Marketplace business models (think Uber, Airbnb, and eBay) have turned upside down the longstanding assumption that companies are like pipelines, with producers at one end and consumers at the other. By giving users the power to interact in a more-or-less open ecosystem—to order rides from local drivers, rent people’s apartments, and buy products from their neighbors online—marketplaces leverage their users’ assets instead of just their own to create value.
A universal challenge for marketplace startups, though, is figuring out how best to capture that value for themselves. Amid the free-flowing exchanges between users, who, for example, pays to use the platform: users, providers, or both? Should startups charge listing fees or stimulate growth by allowing providers (the people offering products or services) to appear on their platforms free-of-charge? And, once founders have settled on a working business model, how do they set prices that entice repeat users to their platforms while generating long-term sustainable growth?
If you’ve already built a critical mass of repeat users on your marketplace—congratulations! Creating a sought-after product and finding reliable ways to acquire users is the hard part. Monetizing an already popular platform is relatively easy, especially if you’re willing to engage users in open and constructive dialogue while you experiment, track results, and carefully adjust your revenue model(s) and price(s) as needed. But if not, here are a few proven approaches to help get you started.
Commission:
Uber, Airbnb, Etsy, and eBay are just a few examples of B2C and C2C marketplace businesses that allow users to transact directly on their platforms. These companies earn revenue by taking a commission, or a percentage, of each sale.
This model is arguably the easiest to scale for marketplaces featuring low-cost products and services. However, establishing a flat commission fee that works for all providers can be challenging. If your platform offers a wide range of products or services at different price points, you’ll likely need to implement dynamic commission fees, which can add complexity to payment and processing, not to mention how you negotiate and structure provider agreements.
Of course, commissions are also a poor fit for platforms on which users don’t directly exchange money. For example, some products are too costly to purchase on the Internet (e.g. real-estate), whereas other marketplace goals are too complex to fulfil through an online transaction (e.g. finding a romantic partner, hiring a new CEO, or procuring certain medical services).
From a provider’s point-of-view, the commission model offers an enticing value proposition: Enjoy exposure to a new audience and only pay commission when you earn a sale. It’s for this reason that marketplace startups facilitating straightforward, low-cost transactions should consider charging a commission fee at virtually any scale.
Lead Generation:
Cost-Per-Lead (CPL)
B2C and B2B marketplace startups should consider the lead fee model. This model works by generating qualified customer leads and selling those leads to providers.
At CourseCompare, for example, we help users find top-rated courses and career training opportunities based on their career goals and learning needs. To find the right course on CourseCompare, users narrow their search using criteria like school location, class schedule, course delivery method, tuition, available credentials, and a school’s reputation based on verified ratings and reviews. Users can then enter their contact information to connect in real-time with their education provider of choice—and this generates a qualified lead. Education partners pay to meet qualified applicants, which helps us ensure the platform remains completely free to users.
The success of this approach will depend on your platform’s ability to generate leads that achieve a high ROAS (Return on Ad Spend) for providers. The larger and more fragmented the market for paying providers, and the higher the cost of their products or services, the more likely you are to make the CPL model work for your business.
Cost-Per-Acquisition (CPA) / Cost-Per-Sale (CPS)
Variants of the lead fee model, cost-per-acquisition or cost-per-sale work such that advertising partners only pay you when a lead results in a sale.
The obvious disadvantage of the CPA model for marketplace startups is that they make platform owners assume all the risk. Inevitably, some providers will perform better than others on your platform. In the (hopefully unlikely) event that an advertising partner fails to turn leads into sales, you won’t get paid. For that reason, CPA agreements may not give early-stage startups the predictability they need to fuel growth, especially if they’ve yet to create a robust marketplace of providers capable of satisfying diverse user needs.
However, CPA agreements can work with the right partners. A sale is even more valuable to your providers than a qualified lead, which means CPA agreements can drive significant revenue at scale. In many industries, providers will pay 20 percent or more of the cost of their products or services for leads that result in a sale. For big ticket items like mortgages and residential real-estate, that means a single sale can fetch hundreds if not thousands of dollars.
Subscription:
Subscription fees are perhaps the most obvious way to monetize an online marketplace. They rely on charging users a small fee, typically monthly or annually, in order to access your platform. Subscription fees are common among B2C and C2C businesses, whether they apply to consumers, businesses, or both in a given marketplace.
