As a Marketplace Entrepreneur, creating the pricing strategy is the most important decision you will have to make. In this article, we will understand the importance and process to create the right pricing strategy for your marketplace.
Hi Entrepreneur! In our last article, we discussed the importance of understanding the cost of building your marketplace, various types of cost that an online marketplace could incur and eventually some ways of managing costs to build a lean online marketplace. In future, we will also be discussing how to build a lean online marketplace model which will enable you to launch your marketplace as soon as possible.
The cost of your online marketplace provides a preliminary benchmark to set your pricing for the marketplace. As a marketplace owner, pricing is one of the most important decisions you will have to make; the right pricing strategy is a make or break for most marketplaces. This is even more important in the initial phases when you are trying to attract customers onto your platform
In a casino, for every game that is dealt, the house keeps a small part called the ‘rake’. This rake takes care of the operating costs of the casino. In other words, it is the revenue for the casino. Every Marketplace needs to decide what is the rake it is going to keep for every transaction on the online marketplace. Most people think, for established marketplaces, the commission can be very high, while for new marketplaces, it must be very low. Industry experts think otherwise. Like revenue models, the pricing strategy differs from business to business and there is no ‘one-size-fits-all’ formula.
Let’s look at some of the key influencers that impact your pricing strategy and some ways to create your own pricing strategy that suits your marketplace business.
Key Influencers That Impact Pricing
- Marginal Costs: The most important influencer in your pricing strategy are the marginal costs for products and services on your marketplace. One cannot take out much rake from commodities or services that already have a very low margin. For eg: Suppose a marketplace for food services. The food and restaurant market is already very competitive, thus business owners work on low margins to attract customers with lower prices. It becomes very difficult to earn a rake from that low margin. Also, a service provider for Home Services vs Real Estate have a huge difference in their marginal costs.
- Network Effect: In Economics, Network effect is a phenomenon wherein increased numbers of people or participants improves the value of a good or service. In a marketplace, the cross-effect of network makes the marketplace more valuable for customers with the inclusion of every seller and vice-versa. With more business on the platform, you can collect more rake from each transaction.This effect however is good only up to a certain limit. A lot of choices on the marketplace creates choice overload. This effect creates a negative user experience on the marketplace. For instance, you are running a marketplace for clothes. Up to a certain limit growing number of sellers will attract more customers. But after sometime, users will be confused with choices and eventually stop visiting to the marketplace.
- Unevenness in Providers: As discussed earlier, it is not possible to have a similar business model for all providers. On the same lines, you cannot have a similar pricing strategy for all providers. A marketplace that aggregates local sellers may want to charge per successful transaction but a marketplace that aggregates insurance sellers cannot charge a commission on the transaction on the platform. The lifetime value of an insurance provider is often capitalized off-the-platform.There is also a differentiation between sellers on the same platform. If you charge a high performer on your marketplace as much the low performer, the latter may not see enough value on the marketplace and drop out.
- Transaction Value and Size: In continuation to the previous point, the transaction size and amount plays a huge role when deciding the pricing strategy. The percentage of rake you collect per transaction decides the perception of the providers on your platform. If they think, you are charging too much for the value you provide, they will drop out.
- Horizontal vs Vertical Marketplaces: The kind of marketplace you operate on impacts the pricing strategy. If you are operate a horizontal marketplace, the pricing strategy will vary as per categories and sellers. If the marketplace is vertical, then there will be differentiated pricing in the offerings of the providers. For Instance: Airbnb deals in rental home-stays but the kind of offerings of every host differs. This will in turn impact the pricing strategy. The quality also makes a lot of difference in customer experience and thus the pricing strategy
In addition to the above key influencers that impact pricing, competitors and market are two other things that influence pricing. The impact of these is however, dynamic and more short term than long term. Thus, one needs to handle them differently.
When you are creating a pricing strategy for your online marketplace, you need to consider the following 3 points:
- Analyse what others are doing: If you are a new player in the market, it is often suggested to look at what others in the market are doing. One does not simply imitate the pricing strategy but takes inspiration from other businesses. If it worked for them, you could always learn from it.
- Understand who to charge: In a marketplace, there are two sets of customers. It is important to understand, who to charge in any transaction. For Instance: A Marketplace for Goods would charge the sellers for every transaction but a marketplace for information sharing would charge the information seeker.
- Charge only what is needed: As discussed in an earlier article, in the initial phase it is important to create a customer base and there needs to be a focus on creating a lean model. Thus, only charge enough to carry out necessary operations.
The process to create a pricing strategy for a marketplace are defined in the following steps:
- Determine your business goals.
- Conduct market pricing analysis.
- Analyze your customers.
- Profile the competition pricing strategy.
- Create a pricing strategy and execute the plan.
Once the pricing strategy is create and implemented, it is essential that the reaction of the customers is monitored continuously. If there are any external influences, you should change the pricing to suit the change. It is okay to change your pricing strategy once in a while. But it is imperative that one pays attention to basic rules of economics like Price stickiness. It is difficult to increase the price of any offering drastically. If you want to eventually increase prices, one safe way is offering products and services at a certain short-term discount on complete list price.
Well, I hope the article helped you get an overview on setting the right pricing for your marketplace. The most important thing is trying it out. Unless you try, you will never know.
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