Is the Freemium Model the Future of Marketplaces?

The Freemium Model, where a vendor offers both a free and paid version of the product, has become the de facto business model for many SaaS companies. Freemium makes general usage free, while monetizing the heaviest users through premium features. This model has proven to work well for consumer apps like Spotify as well as enterprise services like Hootsuite.

Through Etsy’s recent S1 filing, we get a glimpse into a new frontier for Freemium…and that’s marketplaces. Traditionally, most marketplaces charge a mix of transaction and listing fees, with the total fee per sale often being the same for all sellers.

Yet, if we analyze Etsy’s S1 (and there’s a great analysis here), we see that the company’s premium seller services are growing much faster than base transaction fees. Etsy’s seller services revenue nearly doubled in the last two years. These are the services that cater toward the marketplace’s power sellers: promoted listings, direct checkout, shipping labels, etc. The average Etsy seller isn’t interested in such services as they’re too small to be concerned with fulfillment efficiency and/or they’re not thinking about investing in marketing yet.

Image Source: etsy S1 filing

Image Source: Etsy’s S1 Filing

The result is that Etsy takes a higher rate from their power users. And this approach works very well for the company and community. By relying less on monetizing the smaller sellers, the platform ensures that these small sellers can afford to stay on the platform and contribute their crafty and unique inventory that Etsy buyers want. Etsy then takes a higher rate from the big sellers that can most afford it due to their scale.

As a result, Etsy doesn’t have to choose between the number of small sellers/unique inventory and monetization level. This strategy keeps competitors at bay (because there’s no reason for the small sellers to leave) while growing the company’s take rate and revenues.

Will we see a time when Etsy will drop their basic listing and transaction fees altogether? This could very well happen in completely decentralized marketplaces. Sellers pay for added productivity and discovery services, but basic listings and transactions are free. In short, it may only be a matter of time before Freemium comes to marketplaces.

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