Monetization Strategies for Marketplace Businesses: Blending Predictability and Upside Potential
Here’s the problem. You want customers to give you money for your service. But spelling it out so bluntly feels a little off-putting. In reality, you’re just asking for a fee for bringing supply and demand together. That’s perfectly reasonable, right?
But how you cross that line of monetization so that you can make money as a marketplace business, is, in essence, one of the key objectives any marketplace founder needs to achieve. In the dynamic world of marketplace businesses, finding the right monetization strategy and timing can be a challenging, high-wire task.
In this blog post, we reveal the best monetization options for marketplace businesses, using insights from industry experts. We delve into three levels of monetization and discuss when and how businesses should turn on monetization to maximize their success.
The Three Levels of Monetization for Marketplace Businesses
Let's begin by considering the available options for marketplace businesses. To gather valuable insights, we consulted experts from the marketplace industry at our recent annual Marketplace Conference. In the video below, you'll hear recommendations from esteemed investors, such as Pete Flint from NFX, along with insights from successful entrepreneurs, like Ion Sergis from Timberhub.
As Pete highlights, marketplace monetization generally revolves around two main options. Firstly, there's the subscription model, which offers recurring revenue streams. The other route to take is to generate revenue by monetizing the transactions taking place on your marketplace through a take rate per transaction.
Each of these approaches has its own set of advantages and disadvantages, which we’ll discuss in a bit. However, there's also an additional option worth considering: the fusion of both models, allowing you to leverage the benefits of each. This blended monetization strategy is not only favored by Pete but also endorsed by investors like Luca Bocchio from Accel and our very own Mathias Ockenfels.
Now, let's delve into the three levels available to marketplace founders.
Level 1: Transaction-based Monetization of Marketplace Businesses as the Basis
As highlighted by Luca, the traditional and practical approach for marketplace businesses is to monetize through a take rate. That is, a small percentage charged on each transaction. This method has a proven track record of success and allows your marketplace to grow alongside your customers. By monetizing transactions, you can benefit from increased usage and transactions on your platform.
Georgia Stevenson from Index Ventures provides examples, such as food delivery platforms, where restaurants can expand their businesses through the intermediary platform of the marketplace. Another instance is their portfolio company, Motorway, a marketplace for privately owned used cars and vans, which enables dealers to enhance their business by acquiring and selling higher-margin vehicles. By facilitating the growth of your customers' businesses, you, as a marketplace, can capture their growth through revenue generated from transactions.
Merlin de Graaf from Vinted emphasizes that transaction fees work best for maintaining a clean and user-friendly marketplace. She distinguishes between different marketplace types and their suitable monetization strategies. For C2C marketplaces, a buyer fee is often the optimal choice, while B2C marketplaces should typically prioritize a seller fee. She also cautions against placing paid listings at the top of the sorting order on a marketplace as it may lead to irrelevant offers for customers, which can be undesirable.
In short, the experts agree that transaction-based monetization offers significant advantages that are traditionally inherent in marketplace businesses. However, it's important not to rely solely on this method. Monetizing transactions carries the risk of unpredictable demand fluctuations, which is why marketplace owners should consider diversifying their revenue streams. This is where subscription-based monetization of marketplaces comes into play.
Level 2: Adding Subscription-based Monetization to your Marketplace Businesses
Subscriptions offer the advantage of stable and predictable revenue, as Pete pointed out. By adding a subscription fee to your marketplace offering, you can diversify your revenue streams and reduce dependence on transaction-based income. However, non-usage-based subscriptions may not capture the potential upside seen in transactions. Therefore, incorporating subscriptions as an additional monetization layer combines the best of both worlds.
There are various ways to implement this approach. One common method is providing tools for the demand or supply side to streamline their processes and workflows. As Georgia mentioned, this creates the potential for higher customer stickiness. In addition, it creates a lock-in effect for customers using a specific tool that manages their data. At the same time, this is a great example of how to overcome the cold start problem. It’s a topic our marketplace experts have spoken about further in the video below.
