How to choose the business model of your service marketplace?
Airbnb, Upwork, Fiverr, Treatwell, Uber, … Service marketplaces are booming in every industry and If you are interested in launching your marketplace business you are probably facing a few challenging decisions. Which marketplace software to use? How to build a good user experience and search engine? What are the main elements to consider if you want to create a rental marketplace? or build a C2C marketplace? or launch a B2C marketplace?
Building a marketplace with an existing SaaS solution is usually the fastest and most cost-efficient way to do so, especially if you are launching your minimum viable product (MVP) or if you want to avoid coding or developing an entire platform from scratch. The way in which you use your resources during the early stages can be decisive for your success so if you combine a powerful software with personalized expert support as we do with our Hatch solution, you are already on the right path.
However, all service marketplaces do not operate in the same way and the same marketplace business model and features will not fit them all. This is why it is very important for you to define your goals, the type of marketplace which you want to build, the type of services which you will offer and the type of users which you will onboard. Understanding this will allow you to tailor your entire platform to your specific needs and choose the right software and marketplace business model for your project.
In this article we will focus on some of the popular business models and we will go through some examples of live platforms. Although we will not specifically focus on our Hatch solution, all of these marketplace business models can be achieved with it, as its feature set is designed to adapt to the type of business model you need to launch your marketplace.
An overview of marketplace business models
The marketplace business model you choose for your project will depend on many factors, such as the industry, your business goals and even the stage in which your project is at. Although there are many types of business models, we will focus on the most used ones:
- Commission per transaction: this is the business model chosen by most main service marketplaces such as Airbnb, Uber and Fiverr. When transactions are done in these platforms, an additional percentage or fixed fee will be charged to the client, the seller or both. This is the platform’s revenue stream and as you can see, it is directly related to the number of completed bookings. Although this might seem daunting if you are just starting out, this marketplace business model can actually drive user acquisition, since users know that they will not be charged anything until they actually place a booking or receive one through the platform. Marketplace owners who choose this model will have to address two main elements: which commission structure to use and how to add value to the users to prevent them from doing business outside the marketplace. Although it is not always easy, as a general rule, the best is to control the impulse to overcharge, setting fees that are high enough to make the project sustainable without driving users away. Instead, focus on the added value which your marketplace will provide, such as secure payments, insurance, refund guarantees, etc.
- Subscription: another popular choice is to charge users a recurring fee in order to be able to access the platform. This is sometimes used as a strategy to control the quality of the active users and listings, and it can be useful for marketplace owners who already have a user source which they can tap into. However, for most new businesses it can make user acquisition harder, since users might not be inclined to make an upfront payment without having received actual value from the marketplace yet.
- Listing fees: this model is based on charging sellers platform fees for every listing which they publish, the same way as Craiglist does. Since the charge is applied per listing and not in a recurrent manner, this business model can be more attractive for users than a subscription-based one. However, it still requires sellers to make a payment before doing any sales through the platform. Marketplace owners also need to consider that this model is only profitable when the number of listings is high, which is not usually the case for most new online businesses.
- Lead fees: this model is similar to the commission model and the listing fee, in the sense that users are not charged upfront. Instead, clients will publish their jobs, projects or needs, and sellers who pay a platform fee will be able to bid on them. This means that the lead needs to be valuable enough to be worth it and, at the same time, the fees need to be reasonable in order to not discourage sellers. Given the need to create valuable leads, this model is generally limited to B2B and B2C marketplaces.
- Freemium: the idea behind this marketplace business model is that users can sign up, publish listings, place bookings and perform any other basic actions for free, but they have to pay extra to access special features or platform services. Although it can be an interesting approach to attract your first users, it can be a challenging business model to sustain on its own, since it only works if these extra features are good enough to be worth the extra cost, and if a significant number of users pay for them. This is why this model is sometimes combined with others such as listing fees or ads.
- Featured listings and advertising: as can be seen on online platforms like Gumtree or Leboncoin, in this marketplace business model sellers can publish their listings without any charges but they need to pay extra to have them displayed in the homepage or highlighted in some way. Similarly to listing fees, this model is only profitable when the marketplace has a significant number of listings, yet it is still an interesting model to keep most of the user’s activities free. Including ads is also a way to generate revenue but it can sometimes hinder UX.
Marketplace business models of live platforms
In order to better understand these marketplace business models, let’s have a look at examples of live marketplace.
The Treatwell business model
Treatwell is a European service marketplace to book beauty appointments online, such as hairstyling, makeup, nails and massages.
Its revenue is built around a mix of a commission-based model with subscriptions. Providers need to pay entry fees and a monthly subscription in order to sign up and publish their listings. The amount paid per month depends on the country and the plan selected by the provider, as they can select between an Entry or Plus program with different services within them such as financial reports or cash flow management.
