Business model · Revenue

What are commission-based revenue model challenges?

Frederic Moreau Agile Business Transformer

March 30th, 2015

When operating a recruitment platform for experts like Elance or O-Desk, a "pay-as-you-sign-a-deal" commission-based business model seems appropriate. Some take membership fees as well from the experts. What do you think makes more sense in terms of revenue model in this respect? What are the main challenges in executing those models? Have you heard of any innovative business model in this field? 

Brad Bertoglio Attorney and Senior Executive

March 30th, 2015

Think about what behaviors you want to incentivize in your users.  Is your biggest hurdle going to be building the expert side of your marketplace, or getting the best people deeply engaged?  I'll give you my own experience from the perspective of a service provider having participated in these types of marketplaces at the two extremes.  One is pure % of transaction, one is pure recurring subscription fee.  

For the pure % of transaction, it didn't take much convincing for me to join their network.  There was very little barrier there.  But I'm finding that platform to be my lowest priority.  If I'm slow or bored or I notice something particularly interesting come across, I'll pursue the project.  And then I'll still do whatever it takes to exceed expectations as a matter of professionalism.  But the % (which is significant in this case -- more than generic marketplace I think) significantly impacts my interest in working on their platform, and I am significantly less engaged in that platform.  I wonder if there is a bit of reverse incentive here that might eventually degrade the quality of the service provider network.  As the best service providers get busy and start getting referrals and other opportunities to work outside the platform (without fees), they are going to be a lot less inclined to participate in the commission-based platform.  Which maybe means you end up with more participation from people who are just starting their practices, or who are just not getting a lot of work for some reason.  

For the subscription fee, it was harder to convince me to join.  I ended up taking a significantly discounted rate to try it out.  But now that I'm in and its working, they've become a high priority.  I monitor their clients' needs regularly, and I respond instantly to opportunities.  I figure my investment is fixed, so I might as well get as much out of it as possible.  I also feel vested in their success, because the more work they can bring onto their platform, the better it is for me and the better the return on my subscription fee.

Not sure if it makes sense from the business' perspective, but from the service provider perspective, I've often thought it would be good if someone offered options.  E.g. let me join for free and pay a high % transaction fee to try it out.  If I like it and want to work a lot on your platform, offer options to commit to a monthly subscription fee in exchanged for reduced transaction fee.  

Peter] Peter Jones creates solutions for product USP, market messaging, team building, venture and other commercial capital

March 30th, 2015

This all sounds a bit like Maven? You might like to work out who your competitors are, and whether you will be able to stand out in the niche you want to target.

One thing People Per Hour do is to offer a breadth of opportunity. This may work where new work and variety is key, which could be why providers stay on the platform rather than build their own business channel.

But I do think that is inevitable, and a natural progression from a startup new to a marketplace, to someone with higher quality products and services who becomes a name or brand in a specific marketplace.

With the rise in niche marketplaces, we also now need to make sure we can be aware of those marketplaces.

Hope it helps...

Gopi Mattel General Partner. Lifeboat Ventures

March 30th, 2015

I can understand listing fee to be a barrier, but it helps make the partner commit to the business.
I recommend a nominal listing fee, enough to keep the casual people out, but not too burdensome.
The listing fee should also be meaningful to the service provider's country purchasing power in consideration.

it could be set as a proprtiion of expected revenue per partner but not exceed some psychological boundaries.

For example, if a server provider expects to make $20,000 in revenue using this service and the service provider is located in the USA, i would use the following formula:
 Listing Fees: 1% of expected revenue but not  to exceed $99 and not less than $19.

For convenience  i may have two levels of membership:
  One level at $49  and premier level at $99.

Gopi Mattel General Partner. Lifeboat Ventures

March 30th, 2015

@frederic, yes that makes sense to me.
15% seems completely reasonable for a strong channel of business.

As @brad mentioned, side deals where the service provider does business without going through you is going to be the biggest risk for revenue. Even if you have legal language in place, it is going to be hard to stop.  You have to figure out how to add value in every transaction so that neither party is likely to go outside your application. Example: guaranteeing provider service, providing arbitration, ranking of providers by number of pitches made, deals completed, etc.

Roger Wu co-founder at cooperatize, native advertising platform

March 30th, 2015

Amazon vs eBay ... Amazon marketplace takes more per transaction but that's "free" money versus eBay where while the per transaction may be lower the listing fee is a huge barrier.

Frederic Moreau Agile Business Transformer

March 30th, 2015

@gopi @brad Side deals is definitely a big risk I'm looking at. Thanks for your suggestions. 

Arbitration is definitely something I plan on using as the consulting field I want to tackle is complex. 

Another incentive for the expert is to build his/her reputation on the platform based on customer ratings but also number of assignments and $ amount. Experts will need to be vetted by at least 3 clients to be able to become a member.

Experts will also have the opportunity to be hired by clients to review offers made by other experts, like an advisory board if you like - another reason to keep on using the platform I hope.

Frederic Moreau Agile Business Transformer

March 31st, 2015

Thanks @peter I does help. 

I have analyzed the 6 direct competitors and they clearly position themselves on different niches, some more or less clear. 

Distribution is key indeed and I'm still working on this. 

My LinkedIn network enables me to reach 17% of the global LinkedIn population I'm targetting, so there is a lot a progress still to be made here and promotional efforts to get the value proposition in front of those eyes.

Frederic Moreau Agile Business Transformer

March 30th, 2015

Great feedback @brad. I see your point.

I'll have to think it over and see how to switch from a commission model to a flat fee model with the same client along the year. I understand your point though. 

Maybe an option would be to apply a decrease in % with the client based on the volume of dealsalong the year, e.g.  a 15% on the first $30,000 -- then 10% on the next $30K, etc...

What do you think?

Frederic Moreau Agile Business Transformer

March 30th, 2015

Thanks @roger and @gopi. I appreciate your smart feedbacks. 

Gopi, it happens that I plan on applying a $50 annual membership fee for an opportunity to win $50,000 of signed agreements, i.e. 0,1% - the purpose is to cover some of the cost to acquire, screen and approve experts, and avoid casual people to be listed - but I would take a 15% commission out of each approved deals for which payment will also be guaranteed within this commission cost.

Does this make sense to both of you?