How To Make Money Running an Online Marketplace
By Anna Johnson on October 18th, 2010Want to run an online marketplace? A competitor to eBay or eLance perhaps? If so, here are some helpful pointers for building a successful online marketplace.
Firstly, let’s be clear on the business model…
As a marketplace, you’ll make money by getting lots of people to buy and sell products or services on your site, and taking a cut of those transactions. Your cut may be based on charging sellers a listing fee, a commission or both, or even charging buyers (e.g. if you’re running a recruitment marketplace where you ‘sell’ candidates to employers).
Accordingly, the key drivers for a marketplace are:
- Listings
- Listing fee (if applicable)
- Marketplace sales
- Commission rate (if applicable)
As Steven Carpenter explained in a recent TechCrunch article, the downside to building a marketplace is that you’ll need to reach a certain critical mass before ever making much money. How many buyers and sellers you’ll need will depend on your niche but you’ll face the classic ‘chicken and egg’ scenario in which you’ll need enough sellers to attract buyers… and enough buyers to attract sellers.
The upside of running a marketplace is that once you’ve achieved this critical mass, then you’ll benefit from ongoing network effects. Says Steven Carpenter:
“Due to the network effects of marketplaces and small fees, these businesses are notoriously difficult to achieve critical mass and take a long time to build. But once they do, these companies tend to have a long, profitable existence.”
So, what will it take to make, say, $1 million in annual revenues? Based on Carpenter’s assumptions, a $1 million earning marketplace will need 200,000 listings per month generating gross marketplace sales of $1.25 million a month.
Here are his benchmarks for generating $1,005,000 in annual revenues:
- Monthly Listings: 200,000
- Listing Fee: $0.20
- Monthly Listing Revenue: $40,000
- Monthly Gross Marketplace Sales: $1.25 million
- Commission: 3.5 percent
- Commission Revenue: $43,750
- Monthly Revenue: $83,750
- Annual Runrate: $1,005,000