Once they have published their listings, a fee of 25-35% is applied per each new client booking. A 2% fee is applied on direct bookings or pre-paid online bookings done by recurrent clients (who have booked the provider in the last 12 months). A 0% fee is applied on bookings of recurrent clients paid in-salon.
Providers can receive help to set up their profiles and listings, which can include one or more services. These services have their own price and they are rendered at a specific time and date at the listing’s location. Clients can therefore search by category, such as nails or hair removal; by location or by date. Search fields are optional, which means that open searches can also be carried out. Based on the selected parameters, certain search results will be displayed, which the client can sort and refine further using custom search filters such as free wifi, child friendly or free parking.
An interesting characteristic of Treatwell’s search engine is that it doesn’t only allow clients to search by type of service but also by salon. This is an advanced feature rarely found in SaaS marketplace solutions but which our Hatch software does include, and it is especially valuable for B2C and B2B marketplaces. If clients already know which provider they want to book, they do not need to browse all results to find it and instead they can just go to the provider’s profile to see the available services and book them.
Once an available service has been selected, the client can proceed to checkout to select the payment method: online or at the venue. Unlike most platforms, Treatwell does not require clients to register or login to be able to place bookings, and they can book and pay as guests if they prefer to. Placed bookings can be cancelled or rescheduled through the user’s account. If the booking moves forward, users can also leave reviews about their experience.
The Fiverr business model
Fiverr is an Israeli service marketplace for freelancers, similar to Upwork, and its jobs include online marketing, web design, translation, copywriting, etc. However, while Upwork is a reverse marketplace in which clients post jobs which providers can bid on, in Fiverr providers need to create their listings and prices. Clients can browse the different offerings and select the service which they prefer among the search results. If needed, they can also send a message to the provider to ask any questions or clarify any details.
Although users do not need to pay a subscription to access the platform, once the service is delivered, Fiverr takes care of the provider’s payment and takes a 20% commission on it.
In terms of the type of listings and booking flow, two particularities about the Fiverr model stand out: they combine fixed prices with quote requests and they structure fixed prices in what they call ‘packages’. When providers create their offerings, they can define up to three types of ‘packages’ with different characteristics and add ons / extras within them, offering different types of service levels with different prices. Providers can decide if they want to be able to receive quote requests from clients or not.
The Airbnb business model
Airbnb is one of the most successful C2C sharing economy marketplaces and it’s business model is based on connecting guests with hosts who are renting out private rooms, homes or apartments. Guests can access the platform for free and they can browse all properties without having to login or register first. Hosts, however, are required to sign up to create their profile and publish their listings.
Although hosts can sign up and publish their listing for free, the revenue of Airbnb is built on applying charges on the host’s payout and the guest’s payment. These charges are structured as percentages and are set at 3% for the hosts on every successful payout, and a maximum of 14.2% for the guests on every confirmed booking. In some specific cases, Airbnb applies a host-only fee but the most common revenue model is to split the fees between both users.
The Airbnb business model is quite simple yet highly scalable. Since most hosts are private individuals looking to make profit from renting their own properties at low prices, host fees are quite low. Although guest fees are higher, Airbnb provides enough added value to discourage platform leakage, such as secure payment management, property insurance, transparent reviews and hiring professionals to take the property’s pictures. Furthermore, as discussed above, this type of commission-based revenue can be encouraging for new users since the platform will not collect any payment until the host and guest generate value through the platform as well.
The Upwork business model
Upwork is a multi vendor marketplace which connects clients or companies with freelancers looking for jobs or projects. Unlike the previous models which we have seen, in Upwork it is the clients who post jobs which freelancers can bid on. The platform’s revenue is based on a combination of two different charges which are applied on both the clients and the freelancers.
On the one hand, clients can select between two different types of packages: Basic and Plus. While the Basic package is free, the Plus package is based on a monthly payment of USD 49.99 and it allows the user to access additional benefits such as being able to receive up to 15 quotes for their posts instead of only 3. In addition to this recurring monthly payment, platform fees of 3% are applied on the payment.
On the other hand, freelancers can sign up, create their profiles and send quotes for free. Yet, if they are hired, Upwork will apply fees on their payment. These fees are structured as a percentage and it is linked to the billings with each client:
- 20% fee on the first USD 500 billed to the client
- 10% on total billings between USD 500.01 – USD 10,000
- 5% on total billings above USD 10,000
An interesting detail about Upwork is that they keep a tight grip on the quality of the freelancers, who are verified and tested before being live.
Time to reflect on your service marketplace business model
The marketplace models discussed in this article are just some options to structure your platform and there is no one size fits all. Before making a decision, take the time to think about your project and the types of services which your providers will offer. Understanding this is the first step to build your business. If you need help or would like to discuss this with a Hatch expert, contact us and we will be happy to provide insights on your project and advice on which mode to choose. Hatch supports various business models and once we identify which one fits your needs, we can deliver you with a personalized marketplace in 48hrs so you can start your new project supported by our team of experts.
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