How to Monetize Your Multi-Vendor Marketplace

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Head of Marketing

A multi-vendor marketplace is an aggregator that brings together any number of vendors with their customers. Instead of holding inventory and performing fulfillment themselves, a multi-seller marketplace acts as an arena for the interplay of supply and demand.

If you’re looking to build a multi-vendor marketplace, one major decision is how to monetize it.

This article will lay out the various types of multi-vendor marketplaces, the most popular monetization models, and how to choose a suitable marketplace monetization model for your business.

Types of Marketplaces

The type of marketplace you build will impact how you monetize. There are several different kinds, including services, digital and physical products, rentals, delivery, and B2B marketplaces. Each has its specific niche.

  • Services: Service marketplaces connect service providers with clients. Service providers have a specific competence, skill, and expertise that is needed by a client. Online, this covers everything from accounting to writing to IT support. In-person services include services like haircuts, yard work, and construction projects. Supply is limited by the number of skilled workers available and typically further limited by location for in-person engagements. Example: Wag!
  • Digital products: Digital product marketplaces offer digital goods like images, NFTs, downloads, and more. Digital goods make up the supply. Stock is theoretically infinite but practically dependent on factors like licensing, obsolescence, etc. Example: Envato.
  • Physical products: Physical product marketplaces offer tangible goods. The supply comprises physical goods in limited numbers, further limited in distribution by supply-chain bandwidth. Physical product marketplaces don’t usually hold inventory themselves but coordinate with vendors to fulfill and ship products. Example: Vinted.
  • Rentals: Rental marketplaces offer items for rent, like tools or vehicles. Supply is limited based on local availability. These marketplaces often have a booking component and require the buyer and seller to speak directly. Example: RVshare.
  • Delivery: Delivery marketplaces offer items for delivery — often perishables delivered on-demand in a timely fashion. They may differ from other marketplaces in having three entities involved in the transaction (customer, business, delivery driver). Delivery has two supply bottlenecks: the physical product and the availability of delivery personnel. Example: Mercato.
  • B2B: B2B marketplaces are defined not by the nature of the product but by the type of customer, so they can include any of the above types of marketplaces. They offer all manner of digital and physical goods, rentals, and services to businesses. Example: Faire.

Who Foots the Bill?

Now that we’ve walked through different marketplace models, we get to the fundamental question — who foots the bill? The question of who pays the marketplace premium is more nuanced than it might appear at first glance. After all, there are only three basic options:

  1. The vendor pays to be in the marketplace
  2. The customer pays to use the marketplace
  3. Both pay

When we consider delivery marketplaces, possibilities increase because a third party is involved in the transaction.

But who pays?

We’ll need to cover the most popular marketplace monetization models to answer that question. Once you understand the levers that can be pulled, you’ll have a better answer for your particular marketplace.

Most Popular Monetization Models by Marketplace Type

Of the marketplace types we shared earlier, here are the most popular monetization approaches used by the Top 100 Marketplaces:

  • Physical Products: Commissions
  • Digital Products: Subscriptions
  • Rentals: Commissions
  • Services: Commissions
  • Delivery: Subscription-Commission Hybrid
  • B2B: Dependent on type factors above
Monetization Models by Marketplace Type | Research by Sharetribe

While this list tells us how different marketplaces typically monetize, the data is flat. It doesn’t tell us why these marketplaces chose to monetize in the way they did. Nor does it share the nuanced differences between them.

To dig into that, let’s look at these monetization models in more detail.

Marketplace Mo‎netization Models

The top-100 marketplaces use the following revenue models:

  • Commission: The marketplace charges a fixed fee on each transaction or takes a percentage of the sale, typically from the seller. Example: Boatsetter.
  • Subscription: The seller, buyer, or both pay a subscription fee for the right to engage in the marketplace. Examples: Skillshare, Angi, Care.com.
  • Subscription-Commission Hybrid: Monetization of the marketplace is done via subscription fees for one or both parties. A commission is also collected on each transaction. Example: StyleSeat.
  • Freemium: The marketplace is free, but additional functionality is monetized by allowing buyers and/or sellers to purchase upgrades. Example: Good Dog.
  • Lead Fee: Customers make requests on the marketplace. Service providers pay a fee to bid on the requests to get those leads. Example: Thumbtack.
  • List Fee: Providers on the marketplace pay a fee to list their product or service for customers, regardless of whether a sale is made. Example: Craigslist.
  • Multifaceted: Some marketplaces use a combination of the methods described above that may depend on their vendor or client base (in the case of some multi-vendor marketplaces), the type of marketplace (delivery), or some other set of factors (like premium listing fees, where sellers pay to have their listings placed in high-trafficked areas).
Top Monetization Models for the a16z Top 100 Marketplaces | Research by Sharetribe

