What’s the right business model for your marketplace?

I recently came across a good story about pivoting and how hard it can be to find the right monetization model for your marketplace. Thumbtack is a platform that helps people find service professionals (photographers, painters, home contractors, movers, etc.). My friend (and Thumbtack CEO) Marco Zappacosta described how the company first tried transaction fees, then a subscription fee, before finally settling on a lead-based model. “I don’t know if it was because we were sort of dumb, or if we weren’t sort of seeing things correctly, but it took us three tries to get it right,” he said.

Transaction fees vs. listing fees

Let’s start with the transaction fee, where the marketplace takes a cut of each transaction generated through the platform. It’s the fairest monetization model for suppliers and vendors, as they only pay a fee if and when they sell something.

By taking away the upfront costs of listing and the risk of not making a sale, this model encourages more suppliers to join the platform…thus increasing a marketplace’s supply. A transaction fee model also scales nicely: the more sales your platform generates, the more revenue you bring in.

By contrast, listing fees can have the opposite effect. Charging suppliers to list on your site will discourage many from listing. You might find your marketplace soon hits a ceiling where you can’t get any new suppliers to join. In addition, this model is less fair than monetizing by transaction fees as listing fees hit all vendors equally – no matter how many sales they end up making on the site.

What to do when services are delivered offline

A business model based on transaction fees seems like the simplest and most effective approach for any marketplace – and it’s the first model that Thumbtack tried. However, Thumbtack soon realized that a transaction fee model is hard to pull off when transactions are made online, but the service is delivered offline.

For example, when a plumber goes to the customer’s house to fix a leaky faucet, it’s hard for Thumbtack to stay in the loop and know when the service was performed and for how much. That makes charging by transaction fees tricky. Marketplaces that deal with high-ticket products or services with a low degree of commoditization will find themselves with this same struggle.

That’s why Thumbtack settled on the introduction or lead based model: the company makes money by charging suppliers to contact customers. A vendor on Thumbtack sees all the details for a particular job (what, when, where) and if they feel they are a good fit, they pay Thumbtack to be introduced to compete for the job.

Another option for this situation is to make the base listing free and then charge for enhanced services like better placement. This encourages more suppliers to list, but revenue can be hard to come by since only a small percentage of suppliers will choose to pay for the better placement. Such a freemium approach works best for companies that serve a huge market: even if just a small percentage of suppliers pay for additional seller services, their base is so big that they can build a large business (e.g. Yelp). However, if you are tackling a niche market, you’ll never reach the scale necessary for a freemium model to work as the core source of revenue.

Last but not least, a start-up can decide to attack the market with a full-stack approach and manage the marketplace or even become the provider of the service (like Homejoy, Handy, Pro.com). By standardizing the offline service, you can get closer to the simplicity of an online transaction. However, the downside is you need to take on the added operational complexities and risk of managing, guaranteeing, and/or providing the service.

So, generally speaking, my advice to marketplace start-ups is to try to move your business model as close to monetizing the transaction as possible in order to minimize the friction for onboarding supply. But if the underlying service or product doesn’t lend itself to this model, then you could try Thumbtack’s strategy and adopt the lead-generation model.

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