LinkedIn Premium is a popular example. Users of LinkedIn Premium will be familiar with four different price tiers, ranging from about $30 to $120 per month. For a monthly subscription fee, users get credits they can use to directly email professionals on the platform, as well as access online educational content, in-depth job and salary information, and analytics that show who’s searched for and viewed their LinkedIn profiles. At a higher price point, businesses, too, can unlock premium access in the form of unlimited profile searches and advanced recruiting and filtering tools.
The subscription model works best for startups with a high volume of repeat users performing regular transactions—volume, as well as obvious value, are critical. Charging users upfront, especially before you’ve proven your platform’s value, can significantly inhibit user growth and acquisition. Startups considering this model should therefore look at alternatives, like charging businesses instead of users, or offering temporary discounts, to incentivize growth before switching to a full-blown subscription model.
Listing Fee:
Marketplaces like Etsy, Kijiji, and eBay charge users a listing fee to appear on their platforms, allowing them to complete transactions on their own. Listing fees are sometimes preferred to subscription fees at massive scales, where individual users transact sporadically, and advertisers are willing to pay for direct exposure to customers without the promise of a lead or sale.
Marketplaces that depend on listing fees will need to be creative in terms of how they feature different products or providers, and how they charge for different levels of visibility. Kijiji, for instance, determines how much to charge users posting classified ads on its platform based on things like where a users’ ads appear in its search results, the city in which those ads are served, and for how long they appear on the website.
As with the subscription model, listing fees only work at scale—so much in fact, that your platform must be virtually impossible for would-be advertisers to ignore. For this reason, early-stage marketplace startups, especially bootstrapping startups, should consider other models that will help them generate the cash they need to grow while they work to acquire more users.
Advertising:
Cost-Per-Click (CPC)
CPC advertisers pay only when a user clicks on their ads. Thanks to Facebook and Google Ads, many advertisers are already very familiar with this model—and that means you’ll spend less time educating prospective B2B and B2C customers about how you monetize your platform than you might need to with other models.
You’ll spend less time setting prices, too. Average CPCs vary by industry, but many providers will have established benchmarks based on how they’ve performed using Google Ads. In the legal industry, for example, average CPCs are more than $6. Not-for-profits, by comparison, are more likely to pay less than $2 per click.
CPC, like all other models, presents tradeoffs. Tracking and analytics can be difficult to implement when determining how many clicks result in sales across a vast network of advertisers. You and your providers will also need to be vigilant against fraud, as some companies use bots to generate clicks.
What’s more is that, as a platform owner using the CPC model, you relinquish control over how likely users are to convert when you send them from your platform onto someone else’s landing, signup, registration, or checkout page. If you’ve developed a compelling product for a niche audience, for example, then lead generation with a high cost-per-lead might better serve users and advertisers alike.
Cost-Per-Thousand Impressions (CPM)
Cost-per-thousand impressions, or CPM (the “M” is the Roman numeral for 1000), is perhaps the most common way in which digital advertisers “buy media.” The CPM model allows platforms to charge advertisers every 1000 times their ad loads on a page or in an app.
CPM only works if you attract significant traffic to your website. To earn $20 per day using Google AdSense, for example, marketplace founders will need to generate roughly 10,000 pageviews per day. Providers simply don’t value an impression the same way they do other forms of marketplace participation—and that makes building a business on CPM alone extremely difficult.
Another drawback of the CPM model is that users have largely learned to ignore banner ads in the first place. So, unless you’re Facebook, LinkedIn, or the New York Times, it’s best to consider CPM as an additional revenue stream, instead of your primary one.
Which Revenue Model Do I Choose?
How you choose to monetize your marketplace today may not be how you generate revenue tomorrow. Founders should work closely with their users to select and perfect one model before layering on others. At scale, demand for an entirely new model may force you to abandon an old one, or multiple approaches may work simultaneously to help you unlock explosive growth.
Early-stage founders need to remember that no business model can by itself overcome a bad product. A platform gains or losses value in proportion to the number of people using it. And building a platform with tens or hundreds of thousands of active users takes both a great product and a lot of time. So, before you invest time, money, and effort into developing a dynamic billing system, creating a tiered subscription model, or onboarding new lead buyers, ask yourself: is your business really ready?
This guest post was authored by Robert Furtado, Founder & CEO of CourseCompare, Canada’s marketplace for education. Robert is a former marketing agency executive and instructor at the Humber School of Media Studies, as well as a Mentor for the Toronto Founder Institute. He created CourseCompare to make it easier for people to identify and pursue in-demand digital skills across Canada and beyond.
If you’re interested in upgrading your skills, you can visit CourseCompare to check out top-rated data science courses, Python courses, project management courses, SEO courses, scrum master certifications, management courses and more.
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