where your niche hangs out, influencer advertising, print advertising, etc. it’s likely that you’ll have to spend money on some form of advertising.
  • Cost of Advertising for Customers: Just because you build an online marketplace does not mean that customers will come running, so again, you’ll likely have to spend some money on advertising to get customers to start shopping on your online marketplace.

A word of warning, however, when it comes to creating a budget for your online marketplace: Don’t spend too much. When you’re just getting started, it can be tempting to pump as much capital as you have available into your online marketplace, but remember that you’re just getting started and it’s going to take some time to grow.

Don’t put too much into your platform and advertising before you launch or when you first launch. Put enough in to get started, and then give your online marketplace some time to grow and some time to earn revenue.

At the beginning, focus instead on hustling to get free advertising whether it’s through SEO or your own social media, for example, and let your online marketplace start to generate its own revenue before you invest too much more into it.

Even if it’s slow growth, it will help to validate your online marketplace idea before you go investing too much money into it which you may not get back if your marketplace idea doesn’t work out in the end.

Focus on the outcome of the online marketplace

Finally, when it comes to creating an online marketplace, don’t forget to focus on the main outcome of the online marketplace. Ask yourself, what are you aiming to achieve with your online marketplace? What is it that your online marketplace is providing that adds value to those in the niche market it services.

The goal of any online marketplace is to connect merchants and customers within a niche to sell or rent goods or services, so think about how that actually begins to look within your online marketplace and how you want to bring that to life.

How are Online Marketplaces Generating Profit?

We will now review the different options for revenue streams and help you choose the right marketplace business model for your idea.

1. Commission

The most popular business model for modern marketplaces is to charge a commission from each transaction. When a customer pays a provider, the platform facilitates the payment and charges either a percentage or a flat fee.

The biggest benefit of this revenue model is that providers are not charged anything before they get some value from the marketplace. This is really attractive to the providers.

At the same time, from the marketplace’s point of view, this model is usually the most lucrative: you get a piece of all the value that passes through your platform. The best-known marketplace platforms—like Airbnb, Etsy, eBay, Fiverr, TaskRabbit, and Uber—all use commissions as their main business model.

The biggest challenge in getting the commission model to work is to provide enough value for both the customer and the provider. If your users do not get enough value from your platform, they will find a way to go around your payment system, and you will not get paid.

Another challenge with the commission model is pricing. How big should the commission be? Should it be the same for all users? Should I charge the customer, the provider, or both? Should I first have a lower commission to get people to join my platform, and raise it later on? We will address that soon.

There are, however, scenarios in which it is not feasible for the platform to facilitate payment transactions. In these cases, the commission model does not work. Examples include:

  • When the size of the typical transaction is huge. With car or real estate sales, for instance, it’s difficult for the marketplace to justify the commission.
  • The marketplace has lots of different types of offerings. It becomes impossible to design a transaction process that provides value for all of those cases. Traditional classified ads are a good example of this.
  • The invoicing process is too complex for the marketplace to facilitate it. This is common in business-to-business (B2B) and some business-to-consumer (B2C) marketplaces.
  • Money is not exchanged at all in the platform. For instance, if the marketplace is about dating, finding people to hire, bartering, or sharing something for free, there’s no monetary transaction involved, and thus no way to charge a commission.

In these cases, you need a different type of marketplace business model.

2. Membership / subscription fee

A membership fee (sometimes called a subscription fee) is a revenue model where either some or all of a marketplace’s users are charged a recurring fee to access the marketplace. With this model, the typical value proposition for providers is that the platform helps them find new customers.

For customers, it helps them save costs or find unique experiences. The membership fee is a good choice if the value you provide is high and a typical user will engage in several transactions, but facilitating payments is challenging or impossible.

Typical examples of consumer-to-consumer (C2C) marketplaces with membership fees are home swapping sites (Love Home Swap, Home Exchange) and dating sites (OkCupid, Match.com). Oftentimes, these sites vet all the subscribers in order to guarantee quality matches and create a sense of exclusivity that justifies the fee.

