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.
– Unlike commission-based marketplaces that earn money from individual transactions, subscription marketplaces rely on recurring memberships, making revenue more predictable and increasing customer lifetime value.
– The success of a subscription-based marketplace depends on delivering continuous value, minimizing churn, and giving users compelling reasons to renew their subscriptions over time.
What is a subscription-based marketplace?
A subscription-based marketplace is an online platform where buyers, sellers, or both pay recurring fees—monthly, quarterly, or annually—to access products, services, content, suppliers, customers, or marketplace features.
In a commission-based marketplace, the platform earns revenue only when transactions occur. In a subscription-based marketplace, revenue is generated regardless of transaction volume as long as users continue paying for access.
Most subscription-based marketplaces use one of three models:
- Buyer subscriptions — customers pay for access to products, services, or content.
- Seller subscriptions — vendors pay recurring fees to list and sell on the platform.
- Hybrid subscriptions — both buyers and sellers pay recurring fees for marketplace access and benefits.
Examples of subscription-based marketplaces include Spotify, Netflix, Amazon Prime, subscription box platforms, professional communities, and supplier directories.
| Feature | Subscription-Based Marketplace | Commission-Based Marketplace |
|---|---|---|
| Revenue model | Recurring subscriptions | Percentage of each transaction |
| Revenue predictability | High | Depends on transaction volume |
| Main KPI | MRR, LTV, Churn | GMV, Take Rate, Revenue |
| Customer relationship | Long-term | Transaction-focused |
| Revenue when no transactions occur | Yes | No |
| Examples | Spotify, Netflix, Amazon Prime | Upwork, Fiverr, Airbnb |
How the Subscription-Based Marketplace Model Works
In a subscription-based marketplace, users pay recurring fees in exchange for continuous access to products, services, content, suppliers, customers, or marketplace features. Instead of generating revenue from individual transactions, the platform earns recurring revenue through monthly or annual subscriptions.
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. A subscription marketplace operates on this principle, ensuring users receive continuous access to products or services in return for a recurring 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 the platform, and Spotify figures out how to distribute revenue to 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 well suited to business models that don’t involve direct payments between users. A good example is dating websites. Since users don’t transact between themselves, the platform simply charges a recurring subscription fee in exchange for access to potential matches and premium features.
You can also apply this model to dropshipping marketplaces, supplier directories, professional communities, or content platforms, where access to suppliers, customers, content libraries, or premium tools is provided through a subscription.
For a subscription model to succeed, users must receive ongoing value. This can include access to exclusive content, supplier networks, premium tools, curated products, industry expertise, or membership benefits that would be difficult to obtain independently.
The model prioritizes recurring relationships and predictable revenue over one-time transactions.
Pros and Cons of a Subscription-Based Marketplace Model
Pros
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, just like 409A valuation providers need to know. Because revenue is recurring, subscription-based marketplaces often track metrics such as Monthly Recurring Revenue (MRR), Customer Lifetime Value (LTV), and churn rate to measure long-term business health.
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.
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.
Cons
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.
Wrapping Up
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.
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FAQ
What is a subscription-based marketplace?
A subscription-based marketplace is an online platform where buyers, sellers, or both pay recurring monthly or annual fees to access products, services, content, suppliers, customers, or marketplace functionality.
How does a subscription-based marketplace make money?
Subscription-based marketplaces generate revenue through recurring membership fees, seller subscriptions, premium access plans, or hybrid monetization models that combine subscriptions with commissions.
What is the difference between a subscription-based and a commission-based marketplace?
A commission-based marketplace earns revenue when transactions occur and typically takes a percentage of each sale. A subscription-based marketplace earns recurring revenue from membership fees regardless of transaction volume, as long as users continue paying for access.
What are examples of subscription-based marketplaces?
Examples include Spotify, Netflix, Amazon Prime, subscription box marketplaces, professional communities, supplier directories, dating platforms, and some dropshipping ecosystems.
What are the advantages of a subscription-based marketplace?
The main benefits include predictable recurring revenue, higher customer lifetime value, lower dependence on constant customer acquisition, and the ability to build long-term customer relationships.
What are the biggest challenges of a subscription-based marketplace?
Common challenges include maintaining ongoing value for subscribers, reducing customer churn, attracting early adopters, and convincing users to commit to recurring payments.
How do you start a subscription-based marketplace?
To launch a subscription-based marketplace, you need to choose a niche, validate demand, select marketplace software that supports recurring billing, define subscription plans, and continuously monitor metrics such as MRR, customer lifetime value, and churn rate.
Yan Anderson is the Content Marketer at CS-Cart with over 10 years of experience in the eCommerce industry. He's passionate about explaining complicated things in simple terms. Yan has expertise in building, running and growing eCommerce marketplaces.