Mathias Ockenfels, from our marketplaces and consumer team, highlights the example of CoachHub to illustrate subscription-based monetization. CoachHub operates as a typical marketplace, connecting coaches with companies and their employees. However, their monetization strategy goes beyond single transactions by offering subscriptions to companies, who pay for coaching services on behalf of their employees. This approach combines enterprise SaaS sales with the defensibility and network effects inherent in a marketplace business.
Therefore, incorporating a subscription-based monetization component should always be considered. The most successful monetization models at scale are those that blend the two main types, providing stable and predictable revenue while still capturing the potential upside.
Level 3: Combination of Transaction-based, Subscription-based Marketplace Monetization, and Further Services
With the two main options in place, you've already positioned yourself for success. However, there's still room to take it a step further.
Luca suggests exploring additional avenues for revenue beyond transaction-based and subscription-based monetization. These can encompass various supplementary services offered by your marketplace, such as shipping logistics, payments, financing, and insurance––anything that has the potential to generate more value for buyers and sellers, ultimately leading to increased transactions. Luca provides the example of a trading marketplace where insurance becomes an essential need. Examining processes before and after the core transaction can uncover further monetization potential.
Ion from Timberhub supports this idea by emphasizing the importance of controlling the end-to-end transaction experience, going beyond mere discovery and transaction ownership. While this approach may be less scalable and more costly, it enhances user trust, stickiness, and overall value by addressing the associated complexities, particularly in a B2B environment. Ion presents thought-provoking questions to consider, like "You find the supplier, but what happens next? How do you facilitate payment? Is there mutual trust? How do you handle logistics? Which carrier offers the best rates? What are the optimal routes?"
By addressing the end-to-end experience, you open up further opportunities for monetization along the way.
When Marketplace Businesses Should Turn on Monetization
Having addressed the question of how to monetize marketplace businesses, let's now focus on when to activate monetization in general. Once again, we had the opportunity to pose this question to marketplace experts at the recent Marketplace Conference.
Investing experts unanimously agree on the importance of monetizing as early as possible. Georgia highlights successful marketplaces, like Farfetch, Delivery, and Etsy, which prioritized product-market fit and pricing market fit from the outset. As leverage and brand value grow over time, businesses can gradually increase commissions or introduce additional monetization layers, such as vertical SaaS functionality, as described earlier.
Carolina Brochado from EQT Growth emphasizes the significance of early monetization testing, even in small ways, to validate customer willingness to pay for the service. This proactive approach prevents potential setbacks and enables businesses to refine their strategies before committing substantial resources to scaling.
Tara Reeves from Eurazeo identifies a crucial milestone for marketplace success. That is, the moment when professional users start earning a meaningful income through the platform. While the long tail of users contributes to liquidity, having professionals who depend on the marketplace indicates its value and potential.
Mathias suggests that B2B marketplaces can monetize more quickly, because enterprises paying for the product demonstrate its delivered value. In contrast, B2C or C2C marketplaces require critical mass, with a significant portion of the target audience already on the platform, before activating monetization.
However, our very own Jeroen Arts advises caution when implementing heavy monetization at the initial stages of a B2B marketplace. Gradually opening up the buyer landscape and monetizing transactions outside of existing deals can help foster platform interaction. As users gain experience and witness the simplified transactions, their willingness to pay for established deals increases.
Takeaways on marketplace monetization
Monetizing a marketplace business involves finding the right balance between predictability and upside potential. Combining subscription-based revenue with transactional monetization and further exploring additional service avenues due to controlling the end-to-end transaction experience can create powerful and valuable marketplace businesses.
Timing is crucial. As successful businesses initiate monetization early, test customer willingness to pay, and gradually scale up the monetization strategy as your leverage and brand value grow.
Discuss your monetization strategies for new marketplace ideas
Do you have a business idea where monetization through the named levels is possible? Please reach out to us. We are always happy to exchange ideas with you!
Join this year’s Marketplace Conference
And further input on how to scale your marketplace business is not far away. This year’s edition of the Marketplace Conference is just around the corner. Grab your seat now and learn from experienced marketplace entrepreneurs, like Johannes Reck from GetYourGuide or Daniel Krauss from FlixBus on how they were able to build successful marketplace businesses.