In the B2C market, the membership model is common in recruiting. For instance, LinkedIn and StackOverflow Careers charge companies a subscription fee to get access to their talent pools. 

Studiotime, an “Airbnb for record studios”, is an example of another niche where membership fees work as the main business model. With B2C companies, the platform is typically free for customers but requires a paid subscription for providers.

A membership fee can also be a good initial business model for B2C marketplaces that eventually want to charge a commission but don’t yet have the tools in place to facilitate transactions in their particular niche. 

Venuu, an “Airbnb for event spaces”, started with the membership model in order to get revenue upfront, even before launching its site. Later on, when they had validated their business plan and had the resources to build an invoicing system, they moved to the commission model—a revenue model that was much more lucrative for them.

The challenge with the membership fee model is that it makes the “chicken and egg problem“—how to find providers without customers and how to find customers without providers—even worse.

You need to have enough users on your platform to make it valuable for both providers and customers, and a mandatory payment discourages users from signing up. One way to get around this is to offer heavy discounts for early adopters, or even lifting the fee completely to build the initial user base.

3. Listing fee

Some marketplaces charge a fee from providers when they post new listings. This model is typically used when providers get value based on the number of listings they have on the site, and the potential value per listing is big.

This marketplace business model is quite common with classified ads. The value proposition of the website is really simple: it aggregates a massive volume of listings to a single online destination and guarantees lots of visibility for those listings. Classified ad platforms typically don’t even try to facilitate the transaction.

Perhaps the most well-known example in this category is Craigslist. It is a collection of local sites where people can post listings about anything they want; whether it’s about selling goods, services, jobs, finding an apartment, dating, or something else.

Generally, posting a new listing to Craigslist is free—this is how they managed to reach critical user mass—but in certain categories (namely, job and apartment listings in some cities) they charge a fee for each listing.

It can sometimes be useful to use several business models on the same site. For instance, Etsy is an example of a B2C marketplace that uses the commission model but also charges a fee to post new listings. Etsy’s reasoning for this is likely that its liquidity (the probability of a certain item being sold) varies a lot.

While there are some hugely popular items on Etsy, most items probably never get a single sale because Etsy’s total volume of listings is massive. By using both the commission model and the listing fee model, Etsy gets revenue from both popular and not so popular items.

A listing fee is better than a membership fee in cases where providers don’t want a continuous subscription, and only want to sell certain items. This is the case with Mascus, a B2B classifieds site for expensive machinery.

The challenge with the listing fee model is that it doesn’t guarantee value for providers, and thus the fee cannot be too high. This results in the platform being able to capture only a relatively small portion of the value going through the site.

A sustainable business model that depends solely on listing fees thus requires a very large volume of listings. Additionally, since paying a listing fee does not guarantee that the item is sold, the marketplace will have a harder time proving that it provides actual value to its providers.

4. Lead fee

Lead fees are somewhere between the listing fee and the commission models. In a typical lead fee model, customers post requests on the site, and providers pay in order to make a bid for these customers. The model gives a better value proposition than the listing fee model: you only pay when you are put in touch with a potential customer.

The lead fee model only works if the value of the lead is high. For this reason, this model is not common in C2C marketplaces. A typical use case is B2C or B2B services, where each new lead can lead to a long-lasting customer relationship with multiple deals.

A recent well-performing example of this model is Thumbtack, a B2C marketplace for all kinds of local professional services, from plumbers to guitar teachers. At the time of this writing, the fast-growing startup was valued at more than $1 billion.

However, while Thumbtack has been doing well with the lead fee model so far, their problem is that the providers no longer use Thumbtack with existing customers—instead, they build the relationship outside the platform once they have the lead.

This is why Thumbtack decided to build invoicing, payment and scheduling tools for professionals. They’re likely moving towards the commission model to extract more value from the transactions they help facilitate.

