There's so many different examples from Airbnb (12% host, 3% to renter), Uber (~15% to driver) to Craigslist (freemium w/ paid placement + posting) for pricing a marketplace. Is there a framework to follow when thinking through this model? Is there different pricing sensitivities per marketplace type (heavily curated vs. more open)?
Business model is not always enough. There are many things that must be attached to it make a business succeed. The term business model has especially grown in popularity since 2004–2005 and entered the everyday business language. Not surprisingly, several definitions of what a business model is have been introduced. However, going through different definitions they have very much in common: the business model is about value creation, customers, product or service, costs, and revenue. According to University of California, Berkeley lecturer, serial-entrepreneur, and angel investor Steve Blank “A business model describes how your company creates, delivers and captures value.” This is how Alexander Osterwalder defines business models: “A business model describes the rationale of how an organization creates, delivers and captures value”.
The building blocks of the business model vary slightly across different frameworks. However, the business model should always include a value proposition, customer segment, profit formula (or revenue and cost), delivery channel and key resources. A particularly important aspect of a business model is that it needs to be sustainable, i.e. the costs cannot be higher than the revenue over time. Revenue here is defined in its widest sense and includes donations, government support as well as payments from customers. With such a wide definition of revenue, business model frameworks can also be used with success by for-profit, non-profit and government organizations.
Business models do capture much of the same information as a business plan, but they are presented in quite different formats than the normal 50+ page business plans. However, there is a more fundamental difference between business models and business plans. Business plans are made for execution and follow a predefined plan – the implicit assumption behind the way we used to write business plans was that we could sit behind a desk and do all the research we needed and find all the relevant information and devise the perfect plan to success. Failure was due to poor planning. We now know that no business plan survives first contact with customers. Hence, producing heavy weight business plans for execution is a waste of time and money before we have a proven business model.
The business model is a lightweight representation of all the hypotheses we need to confirm to devise a business plan. Only when we have validated our hypotheses about our business model and turned those hypotheses into facts by testing them in the marketplace will we go on to prepare a business plan. If through validation you have arrived at a scalable, repeatable and sustainable business model, the focus shifts from iterative testing of hypotheses to execution on a plan and company building to extract as much value as possible from the business model. Leading global companies like GE, P&G, Nestlé, Telenor and others use business model frameworks to manage strategy or create new growth engines. One of the main benefits of using a business model framework is that it helps companies move beyond product-centric thinking and towards business model thinking.
So, are business models the same as strategy? Your business model is certainly strategic, but it is not the same as strategy. The strategy determines the position a company will have in its industry. How much of the created value an organization is able to capture is dependent on its strategic position in the industry it operates. Value is always created in a value chain before it becomes available for the customers. The structure and strength of the actors in this value chain together with the characteristics of the industry, such as competition, substitutes etc. will determine how much of the value the organization is able to capture.
Business model innovation takes place when the assumptions or content of one of the several buildings blocks are new or significantly changed. Business model innovation is about new ways of creating, delivering, and capturing value. Unlike product or process innovation, changes to the business model require changes to the foundational decisions upon which the business operates. Therefore, business model innovation will likely be radical, and in many cases, transformational. A well-designed business model has interlocking building blocks that reinforce each other. The Doblin group conducted a thorough analysis comparing the return on investment (ROI) of different types of innovation. Evidence suggests that organizations that harness innovation prosper in the marketplace. Companies that harness innovation achieved profit margin growth of 3.4 percentage points annually since 1995, compared to 0.4 percentage for the median Standard & Poor’s 1200 global company average. The group’s stock price also grew by 3 percentage points higher per year over the decade compared with the S & P average.
Different marketplace pricing models are as follows:
1. Commission: A commission consists of a chunk of the transaction price. Commissions are relatively easy to implement and one of the most common marketplace pricing strategies. Most bigger platforms ask for a commission, such as Airbnb, Etsy, and Upwork. You might create different commission levels. Premium sellers might get a reduction on their commission or other perks. For example, Upwork offers different commission levels depending on lifetime project value. Airbnb offers different types of perks for its Superhosts.
2. Subscription: You could charge a subscription, which would mean that people pay you every month to use your platform. The most prominent service that works with subscription fees (although it is not a full-blown marketplace) is Amazon Prime.
3. Listings: You can charge a fee for listings. For example, Etsy charges a listing fee for every product listing.
4. Ads: Your customers can pay an ad fee to get more visibility on your platform. One marketplace doing just that is Yelp, which lets businesses buy ad listings to get higher up in searches.
5. Freemium: Your marketplace can operate on a freemium model. So, your platform is free to use, but you offer extra services (like insurance or customer service) for free. This marketplace monetization model works best for marketplaces for free services or products (think: a marketplace that lets people borrow products).
These are pandemic times, which has brought the great recession back upon us, with huge job losses and staggering economies market place around the world had been thrown off balance so it is you who must figure out which is the best. Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath
Answered 2 years ago