Which Business Model Is Right for Your Startup?
The choice of business model is one of the key factors that determine the future success of every startup. If the model is not profitable, scalable and sustainable, the business is bound to fail.
The business model should be selected with even greater care if you are planning on launching a marketplace, an online platform where consumers buy products and services from various vendors and providers. Creating a tech platform is important, but without a clear business model, technology is powerless.
For each of type marketplace, balance is vital. You have to think through not only how you'll profit from your marketplace but also how you will make it profitable and convenient for users who will buy and sell using your platform.
There are several basic business models you can use to monetize your product or service. Below is an overview of six popular models and examples of companies that have adopted these models.
Transaction fee (commission)
One of the most popular ways of monetizing a marketplace is to introduce a per-transaction fee, or commission. There are three ways this model can function: The fee can be paid by the vendor, by the buyer or by both.
Vendors and providers who list their goods and services on a platform tend to prefer the transaction fee model, because they don't have to pay the marketplace until they get their first revenue. Owners also enjoy the benefits of this model because all the cash flows through the platform.
Airbnb, eBay, Fiverr and Uber are all examples of services that charge transaction fees.
Membership fee (subscription)
In this model, a portion or the entirety of the marketplace's users are regularly charged a sum of money for access to the marketplace and the opportunity to find new customers or suppliers.
Unlike transaction fees, this option is better suited for those who sell expensive products or services. Subscription is more convenient for users who plan on constantly using the services of one specific marketplace.
Typical examples of C2C projects that function using the membership fee model are dating sites (OkCupid, Match) and home exchange services (Love Home Swap, Home Exchange).
Projects like these aid their users by analyzing all of their preferences and finding perfect matches. Whether it's a significant other with similar interests or the house of your dreams in a conveniently located area, the idea behind subscription is that the offer itself is exceptional.
Marketplaces that aggregate a large number of listings often operate under a payment-per-listing model. Technically, this model is similar to a paid advertisement. This option works well when the vendor is ready to pay for access to a wide audience and when the platform can guarantee broad coverage.
Craigslist, in business since 1995, is one such marketplace. This online billboard is separated into different categories. Some of these categories provide free listings, while others – job hunting or home rentals – require a fee.
Yet another good example is the IT-related job-hunting service called Techfetch.com. The platform provides employers with a free trial for seven days, and then you can choose from one of its paid plans.
Listing-fee-based models can function well in the B2B segment too. This model was adopted by a marketplace called Mascus, a platform for buying and selling equipment for construction, agriculture and other specialized uses. In the case of Mascus, vendors are not interested in subscriptions and long-term relationships with the platform because the volume of sales is low. (Generally, its users only buy or sell a few units of equipment and then leave.) Consequently, a listing fee is a more attractive model for Mascus than, for instance, a membership fee.
Payment for connecting the contractor and the performer, or lead generation, is a popular business model often used by platforms where users leave their requests and wait for offers from specialists. In this model, the marketplace charges fees for leading the performer to a potential customer interested in their services. This does not always guarantee a successful deal. However, in comparison to listing fees, the chance of a positive outcome is significantly higher.
One of the platforms that proves the efficiency of this model is Thumbtack, which helps local specialists who provide all kinds of services, ranging from house cleaners to belly-dancing teachers, sell their skills to interested buyers. It was estimated that, on average, service providers would pay $500 for each lead. In 2017, customer and performer selection was automated with the help of the Instant Match system.
In general, the lead-fee business model is more common in B2B and B2C, where each customer is especially valuable. In the C2C segment, this business model is usually not a solid choice.
Exclusive services (freemium)
The principle behind this business model is that the basic offer is free for all users, while more extensive features require payment.
Freemium differs from a trial version, in which the user gains full access to all features, but for a limited time. The freemium model allows users to enjoy the basic features of the platform for an unlimited time. Paid features are a buffer of sorts, which the customer might use for more convenience and security.
The C2C Dutch service Peerby is a good example of this model. On Peerby, users can lend each other items they seldom or never use – tools, appliances, gardening implements and so on. To monetize the platform, Peerby offer paid services: insurance (against item damage and loss) and delivery (to save users time on getting the item from the owner themselves).
Featuring listings and offers
Featuring is a way for providers to buy a more prominent listing for their product or service. This model is close to advertising, but in this case, it is common for the platform to provide basic listings for free while also offering more visibility to vendors if they pay for their listings. For instance, after a vendor has paid for their listing, their profile is put on the main page or in the top position in its respective category.
When determining which marketplace model is best for your business, keep in mind users more often than not dislike advertisements, which is why featuring is more effective in niche projects where vendors place listings and offers that are relevant to the interests of the platform and its audience.
A good example would be the Finnish Häätori platform, on which users can freely add listings to sell used wedding dresses. The service was successfully monetized with the help of stores, photographers, wedding planners and other wedding-related vendors and service providers who buy listings on the website. As this advertisement is relevant to the website's users, it does not cause the usual annoyance associated with ads.
When choosing the right business model, it is necessary to account for a lot of factors, ranging from the scope of your future marketplace and the problem it solves for customers to the average price of the listed products and services.
Focus on attracting and retaining the party that will later allow you to profit the most. Calculating your unit economics – profits (or losses) per user – is essential as well. This can be done by subtracting the cost of attracting one customer and carrying out their order from the average revenue brought in by this customer. The result might help you see whether the selected business model is financially viable or not.