One online marketplace model that has been gaining popularity in recent years is the subscription-based model used by companies like Spotify and Netflix. According to a report by Zuora, the subscription economy has increased by 435% in the last decade.
So, is the subscription-based model the best for your new online marketplace? In this article, we’ll look at how this model works, its benefits and drawbacks, and how you can set up your subscription-based marketplace.
How the Subscription-Based Marketplace Model Works
A subscription-based marketplace model is one where the marketplace charges users regular fees to access the platform. For instance, when you sign up on Netflix, you pay a monthly fee to access the content on the website.
The allure of a subscription-based marketplace is that it makes life easier for users by giving them access to a database of clients, suppliers, or content in exchange for a small, regular fee. This model works best when the marketplace doesn’t want or doesn’t have the resources to facilitate direct transactions between users.
For example, when you sign up on Spotify, you don’t directly pay an artist to stream their music. Instead, you pay Spotify to access all the music on their platform, and Spotify figures out how to pay artists. In contrast, on marketplaces like Upwork, the client pays the contractor directly, and Upwork takes a portion of the payment as a commission.
The subscription-based marketplace model is also great for business models that don’t involve exchanging money between users. A good example is dating sites. Since users don’t transact between themselves, the platform simply charges them a subscription fee in exchange for easy access to potential dates.
Pros and Cons of a Subscription-Based Marketplace Model
Setting up a subscription-based marketplace offers several advantages. Here are a few:
More Predictable Revenue. One of the best things about a subscription-based model is that you can easily predict how much money will come in over the next couple of months. This predictable revenue makes it easier for you to forecast and plan your finances. It also helps to attract investors because they have a solid idea of the money coming in.
Helps Attract More Clients. Most subscriptions are relatively cheap. Instead of paying $1000 to access a platform, you can pay just $20 per month. Additionally, if you find the service isn’t working for you after a few months, you can cancel the subscription. With a one-off payment, you’ll lose the entire amount if the trial period has expired. This offers reduced barriers to entry and makes subscriptions more attractive to clients than a one-off payment.
Higher Customer Lifetime Value. With other models, like a commission-based marketplace model, you’re not assured that a customer will return after the first transaction. You must constantly invest in customer acquisition to keep your business running.
With a subscription-based model, on the other hand, you keep regularly earning from the same client, so over time, you end up making more from that one client. Additionally, you don’t need to invest as much in customer acquisition to keep your business going.
Potential for Untapped Markets. Some of the most successful subscription-based marketplaces disrupted their industries and tapped into previously ignored potential. For instance, before Spotify, people had to pay higher prices to purchase music on iTunes. Plus, the costs added up pretty quickly if you were constantly listening to new music. The subscription model revolutionized this by giving users unlimited access to music at just a small monthly cost.
Similarly, by embracing the subscription-based marketplace model, you could easily stumble upon a new, unexploited market.
Despite its many benefits, it’s not all smooth sailing with the subscription-based model. Some of its drawbacks include:
Difficulty Maintaining Value. Subscribers will keep paying for as long as you provide them with enough value. For instance, Netflix maintains value by constantly adding new movies and TV shows to its library. Therefore, you have to find a way for users to justify their investment in the monthly subscription.
Contract Nerves. People are usually nervous about getting into contracts that require regular payments. While the reasons for this vary, it can make the subscription model less attractive compared to other models like a commission-based model.
Difficulty Attracting Early Adopters. In cases where value comes from users, the subscription-based marketplace can sometimes be prone to the chicken-and-egg problem. Let’s say, for instance, you’re setting up a freelance jobs marketplace where clients and freelancers can meet and collaborate on projects. For clients to pay a subscription to the platform, they need proof of high-quality freelancers on the platform. However, for such freelancers to pay to join the platform, they need proof that there are high-quality clients. This could end up creating a catch-22 situation.
How To Start Your Own Subscription-Based Marketplace
Launching an online marketplace isn’t difficult or expensive. You can launch your online marketplace for as little as $5,000. Here are the steps you need to follow to open your subscription-based marketplace:
1. Pick Your Product/Services
The first step is deciding on the products and services your marketplace will offer. This has a massive impact on the success of your business, so you need to do thorough market research before settling on a product or service.
Here are a few examples of viable ideas:
- A marketplace for digital content, such as photos, themes, music, or eBooks
- A marketplace for freelance work, such as graphic design, content writing, or virtual assistance
- A dating website
- A marketplace to connect eCommerce sellers with dropshipping suppliers
2. Choose the Right Platform
After deciding on the kind of marketplace you want to build, the next step is to choose the right platform to build your marketplace. While there are many multi-vendor marketplace software platforms to choose from, we recommend going with CS-Cart combined with the Recurring subscriptions add-on. CS-Cart was named the leading marketplace software in the G2 2022 Fall Report. And we also offer free business education on how to start and grow a marketplace.
You should also ensure that your marketplace platform has good invoicing software that comes with crucial features such as the management of recurring billing.
3. Set Up Your Subscriptions
A good marketplace software platform makes it easy for you to set up access restrictions and recurring payments for users and manage renewals and cancellations. Here, you must get the price right. Charge too much, and you won’t be able to attract users to your new marketplace. However, if you charge too little, you won’t make any money.
4. Track Your Progress
The work isn’t done once you launch your subscription-based marketplace. Businesses operating on this business model are highly prone to customer churn. According to Gravy Solutions, subscription businesses have an overall churn rate of 6.12%.
If you want to keep your business going, you have to keep tracking your progress to see how you’re faring and to learn the things that keep subscribers and those that contribute to churn. Whenever a customer cancels their subscription, always ask for feedback. You can then use insights from this feedback to improve your business and provide a better experience to both new and remaining subscribers.
The subscription-based marketplace model is one of the most popular business models today and with good reason. It gives your business predictable revenue, is attractive to customers, delivers higher customer lifetime value, and gives you access to untapped markets. If you’re planning to start your online marketplace, you should consider setting it up based on the subscription model.