Your marketplace pricing is one of the most important decisions you need to make. Primarily this is true of the marketplace commission model where you’ll need to work out the appropriate amount of commission to take. After all, it’s that figure that will add up to make your revenue so you need to get it right.
There is no ‘one size fits all’ here, one marketplace pricing strategy may work well in one market, but be totally unsuitable for another. So let’s go through the variables to help you decide on the pricing strategy that works for you.
If you take a look at some current examples and how their marketplace pricing works, service marketplaces like AirBnB charge fees to both the hosts and the travellers. The property owners pay a 10% commission from the received amount of money and the guests pay only 3%.
But if you take a different sort of product based marketplace, such as Etsy or Amazon, they range from 3.5% to 15%. And rental marketplaces seem to have even more variance from 10% to as much as 25%.When working out what your marketplace commission rates should be you need to consider a number of factors. These are competition, marginal costs, vendor differentiation, network effects, transaction size and volume, quality vs quantity and who is paying the bill.
- Competition
- Marginal costs
- Vendor differentiation
- Network effects
- Transaction size and volume
- Quality vs. quantity
- Who is paying the bill?
1. Competition
Through your research you should have worked out if you are the only channel that your vendors will utilise. This is likely if you have a very niche market because no one else will be catering for them, and if that is the case, you’ll be able to charge more as they don’t have an alternative. Going back to our recommendation to keep your market as narrow as possible, this is another good reason for doing that.
Chances are though, competitors will exist and you will therefore need to price your commission accordingly. People are unlikely to switch from a competitor to you if you are more expensive and untried. If you’re trying to compete with an existing successful marketplace, or even the marketplace leader, you either need to offer a service that provides better value for your customers, or have lower fees. If you can do either of these and still operate successfully and profitably there is room for your marketplace.
2. Marginal costs
One of the most important things that you will need to consider! If the vendors using your service are already operating on small margins, you’ll need to set your marketplace commission accordingly otherwise you’ll price yourself out.
If profit margins are high for the vendor you’ll be in a position to charge a higher commission too. It might be that your proposed marketplace has very different types of products with varied marginal costs and in that scenario you’ll want to consider a sliding scale of marketplace commission rates depending on the product type.
3. Vendor differentiation
Not all vendors are created equal, some will make lots of sales, some few, some high value and some very low. For those reasons, you might want to consider having a different marketplace pricing strategy for different vendors. Or perhaps offer added value to those who turn over a high volume of sales. An example of this would be Airbnb offering their superhosts benefits such as travel coupons. This both encourages loyalty and incentivises increased sales.
Other platforms offer paid for premium services. This means they can keep their base commission low but higher volume sellers have the option to pay extra for things like promoted listings and postage labels.
4. Network effects
Obviously if a marketplace has a large number of vendors, that is seen as more beneficial to customers and is known as the network effect.
A really good example of how this allows marketplaces to keep commission high is istock (or similar photo sites that sell the rights to use stock photography). The more photos that are available the more traffic the site will see, particularly as the searches can be so varied, the breadth of options needs to be available. A site with few photos may charge lower commission, but won’t be used because of the lack of choice limiting the number of customers.
Not all marketplaces are able to fulfil this network effect, but the stronger you can make it, the more commission you can charge, particularly if your offering is much bigger than your competitors.
5. Transaction size and volume
Vendors want to know that they are getting value in return for your commission when your marketplace facilitates a transaction for them. As your marketplace pricing is effectively money being extracted from each sale they make, they need to be comfortable with it.
Because it’s possible (depending on your marketplace) that the value of transactions will vary, you need to consider whether you need to scale your commission accordingly. Paying 20% on a £20 sale is very different to 20% on a £200 sale.
When starting your marketplace, consider carefully how you can make it a sustainable business. By working out your figures based on potential transactions within a particular time period, and what the transaction size is likely to be. By doing this you should be able to come up with your optimal marketplace pricing strategy.
If you are operating in an area where there is a lot of competition, keeping your pricing low may be necessary. But as long as you have enough people completing transactions, low pricing won’t have to equate to low profits.
6. Quality vs quantity
There’s two groups of people you are trying to give value to, vendors AND customers. The more value you provide, the more people will be attracted to your marketplace platform over others, and ultimately, the happier they’ll be to pay a higher price.
Make sure you clearly communicate the added value that you are offering. For example, offering a service where you check a vendors’ credentials before they are allowed to list. This will give confidence to customers and build a reputation of quality.
This leads to the quality vs quantity question. Ideally you will have both, but initially you need to work out if you’re going to get as many vendors on your platform as possible, or whether you’re going to be really selective with who goes on there. If you go for the first option you’ll want to encourage as many people as possible to use you and will need to keep margins low. If the second option, you’ll need to communicate the value that you’re providing to justify your prices being higher.
7. Who is paying the bill?
Going back to the fact that you are dealing with two groups of people, while money earned is going to be split between you and the vendor (to whatever degree you have deemed appropriate), how the customer perceives this plays a big part. The vendors will want to be on a marketplace platform where there are a great many customers.
A good rule of thumb is to take as little as you need to remain sustainable. Perhaps start off considering a figure of 10% and then go through each of the headings discussed above and tailor that 10% up or down accordingly. If your percentage is too high, this will be passed on to your customers and you may price yourself out of the market. Ideally, you’ll want your marketplace to be ‘the’ place that people want to do business.
Conclusion
Bear in mind, you are allowed to change your mind if at any point you feel like your marketplace pricing needs ‘tinkering’ with to reach its optimum level. That said, it can be quite difficult to justify a price rise, so if you’re unsure, err on the side of higher and then bring It down if you need to.
If it makes you nervous to start high for fear it will put off potential vendors, be very clear that a lower price is an introductory offer that will run out at some point, and after which prices will rise.