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Marketplace Monetization

Marketplace Monetization: How Marketplace 2.0 is Driving Sustained Profit

The following article is based on the recently released Marketplace Monetization: How to Make Money as a Multi-Vendor Ecommerce Operator book by Tom McFadyen and other SME contributors, which has recently reached #1 status in three Amazon categories. The book is available for purchase in Paperback Print and Kindle Edition formats.

The exploding popularity of the online marketplace model has brought new and exciting ecommerce growth possibilities to organizations all around the world utilizing an expanding variety of multi-vendor commerce permutations. Yet for all the scale and success marketplaces have seen, many have either failed or underperformed due to insufficient monetization strategies. Fortunately, this is a solvable issue that presents opportunities for previously unseen levels of sustained profit. Capitalizing means being aware of the monetization possibilities and implementing such measures in a way that adds value to the sellers and customers as your bottom line increases.

Consider that a shopping mall operator primarily makes money by charging their tenets rent, but that’s hardly the only source of profit for that operator. They also sell print and video advertising space in various forms throughout the mall. There are areas for featured product displays which are rented weekly or monthly to the retailers. The food court provides a valuable consumer service, but is another source of either rent or margin for the operator. Some even have arcades or other entertainment options run by the mall operator, all which provide additional shopping experience value and profit. Just like that mall operator is creating multi-sided revenue extensions beyond the core profit driver of rent, online marketplace operators have many channels from which to drive additional profit beyond the core of commision or transaction fees.

Marketplace 2.0 means a Fully Monetized Marketplace

Marketplace Monetization 1.0 vs 2.0 Infographic

The Marketplace 1.0 model typically monetized commision fees or seller subscription fees and little else. Marketplace 2.0 monetizes every channel possible while adding value to all sides.

Marketplace 1.0 is what popularized the model, seeing the first round giants such as Amazon, Alibaba, Walmart, Teleflora, Ebay, and more blaze the path towards a multi-vendor ecommerce future. This 1.0 model focused primarily on marketplace as a category expansion and inventory depth mechanism with most revenue being driven either by commision fees (Amazon, Walmart), transaction fees (Ebay), or seller listing fees (Alibaba). And while enough sellers providing goods to enough buyers can certainly be profitable, there were valuable lessons to be learned as more and more retail and B2B ecommerce organizations launched marketplaces.

Marketplace 2.0 goes far beyond the category and depth purpose of a marketplace with additional models such as vertical marketplaces (narrow focus, but deep stock), closed marketplaces (loyalty programs), circular platforms (recycle/upcycle, reuse), group purchase organizations, eprocurement, and hybrid dropship/marketplace experiencing success in a number of industries. Each of these models has one thing in common, other than the multi-sided nature of their commerce model, and that is the possibility to monetize each of those sides.

There are several ways to monetize a marketplace, but the biggest profit-motive methods are commissions & subscriptions, embedded financial services, retail media/on-site advertising, and internationalization/cross-border considerations. From there, you can layer in additional seller services related to data, logistics, or storefronts, claw-back funds via seller penalties, or adding additional consumer services, just to name a few. The goal is always the same, to add value to the seller and buyer experience while charging additional fees that pad the bottom line beyond the core profit divers.

Commissions & Subscriptions

Commissions are the most common way to monetize a marketplace. This is where the marketplace operator takes a percentage of each transaction conducted on the marketplace. In lieu of a commission, a flat fee can be levied per transaction, but the percentage of sale model is far more common.  This vital revenue stream has evolved from its nascent stages, seen with early digital marketplaces like the Boston Computer Exchange, to sophisticated structures utilized by giants such as Instacart, Amazon, and Walmart.

An alternative method is the seller subscription model where the sellers pay a yearly or monthly fee to list on the marketplace instead of charging a fee per transaction. This is often enacted when a marketplace operator fears revenue leakage where sellers are incented to take relationships offline due to commission fees.

Embedded Financial Services

As marketplace operators look to expand their earning avenues, embedding financial services emerges as an innovative proposition. Particularly, the Buy Now Pay Later model (BNPL) is rapidly growing. Projected to reach a market size of $309.2 billion in 2023, BNPL solutions like AfterPay bridge the gap between immediate purchase desires and payment flexibility. By automating transactions and payment terms, marketplaces see this as a golden opportunity to accelerate their growth cycle.

On the B2B side of things, we’re seeing innovative offers from companies like Balance, who provide a simplified checkout experience, but also allow operators to offer terms to their buyers for larger purchases (basically, business BNPL), with the option of adding additional percentage values to the terms as another profit center.

On-Site Advertising / Retail Media

Stepping into on-site advertising and retail media, we see marketplaces garnering additional income through targeted ad placements. This model thrives on precise consumer behavior data and leveraging AI technologies. Marketplace operators not only generate substantial revenue from this stream but also enrich the shopping experience, making consumer journeys on the platform more personalized and engaging.

Cross-Border / Internationalization

Cross-border transactions offer a goldmine of opportunity for marketplaces to scale internationally. Platforms must maneuver through regulatory landscapes and adapt their operations to various regional intricacies. Successful ventures, like the niche-focused Reverb, teach us that market potential is abundant when international user experiences are prioritized and marketplace offerings are adeptly positioned.

Other Monetization Areas

Marketplace operators have an array of other fluxes to boost their revenue. Fulfillment services, seller penalties, and buyer services are just a few avenues that can further profitability. Integrating these services enhances the overall platform appeal and preserves its integrity, fostering a dynamic marketplace environment.

Next Steps

For marketplace operators, monetization is not just a goal—it’s a continuous journey of innovation and adaptation. The importance of financial modeling, technology assessment, and aligning organizational structures cannot be overstated. A thorough revenue roadmap drawn from insightful data and tested models usher forth a future of sustained growth.

If your organization could benefit from the steady hand of experienced marketplace and ecommerce experts, reach out to us at info@mcfadyen.com and we’ll be happy to help. Also remember to check out the Marketplace Monetization book for a lot more in-depth information on how to maximize the monetization strategy for your marketplace.

Thomas Gaydos
CMO & Marketing Practice Lead
McFadyen Digital

Tom McFadyen
CEO & Author
McFadyen Digital

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