Creating your own marketplace requires proper planning and execution. Part of that plan includes your marketplace revenue model. This is probably one of the most important aspects of your business plan. Get this wrong and your marketplace will fail. There is a lot of competition in the online business market which requires careful planning, research, development and refining to succeed. Gone are the days of simply building a platform and magically it will fill with users. You need to have a marketing plan, onboarding plans and of course a marketplace revenue model.
Without a clear marketplace revenue model in place, your ability to generate income to further build your marketplace becomes severely limited. In this post, we’ll outline the various revenue models available to you from the vendor perspective and from the customer perspective.
Marketplace Revenue models
Creating a multi-vendor marketplace is sometimes seen as a chicken and egg game. Who do you focus your initial marketing efforts on? Do you focus on onboarding vendors first and customers second? Or do you focus on customers first? Or do you try and focus on both?
Who you focus on first depends on if you are creating a marketplace from scratch with no existing community or you’re extending the community to include a multi-vendor marketplace. If you’re creating a marketplace from scratch without an existing community its a good idea to focus on onboarding your vendors first. This gives you product and vendors to use in your marketing. If you have an existing community than you could easily focus on both at the same time. Unless you have your own existing product range and want to expand to include other vendors, we do not recommend starting your focus on customers.
Revenue from your vendors
Multi-vendor marketplaces generate their revenue from the partnership between the vendors and the marketplace. The models available to generate this income varies widely and depends on your specific business model. Choosing the model that works for you will require research on existing successful models and testing these in your financial projections.
Two of the most common models available include
Commission-based revenue model
The most common marketplace revenue model is the commission-based model based on a per-sale rate. This is usually a percentage split between the marketplace and the vendors. WC Vendors Marketplace supports the simple percentage split, while WC Vendors Pro provides an extension to this including tiered rates and fixed rates. Depending on your requirements and marketplace type a simple split might be all you require. If you want to be able to reward the power sellers, then tiered rates might be more appropriate.
Commission-based rates are usually calculated after costs such as payment processing fees, discounts or affiliate payments have been accounted for. We often see marketplaces trying to launch with very low commission rates that do not take into account any of these costs. This can make it very hard to make any revenue and often results in total failure of the marketplace. If you are considering charging a low rate of 5-15% chances are it will take a very long time if at all to make any revenue to support your marketplace.
This is the easiest revenue model to get started, you split all sales between you and the vendor on a percentage base. To give you some examples of marketplaces we’ve found a few examples of popular marketplaces and their commission rates.
Beyond the simple split, is the tiered based commission rates. These are also a percentage split but are based on the vendors’ total sales. The more sales the vendor has the better their rates are. They will usually start out with a low commission rate but as the vendor sells more, they will earn more.
A simple example of a tiered commission system comes from the fine folks over at Mojo Marketplace. As you can see they have a tiered rate and a flat percentage rate. Like a lot of marketplaces, they allow the vendors to sell on other marketplaces but if the vendor chooses to sell exclusively on Mojo Marketplace, they have the potential to make a lot more money. This is something you should be considering when designing your marketplace revenue models. Tiered based rates like this are available on WC Vendors Pro.
Subscription-based revenue model
Another popular marketplace revenue model is the subscription or membership model. Instead of charging a commission on every sale the marketplace will charge a subscription/membership fee to the vendors. This is usually a tiered system that provides more features the more the vendor pays. This model is a great way to guarantee revenue on a recurring basis. This is due to the fact that your model is not reliant on sales coming from customers to generate income.
The subscription-based model will usually restrict various aspects of the vendors’ capabilities depending on how much they pay per subscription. The most basic is the number of products they can list or the kinds of products they list. A lot of these will be a hybrid model where the tiered rate will have a different commission rate. This means as the marketplace you have recurring revenue as well as revenue from the sale.
Subscriptions are a great way to hedge your revenue and beat the chicken and egg problem. You might have various models depending on your products and service offerings, the kinds of vendors you have and your specific customer base. This requires that you research your industry to see what is and isn’t working.
Revenue from your customers
Customers are how this whole business model works. People purchase products or services, there is revenue made from the vendors. If your marketplace is a physical product marketplace, then your marketplace revenue from the customers is very simple. It’s a simple transaction between the customer and your marketplace. Depending on how your revenue model has been set up with the vendors will depend on how that transaction continues.
When it comes to digital products another option to make revenue from your customers is selling a subscription for access to all the products. Subscription models are usually all-you-can-eat models that provide the customers with access to everything in the subscription catalogue for a subscription fee. This can make your commission system for your vendors a lot more complex but can provide greater chances for scaled revenue with both customers and vendors.
Envato, the fine team behind products such as code canyon and theme forest have a newish system called Envato Elements. This is a subscription-based marketplace that provides access to thousands of digital assets for a single subscription price. Depending on the sales and downloads from customers will depend on the split to vendors. This is known as subscriber share and is becoming a more popular model on the larger marketplaces.
This is not a model that we would recommend you start with as creating a subscriber share-based marketplace revenue model is a complex operation. Currently, there are no marketplace plugins on the market that provide this functionality off the shelf.
Working out how and where your marketplace revenue will come from requires a lot of planning and research. There are various models and depending on your target markets, will depend on the solution you choose. We suggest that you take the time to plan your marketplace revenue models to ensure a higher chance of success with your business. It will help you to avoid the common mistakes that happen when it comes to marketplaces.