If you are not new to the business world, you are familiar with the word broker. You have ever bought a product or service through one. Whether it is on the internet or physical sales, you will find a broker offering you a product or service. Brokerage is one of the many business models that companies and entrepreneurs use to generate revenue in their ventures.
However, you need to understand it before considering it as your formal business approach. Maybe you are asking: what is a brokerage business model? How does it work? Does it have some benefits and shortfalls? Keep reading to get answers to these questions lingering in your mind
What is the Brokerage Business Model?
Brokerage is a business model where a broker connects a seller and buyer, facilitates the transaction, and charges a fee for the service. Unlike the situation where a seller struggles to get a buyer from the market, the broker creates a bridge to connect the two of them. The brokers then charge a commission or fee for the task to either or both parties.
In other words, as a broker, you do not need to own products or be the service provider. Your role is solving the buyer and seller’s problem and receiving compensation. So, it is an easy model to implement for any entrepreneur. But how does it work?
How Does Brokerage Business Model Work?
As noted, the brokerage model involves three parties – the broker, seller, and buyer.
Seller
The seller can be an individual or company that is offering a given product or service. A seller is the creator of the product and services and offering them to the market. You as an entrepreneur might be seeking customers to buy the product or services. However, sometimes it is hard to get the right customers for your item. In this case, they contract a broker to sell the product by acting as the owner.
Broker
With the challenges the sellers face to get customers or buyers, a broker finds an opportunity. A broker acts as the middleman between the seller and buyer. Their role is to connect the two parties and facilitate the transaction. In most cases, brokers have insightful knowledge about the product market and where to find the right buyers and sellers.
Brokers usually have an agency or platform which consists of a database or act as the meeting point of the buyer and seller. But unlike an agent, brokers act as the buyers or sellers. So, you may not have an idea you are dealing with a broker. When the transaction is over, the broker gets a commission from the seller or buyer and sometimes from both.
Buyer
As a seller, buyers can be business entities or individuals. Their goal is to find a particular product or service from the marketplace. Sometimes, buyers have no idea about people offering search services. Or else, no knowledge on how to go about the buying process.
For this reason, they work with a broker who helps them in facilitating the transaction. The buyer can pay a fee to the broker. Sometimes, sellers account for the broker’s fee on their prices. So, buyers do not pay an additional brokerage fee.
Example of Brokerage Business
Brokerage is among the oldest business models. Brokers have been acting on behalf of buyers or sellers from the olden days in France and Italy. Today, the brokerage is the prevalent business model that many enterprises use in driving sales.
A good example of brokers is online marketplaces. Amazon and eBay are good types of the brokerage where customers buy products from different sellers posted on the marketplace. The two businesses get a commission for each sale completed.
Travelocity is another example of a business using the brokerage model. This company act as an agent of travel and hospitality companies. It facilitates air ticket and accommodation bookings. When the customers complete their transactions, they get a commission for the connection.
Also, brokers are common in the insurance and stock market industries. The company you consider as your insurer may only be acting on behalf of another. So, you might be dealing with a broker without your knowledge.
Pros and cons of Brokerage business model
Like other models that entrepreneurs use to drive sales, the brokerage has some benefits and shortcomings. Here they are:
Pros
Opportunity to work with many businesses
Brokerage is not a fixed business. You do not need to offer products of a particular company only. As a broker, you can work with numerous businesses in the area of your expertise. This aspect allows you to earn more revenue from your knowledge.
Also, you can make money from businesses by providing them with market insights. So, brokerage eliminates limitations on the number of businesses you can work with your agency.
Require little capital to start
No doubt, capital is a setback in starting a business. It is one of the reasons why people do not join the entrepreneurship wagon. With the brokerage business model, the case is different. You require zero or no capital to become a broker.
In fact, if you know a person looking for a given item and a seller offering it, all you need is to negotiate with the seller and facilitate the transaction. As such, no tough obstacle to becoming a broker.
Cons
Take high liability
As you know, the broker acts as the owner and not the agent. This aspect means that you are liable for everything that happens in the cause of the transaction. If the product sold is faulty, you will carry the burden and reputation of the services. Hence, you need to embrace high standards of operation and be ready to take liabilities of the transaction.
Conclusion
In a word, the brokerage business model is a superb way to try a leg in the entrepreneurship arena. The model does not require you to have a large capital. As long as you have some expertise in a given niche, you can become a broker.
All you need is to employ your knowledge in connecting a seller and buyer as well as facilitate the transaction. However, be aware of the high liability that you will carry which can hurt your reputation.
