Monetizing the marketplace

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June 16, 2013

I came across this TechCrunch article today – ‘The Curse Of The Network Effect‘. It’s a good read and it got me thinking about different ways to monetize marketplace  businesses.

In the article the author, Nir Eyal, talks to Ethan Stock, the CEO of Zvents. Zvents is an online guide for local events and was sold to eBay recently. Stock talks about how difficult it was to monetize Zvents.  Despite being the largest events directory with over 14 million unique monthly visitors, Stock says that cracking the network effect had become a liability.

Marketplace businesses essentially connect two parties and act as a middle-man. The more famous ones are eBay and AirBnb. Sites like oDesk and eLance count, as do sites like Hostelworld and Viator. The business model for sites like these is straightforward – take a cut off every transaction. To force people to make transactions on the site, some sites restrict the exchange of contact information. Try typing your email address or phone number in a message to someone on AirBnb. Other sites provide buyer and seller protection, like eBay and oDesk.

The problem is, not all marketplace businesses involve online transactions of money. Zvents, for example, simply connected people with local events. Event organizers post events, users go to the site and find the event. It’s like an online directory of all events in the area. The real value Zvents provided is the ability to find any event, yet it’s because of that that Stock says it was difficult.

He calls it the expectation of completeness. Basically, users of the site expect to be able to find any event. So when he started asking event organizers to pay money to post events and they refused, he couldn’t simply stop them from posting events. He needed them more than they needed him.

Stock’s only choice was to offer a sponsored promotion to those who paid. If you look at eLance, you’ll see that apart from taking a commission off of every transaction, they also offer paid memberships to freelancers. If freelancers pay a monthly fee, they get their proposals on top of the others for a job posting. However, I’ve noticed that in most job postings less than 10% of the received proposals are sponsored.

The same thing happened to Stock, and the same thing happens to Google. The only difference is Google serves the entire world, so even though a small percentage pay for sponsored placements, the base is so huge that they make enough money. Low margin times massive volume equals huge profits.

For Zvents and other non-transaction sites, it’s low margin times low volume equals low profits. The only two ways to increase profits are to either increase volume or increase margin. Let’s ignore volume for now and assume it’s extremely difficult to reach the scale Google has. If you’re tackling a niche this isn’t an option anyway.

So, we’re left with increasing margin. That means monetizing a larger percentage of your user base, or extracting more money from a smaller percentage. For Zvents that means convincing more event organizers to buy sponsored placements, or convincing the ones who are buying to pay more for each. Both options are a tough sell. But why are we limiting ourselves only to the sale of sponsored placements?

Let’s go through some other business models and see how they can be applied to Zvents-like sites. I’m going to ignore advertisements straightaway. Sure, they make money, but we’re back to the same problem of low margine and low volume.

You could monetize users. Unfortunately, these days most people expect to use services like this for free. But you could offer a subscription model. Show the first ten events in a search and ask users to pay to see the rest. Or allow the users free use of the site a few times every month and ask them to pay to use it more often. These don’t sound very promising, but there’s only one way to find out – test it.

We already know that a subscription model for the other party isn’t going to work, or rather we’re assuming it won’t because it didn’t for Zvents. I’m trying to think of a freemium model for Zvents but I can’t think of anything that an event organizer might want from the site apart from simply posting events. Perhaps other sites might find a freemium model useful.

The fundamental problem is, people pay for value, and value can mean different things for different people. A few event organizers feel that paying a fee for sponsored placements is worth the value they receive. Other don’t think paying anything at all is worth the value they receive from posting a site. So if you’re site in its most basic form isn’t providing enough value, then you need to add something that does.

Here’s where a cross-selling model comes in play. A site like Zvents could develop ticketing and booking software and cross-sell that to event organizers. Or maybe acquire a furniture or catering company and cross-sell those services.

Take Udacity for example. Udacity offers free online courses from top universities to anyone in the world. The professors make these videos on their own time so they aren’t going to pay to put it up. On the other hand the videos are incredibly valuable to students, yet students don’t have the money to pay for them so Udacity can’t monetize that way either. So they offer additional services built around this, such as conducting proficiency exams for a fee, or connecting top students to hiring companies for a commission.

Every site can find its own way to increase margin. See who interacts with your site, find out how you can increase value to them, and come up with a way to monetize that value. You just need to think out of the box. And if all else fails, just grow the site as large as you can and sell to eBay!

If you can think of other models to monetize the marketplace, I’d love to hear them.


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