How to ensure the financial profitability of my marketplace?

The opportunities offered by the marketplace model are no longer in question. In addition to increasing the visibility of sellers, the marketplace is favoured by consumers, who are looking for a wider choice of products at the best price.

As a result, the growth potential of the model is attracting an increasing number of entrepreneurs. But beware: anyone who wants to take on this new challenge must first make sure that their marketplace is financially viable. Here are 5 critical factors to have in mind and tips on how to do this.

1. Defining the business model best suited to grow the market share

The financial profitability of a marketplace largely depends on its business model. Depending on whether the marketplace offers goods or services, the financial model will differ.

What is a marketplace revenue?

Different business models exist, with the most common being:

• Commission: a percentage is charged to the seller for each transaction.
• Subscription: sellers offer a subscription system and users pay a recurring fee, especially when the price cannot be fixed in advance.
• One-time fees: sellers pay listing fees to publish their offers or companies' services.
• Membership fees: buyers pay a membership fee to access the marketplace's offerings. 

While the commission is the most common practice, financial models can be combined. To create a profitable business plan, consider the specifics of the project while keeping in mind that the goal is to attract as many sellers as possible to the marketplace and become a leading brand with a growing number of sales and repeated purchases.

Are marketplaces profitable?

Yes, digital marketplaces can be highly profitable when properly structured and managed. Their profitability relies on several key factors.

A marketplace's revenue model determines its ability to generate profits. Platforms can use a commission-based model, taking a percentage of each transaction. Others, such as Shopify, rely on subscription fees, ensuring stable income regardless of sales volume. Some marketplaces also integrate listing fees where sellers pay to publish their offers.

One major advantage of marketplaces is their cost efficiency. Unlike traditional retailers, they don’t hold inventory, reducing financial risk (and potential financial losses) and can generate higher gross margins. For example, Etsy connects independent sellers with buyers without managing stock, allowing for scalable operations with minimal investment. Furthermore, automation in payment processing, customer verification, and order management enhances profitability by lowering operational costs.

However, success isn't guaranteed. A marketplace must balance pricing strategies to attract both sellers and buyers. For instance, Uber's dynamic pricing adjusts based on demand, optimizing revenue. Additionally, platforms must build trust—Airbnb’s review system reassures users, while escrow payment systems, like those on Upwork, ensure secure transactions.

Sustained profitability requires continuous platform optimization. Amazon’s recommendation engine increases conversions, while bidding system encourages competitive pricing. Investing in these features enhances user experience, leading to higher transaction volumes and recurring users.

Ultimately, a marketplace's profitability depends on its ability to attract users, scale efficiently, and implement diverse revenue streams while minimizing costs.

2. Managing suppliers: the importance of properly onboarding merchants on a marketplace

To ensure the profitability of a marketplace, one thing is essential: recruiting sellers who offer a consistent, high-quality, and attractive offer, to generate demand. In this respect, the onboarding of merchants is a fundamental step: suppliers must become full members and active users of the marketplace. To do this, marketplace opertors need to:

• Offer a differentiating sale experience and approach
• Highlight the benefits of joining the platform
• Train and support each merchant
• Explain the revenue model and the possible transaction fees
• Have some marketing efforts to promote the platform
• Build loyalty programms for salespeople and the target audience.

3. Measuring the liquidity of the marketplace and the ratio of buyers to sellers

Liquidity is an excellent indicator to ensure the profitability of a marketplace. There are two types of liquidity to measure:

• Buyer's liquidity: this is the probability that a request or search will result in a transaction.
• Seller's liquidity: this is the probability of a merchant selling goods or services.

The second indicator that is worth measuring is the buyers/sellers ratio, in other words: the number of buyers that a seller can serve over a defined period. If a marketplace has to offer a wide range of products to attract consumers, its profitability requires harmony between supply and demand, together with the pricing strategy. This ratio allows maintaining an optimal balance between the number of sellers present in the marketplace and the number of customers.

4. Reassuring buyers of the security of the transactions

As long as customers have not validated the payment, they can change their minds. By the way, you should know that 20% of buyers abandon their shopping carts because they don't have enough confidence in the security of the payments. For a marketplace to be profitable, the conversion rate of the payment page needs to be optimised. It is essential to reassure buyers about the security of the platform to encourage transactions. To do this, there are several tips:

• Simplify the payment experience on the platform
• Only ask for information that will help the online marketplace to function
• Offer a fluid path
• Highlight information on the security of payments: logo of payment partners, SSL certificate, access to the GTC and T&C, contact information...

In particular, you can reassure your buyers by communicating about the 3DSV2. Mandatory since April 2021, the 3D-Secure Version 2 system requires strong authentication of buyers, thanks to the combination of at least two authentication factors. If this secure procedure allows you to limit the risks of fraud and to protect your customers' banking information, it implies a change in the payment path for your end-users, which can result in an interruption in the payment process...It is therefore essential to inform and enlighten the end-users about this secure payment process to reduce the risks of abandonment.

5. Deploying adapted payment solutions

To prevent customers from abandoning their shopping carts, it is essential to deploy appropriate payment solutions. For example, adapt payment methods to the specificities of the sector and offer different currencies to facilitate the European shopping experience. If the payment solution must be fluid and reassuring for buyers, it must also allow to monitor and report on the activity. So, the marketplace operator needs to adopt a tool that allows to manage the payment flows of the marketplace, within a regulatory framework that complies with the standards in force. The best way to ensure the profitability of the online marketplace is to create a long run business on the platform and simplify transactions. 

Choose Lemonway as a payment solution

To help you in this process, Lemonway will manage payment flows. A project? Any questions? Tell us about your needs!