Setting Up Your Marketplace’s Commercial Model – Subscription, Take Rate, or both?

Setting Up Your Marketplace’s Commercial Model – Should You Choose a Subscription Model, Take a Percent, or Both?

All marketplaces have a commercial model – it’s the foundation on which profit is predicated. In other words, a commercial model is your vision of how you see the marketplace interacting with your customers to take orders, supply the product or service desired, and generate revenue. The question here is, which commercial model is the right fit for your needs?

Choosing the right path forward is essential, because each model has its own benefits and drawbacks, as well its own level of appeal (or disapproval) with potential customers. In this guide, we’ll explore the most common commercial models and help you make an informed decision for your own burgeoning business.

Why It Matters

Before we dive too deep into a comparison of the commercial models in use today, we need to explore why your decision is so crucial. Simply put, your business is a long-term initiative. It must be sustainable not just today and tomorrow, but years down the road. For-profit organisations must be able to make money from their user base. Here’s a little food for thought: most new businesses fail because they choose the wrong commercial model. It doesn’t scale with their growth, eventually toppling the business into dissolution.

So, given the extreme importance of choosing the right commercial model, what are your options? Let’s take a closer look at some of the most commonly used commercial models for online marketplaces.

Commercial Models Used Today

While there are many different commercial models in use with online marketplaces today, most fall into one of three categories:

• Transaction fee
• Membership/subscription fee
• Subscription plus transaction fee

How does each of these stack up to the others?

Transaction Fee

This model goes by many different names. You could call it a commission-based system, or a take rate-based business. Essentially, whenever a sale happens on your site, you charge either a percentage of the total sale amount or a fixed fee. This is the most popular model for modern marketplaces and platforms. Want some real-world examples? Take a look at Airbnb or eBay – both of these charge a fee per transaction. With this commercial model, you’re able to extract more value per transaction by offering more value in the process.

Here’s an example of the transaction fee model at work today:

Fat Llama is an online marketplace dedicated to allowing its users to buy, sell, or rent almost anything. The founding principle is that you can save money by buying things you’ll use frequently and only renting things you’ll use occasionally. Items are sold and rented by marketplace sellers, but also local sellers in the user’s geographic area.

To cover operating costs and ensure profitability, the platform charges a service fee on all transactions. They charge 15% from both the lender and the borrower, meaning that a £100 listing costs the buyer £115 and that the seller/lender only earns £85.

Subscription Fee

Call it a membership fee platform, or a subscription fee basis, but it amounts to the same thing. This is a good solution for businesses where it’s impossible to be a middleman, or where you are a middleman, but you control access to whatever it is that you’re offering. Netflix, Hulu, and other streaming platforms are excellent examples here. You (the viewer) pay a monthly fee for access to everything on the platform. You pay that amount each month, regardless of whether you actually watch anything or not.

Your membership/subscription fee could be monthly, quarterly, biannually, or even annually depending on how you want to structure it. You could also add pricing tiers, similar to the way that Netflix does. For instance, the bottom-of-the-line membership doesn’t include high-definition, while the middle tier only offers the ability to watch on two devices at the same time. The highest tier offers multiple high-definition streaming capabilities and other perks. There are other examples of this model in action, too, like Love Home Swap, which facilitates users to temporarily ‘swap homes’ with each other.

Let’s take a closer look at a real-world example of the membership/subscription fee model at work:

AndCo is a unique platform that lets dining and hospitality venues make money on empty seats and tables, while providing freelancers with an affordable workspace. Essentially, the company connects the two, allowing companies to rent table and chair space and freelancers to work where, when, and how they like.

The basic subscription fee is £20 per month, and all of that money stays with the company. AndCo’s partners recoup the cost of the subscription through table/chair rental fees, but also by selling additional food and drink to working freelancers, who generally spend over 2.5 hours per visit and regularly spend at least £15 per session.

Subscription + Transaction Fee

The final commercial model we’ll explore is a combination of both subscription and transaction fees. In this instance, users are charged a membership fee in order to access the platform, and then there is a transaction fee assessed on every single transaction that occurs. Sometimes, the subscription is optional.

Let’s take a look at a company that follows this commercial model:

Deliveroo is one of a slew of food delivery firms that has cropped up in recent years. It’s a tricky business model to balance, because there are actually four parties involved depending on how you structure your business. There’s the delivery company, the driver (if subcontracted/freelance), the customer/diner, and the restaurant.

Deliveroo doesn’t discuss their commissions, but the information available suggests that restaurants see up to 30% in commission fees, with the average meal delivery costing the restaurant between 20 and 25%.

However, it doesn’t stop there.

Deliveroo also charges customers to have their food delivered. The fee is distanced based – the farther you are from the restaurant in question, the higher the delivery fee.

However, the company has recently added an optional subscription plan for diners.
The plan works like this:

• You pay a membership fee per period.
• You get free delivery of meals from participating restaurants, but only if your order meets their minimum requirements.
• Deliveroo still pays the driver.
• Restaurants still pay the same commission rate.

This method allows Deliveroo to potentially earn more than would otherwise be possible. They are betting that you will not order more per month than what your subscription plan allows for. In fact, they may be betting that diners will order less. The extra money would then simply go into the company’s pocket.

Other Options in the World Today

The three models that we’ve explored thus far are really just the tip of the proverbial iceberg. There are numerous others depending on what you’re offering and your plans for the business. For instance, if you offer a service-based business or you’re involved in the SaaS (software as a service) space, then the freemium model might be worth considering, as it essentially allows your users to try before they buy without any sort of time-based limitation. The dating industry marketplace model is a good example of this.

A few other models that are used in the world of online marketplaces today include:

• Pure listing fees (not supported by commissions)
• Lead-fee based systems
• Feature listings and ads

Finding the Right Platform for Your Business

It can be challenging to determine which of the available commercial models is the right fit for your business. Never rush into a decision here, either. You need to balance your company’s stability and potential for growth with other factors, including customer acquisition and retention (they’re not going to stay around for long if you’re charging exorbitant rates without providing unequivocal value), and much more. In some cases, a single model may not be appropriate – you may need to modify one, or even combine two in order to achieve a workable model that supports your goals. You also need to choose with growth in mind, and opt for a model or combination of models that allows you to evolve as you grow.

If you’d like to have a more in-depth discussion about the commercial models you could consider specific to your marketplace aspirations, we’re here to help. Book your free, no-strings-attached discovery session today to speak with our team.