How to Choose the Right Model

The most straightforward answer to the question of “who pays?” is “the side willing to.” Finding out who is willing to pay and how much can be more complex than it seems, so we’ll go a little deeper into choosing the best monetization model for your marketplace.

Co‎mmission

Charging sellers a transaction fee lowers the risk for all stakeholders. This can either be in the form of a percentage of the sale amount or a set fee per transaction. If it’s a commission based on a percentage of the sale, the only limit is demand. Sellers only pay money when they make money.

Because of this low barrier to entry, many startup marketplaces start with a commission structure. In the long run, charging commission is best for product-based and rental marketplaces.

Su‎bscription

Subscription fees are popular for digital product marketplaces and can be charged to either the buyer or the seller. The value to sellers is reaching a new customer base. For buyers, the value is finding lower prices, discovering higher quality items, or convenience.

Charging upfront, especially as you’re building out your marketplace, creates a bar for entry and adds friction to the process. But, depending on your goals, friction isn’t always a bad thing. If you’re just starting out, consider offering discounts for early users.

Su‎bscription-Commission Hybrid

Value-adds that provide premium services to subscribers in an otherwise freemium or commission-based marketplace can land with the right audience (think Amazon Prime). Some marketplaces require vendors to pay both a monthly subscription fee and a transaction fee to be a seller.

Lead Fee

In the lead fee model, service providers pay to bid on requests made by potential clients. A service provider’s value from a lead fee is relatively high because they are connected to a highly qualified lead.

Many service marketplaces using the lead-free model face one issue: you’re limited to providing discovery. Once the customer finds their service vendor, there’s no need for that customer to contact that vendor through your marketplace again, aka no more potential client requests, which means no more lead fees.

As a marketplace, you need to “own” the transaction, meaning maintain (and get paid for) the relationships built in your marketplace. Continuing to monetize the relationship is easier when dealing with web-based services and products but becomes more complicated when handling in-person services, like construction, plumbing, tutoring, house-cleaning, etc. When your two parties are meeting in-person off of your platform, it’s essential to incentivize both parties to return to your marketplace to maintain the relationship.

One solution to the problem of off-platform transactions is to charge listing fees, like a classifieds section, or a monthly subscription, instead of a lead fee.

List Fee

The listing fee might be confused with a subscription fee, but there are stark differences. While a subscription is typically an annual or monthly charge to take part in the marketplace overall, a listing fee is charged per product or service added to the marketplace.

Marketplaces using the list fee model typically need a large number of listings to make a profit. Usually, this means the listing fee is low, and the marketplace is playing a volume game.

Since the listing fee has to be paid per item added to the marketplace regardless of whether it sells or not, the marketplace operator has a more difficult time proving ROI to its sellers.

Fr‎eemium

The freemium model allows users to access the core offering for free, but premium features are built as a value-add. These value-adds can be things like sponsored listings (as is done on Facebook Marketplace), delivery, removing advertisements, or access to improved data or reporting.

Mu‎ltifaceted

This monetization method is usually too complex for a marketplace startup. But, as you grow, especially as a multi-vendor marketplace, multiple monetization methods may be necessary to address your growing client base’s wide range of needs.

‍The best way to start is with a single monetization model and expand your reach as needed.‎

Conclusion

So the answer to questions like “who pays” and “what model should I use” ultimately depends on the specifics of your marketplace — who are your vendors? Who are the buyers? What kinds of things are being sold?

Based on the Top 100 Marketplaces breakdown, you will likely charge the seller and won’t use a multi-faceted approach out of the gate. But there are a lot of multi-vendor marketplace monetization levers to pull, so your best bet is to get acquainted with your buyer and seller goals, look at some examples of marketplaces in a similar space, and start iterating.

Interested in launching your own company-operated marketplace?

With Nautical, you can quickly launch a marketplace alongside your existing business without replatforming. Speak with a Nautical marketplace expert today!
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