5. Freemium

How can you monetize a marketplace where people share low-value items for free? The Dutch startup Peerby has built a C2C platform where people can borrow things from each other at no cost. The basic experience is free for all the users of the platform.

Peerby has decided to monetize by offering premium services. They have two main offerings: insurance (the provider can request that the customer while getting the item for free, pays an insurance fee that guarantees the item will be replaced if it is damaged or stolen) and delivery (the customer can pay a small fee to get the item delivered to their door instead of having to go pick it up from the provider).

The logic behind the freemium model is that the core offering is free, but after you get your users hooked, you offer paid value-adding features.

The challenge with this model is that these paid services need to provide enough value to be tempting to a good portion of your users. If only 1% of your users are interested in your premium offering and everyone else uses your site for free, it’s probably not enough for a sustainable business model.

Coming up with a premium service that is interesting for a wide enough audience can be very tricky. Because of this, many platforms use premium services as additional revenue streams. For example, Mascus offers premium web page services to its customers to complement its listing-fee-based business model.

Etsy complements its transaction and listing-fee-based model by offering premium services like direct checkout, listing promotion, and shipping labels to its power sellers, and has recently seen strong growth from this revenue stream.

In some cases, a marketplace can start offering premium services as an add-on, but eventually shift its entire business model to focus on the paid services. 

Vayable started as a pure peer-to-peer marketplace where individual people offer unique experiences to others, but after failing to get enough traction, decided to pivot to build a concierge service for custom vacations.

The downside of this approach is that premium services are often a less scalable option when compared to the pure commission model. This is often due to the amount of staff that is required to provide the premium services. Vayable only made the shift because they were not able to get the commission model working well enough.

6. Featured listings and ads

Featured listings are a way for providers to buy more visibility for their offerings. If this model is used, listing on the site is typically free, but providers can pay to have their listing be featured on the homepage of the site, or at the top of a certain category.

An example of this model is Gumtree, UK’s most popular classified ads website. Etsy provides featured listings as one of its premium services.

This marketplace business model is relatively close to pure advertising models—ones where you show ads (such as Google AdSense) to your users. Featured listings and ads are both popular revenue streams for classified ad sites. They are often seen on real estate marketplaces (like Zillow) or free sharing platforms (like Freecycle).

The challenge with these models is that, again, they require a significant amount of users to generate meaningful revenue. When you’re in the business of selling eyeballs, the revenue you generate per user is likely a lot less than if you can extract value from your transaction process.

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Moreover, when you’re placing ads on your site, you’re serving two audiences with conflicting interests: from a user experience point of view, ads are almost always a hindrance, and your users would generally be happier without ads. If you want to offer the best possible experience for your users, this business model is not your best option.

Ad-based models work best when you have a really specific niche, and there are commercial providers that are interested in tailoring their offering for that specific audience. For instance, Häätori, a Finnish wedding marketplace for used wedding dresses, lets individuals use the site for free.

They monetize by allowing wedding planners, photographers and other providers of wedding-related services to buy ads on the site. The content of these ads is very relevant for the users of the website, making them less annoying.

Lastly

Modern marketplaces employ many different business models. In general, the best revenue model for most is to “own the transaction” and charge a commission from all purchases made through the site. This approach is very scalable and oftentimes quite lucrative.

About Author

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MegaIncomeStream is a global resource for Business Owners, Marketers, Bloggers, Investors, Personal Finance Experts, Entrepreneurs, Financial and Tax Pundits, available online. egaIncomeStream has attracted millions of visits since 2012 when it started publishing its resources online through their seasoned editorial team. The Megaincomestream is arguably a potential Pulitzer Prize-winning source of breaking news, videos, features, and information, as well as a highly engaged global community for updates and niche conversation. The platform has diverse visitors, ranging from, bloggers, webmasters, students and internet marketers to web designers, entrepreneur and search engine experts.