Building a thriving online marketplace requires the right business model to finance its operations. How you structure payment will form the foundation of how your platform functions. There is no standard payment structure or pricing strategy for marketplaces.
Unlike brick and mortar stores or e-commerce sites, where there is one seller and multiple buyers, marketplaces capture transactions between multiple sellers and buyers. This article explores different options to set up payment for your platform and provides some practical tips to ensure users of your platform do not circumvent your fees.
Charging each customer who purchases a product or service through your platform can be an easy way of making money on every transaction. You can present this to the customer as either a separate fee (for example on eBay, this is referred to as a final value fee. On Airbnb, this is referred to as a service fee) or integrated into the supplier’s cost. There are pros and cons for both.
Charging a separate fee means that the money is directly placed into your account. This means that you do not have to rely on the supplier to transfer you the fee. However, customers may be tempted to contact the supplier directly rather than going through your website to negotiate a lower price (which also saves sellers paying your fees). Combining your fees and the supplier’s fees into one price can make it more attractive to the customer, and also prevent suppliers transacting outside your platform.
Membership or Subscription Fees
With this model, the marketplace charges service providers a one-off or recurring fee. The membership model is most effective when the value you provide is high enough that the typical provider will engage in multiple transactions. Sometimes charging a one-off initial fee can encourage suppliers to join your marketplace by assuring there are no additional costs down the track. This pricing strategy is uncommon, however, especially with new marketplaces as customers like to dip their toes in before diving into payment. A solution could be offering a free trial period before signing up or a subscription service, where service providers pay every month that they want to use your platform.
Arguably, the most common pricing method is a commission-based structure – whenever a customer purchases a product or service, you receive a percentage of the seller’s earnings (for example, eBay takes 8% of the final sale price if the item is sold below $50). This encourages suppliers to join your platform, as there is no sign-up fee, and it can increase your revenue.
How Much Should You Charge?
There are many factors to consider when deciding on a price to charge your suppliers or customers. We have set these out below as well as some questions to ask yourself.
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How to Avoid People Sidestepping your Payment System
It’s an unfortunate reality that people will try to circumvent your payment system. If your marketplace acts as a platform for suppliers and buyers to meet, what can you offer to justify your fees?
Consumers are reluctant to trust service providers they don’t know or can’t see. If you can guarantee customers that you will intervene as the marketplace operator if the transaction goes awry, customers and service providers are likely to be more willing to pay for your service. eBay has a Resolution Centre, as well as an eBay Money Back Guarantee where buyers are protected from fraudulent sellers.
It may be easy enough to prove your worth in initial transactions. But once the buyer and seller have formed a relationship, you need to remain a valuable part of the process to ensure that any returning customer still comes through your website. Including simple tools on your website, such as a calendar schedule or managing supplier’s inventory are ways to add valuable to each transaction.
Make the Purchase Easy
Customers are more likely to proceed with a purchase if the process is straightforward. Try and make your payment process straightforward and quick to reduce the risk of your customer abandoning their purchase.
Customers and service providers would be more willing to accept a percentage going towards your marketplace if you are transparent about your costs. Nobody likes to be ripped off.
Deciding on how you will collect payment for your marketplace is crucial to the success of your marketplace’s revenue earning capacity. You need to balance pricing, security of payment as well as promote an excellent customer experience. If you have any questions or need assistance setting up your marketplace’s payment structure, get in touch with our specialist e-commerce lawyers on 1300 544 755 or fill in the form on this page.
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