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Online marketplaces - understanding the business models

Nov 08, 2020

Online marketplaces connect buyers and sellers at a global scale and are growing faster than we have ever seen businesses grow.

The business model used by online marketplace operators is called platform commerce, and is central to giants such as Amazon, Apple, Uber and Airbnb. The principal revenue model for a marketplace operator is based on sales commission. When the retailer sells a product on the marketplace, the operator takes a percentage commission on the transaction, or a flat fee.

The marketplace operator doesn't own the inventory. Instead, they provide the means for customers and sellers to find each other and complete a transaction. As a result, the platform operator doesn't have to worry about buying low and selling high and is not running any logistical or stock risk. The commission is often pure profit. By being able to offer more products, at more competitive prices, the operator also enjoys increased customer loyalty. They also have the means to leverage that loyalty, since platform operators own the valuable customer data, which allows them to personalize offers

What is the business model for selling products on an online marketplace?

In short, you can profit from increased sales as a result of wider reach and by saving a lot of money on expenses and working hours.

However, the commission for each product sold can range from 5 to 20%, so make sure you investigate the numbers and calculate the profitability before you start selling on a marketplace.

The upside of selling on a marketplace

If you are selling with giants such as Amazon, with millions of monthly users, your business will benefit from the massive investments Amazon puts into paid Google search. You have access to big volumes of traffic, national and international, which means that you can start selling larger volumes abroad without additional effort. Customers tend to come back for more, so customer loyalty and repeat business is often an included perk.

You can save working hours, time and expenses on

  • Advertising and marketing costs -they are entirely assumed by the operator
  • SEO positioning
  • Web design
  • Technical infrastructure
  • Payment methods
  • Logistics (not all marketplaces manage the logistics, but Amazon offers this service for a fixed fee)
  • Returns and complaints
Strategic Advisory

Do you need to optimize your business in relation to marketplaces?

Avensia offers support in your marketplace endeavors, customized according to your needs. We can help you with everything from strategy, new organizations and concepts to customer communication, solution architecture and implementation. Read more about our Strategic advisory offers for online marketplaces.

The downside of selling on a marketplace

The competition between sellers on a marketplace is fierce. Price wars are common and you will have to revise your prices regularly, or see the marketplace adjust prices without your control, which could reduce your margins.

When your products are sold elsewhere, you don’t get the customer data. You are not in control of communications and you cannot use data to make your offer more relevant. You are also losing control over how your products and your brand is displayed online. If you are selling your own brand, make sure that you can provide information about brand identity and promises.