07/12/2016
How to set pricing in your Marketplace
Erin Thompson Erin Thompson

Pricing is one of the most important decisions you'll have to make if you are a marketplace owner, especially if you use the commission model. What exactly should you set as the size of your commission


"The highest you can" might be the next thing that comes to your mind when that question is asked but the thing is, the real answer might be the exact opposite of what your answer is. Note that just like other business models, there is no particular pricing strategy that works for all marketplaces. Below are some of the things you things you need to consider, that will help you in choosing the correct strategy based on the concept of your marketplace.



HOW OTHERS SET THEIR PRICING


Let's check out what others are doing so as to determine a baseline for pricing. A lot of service marketplaces like Fiverr and Uber have let their pricing remain on the 20% spot. There are some who even think the 20% commission is perfect for most new marketplaces.


Now in product marketplaces, there's an entirely different strategy set up here. Etsy is very much on the lower end, setting up a commission of just 3.5% while Amazon and EBay are stuck on 10%. In rental marketplaces, there seem to be some sort of variation; Airbnb's commission is just 11% on average while RelayRides -which is now Turo- has as much as 25% set as their own commission.



WHAT ARE SOME EFFECTS ON PRICING



Cost Margins

One of the most important factors affecting the marketplace pricing is marginal costs. Whether your marketplace is included or not, if your marketplace provider has got thin profit margins, there's no way you can expect to take much out of it. Let's take OpenTable for instance, they are a table booking service which has restaurants as their providers. Most of the money from each order is used for the salaries of the restaurant personnel, the space rented by the restaurant, the ingredients used in preparing the meal and other costs. The restaurant business is very competitive which makes profit margins very thin and provides little room for OpenTable to work in. Etsy can also be used as an example; they are a lot of sellers which makes competition very high and that in turn makes the profit margin very low.

Now, let's consider the photo stock market or let's say the digital stock market in general. Once you've produced digital media you can sell it repeatedly at no extra costs.

It is know that the photographer owns 30% of the profit every time an item is sold. If the marketplace you are involved in sells different types of products that have great variety in their marginal costs, you might want to consider different commission for different product categories. Examples of marketplaces that do this are Amazon and eBay. Determined by the category of the product, Amazon's fee range from 6% to 45%.



Who is Competing?

The different channels through which your providers distribute their goods and services is another big factor to consider. If you have a small enough niche which nobody is attending to -for now-, you might be their only channel for that niche. This will give you the opportunity to charge more for offering the marketplace. This is one good reason why you should have a birds eye focus especially when you are just starting out.



However, the more likely case in which you can find yourself is that there are other existing channels, which will make you create a competitive environment. OpenTable for instance; when they started out, the restaurants already had customers coming in from different channels, some of which came at no cost, so OpenTable had to set extremely competitive low prices.

Etsy too was in the same condition when they first started out. Most of the sellers were already registered with Amazon or eBay so Etsy had to set their price to only 50% of what its competitors were offering which made it attractive to sellers. While Etsy fees are currently low, there's still a chance for competition to take on it as it is facing a lot of pressure from its shareholders who are demanding an increase in profits and commission rates. By focusing on a smaller piece of the market, targeting the best value proposition for your providers, and charging much lower fees, you may be in the running.

How Taobao beat eBay can be used a great example of how low pricing can be used to interupt a marketplace. If you are competing with a pioneer like eBay and Etsy by trying to attract their sellers to your website, you either need to provide more value or charge lower fees.



Word-of-mouth Effect

A marketplace benefits from the network effect if having more providers makes the marketplace more desirable for customers. This is why stock photo sites have been able to keep their commissions higher. A stock photo site becomes much more useful to a customer when the inventory increases, especially since each offering on the site is unique. Also, since stock photos are generally needed for very industry specific topics, customers will migrate to the websites with the biggest selections. From the outside, it might seem that all marketplaces benefit somehow from the word of mouth network effect, perhaps that is true. If the marketplace can always surpass the expectation of a customer with a specific number of sellers, then there is no added benefit to increasing the number of sellers. In a nut shell, the more powerful the benefit from the word of mouth network effect, the higher you can set your commission —as long as your network is large enough.



What makes the providers so different?

Most marketplaces are far from ideal competition in real life. There are many various types of providers; some are experts with a lot of transactions daily while some make profits once or twice a year. This brings up an intriguing question, should you set the same pricing for all providers?

Diverse commercial centers have taken distinctive techniques for this. eBay offers advantages to individuals who make a lot of sales: while the base charge is not lower, power sellers are granted less expensive delivery, unpaid item assurance and limited time offers. Airbnb offers its super hosts perks like travel coupons and priority support. The thinking behind these projects is unmistakably to urge individuals to offer more, and to hold the best suppliers on the stage.



Etsy has taken an alternate technique. It offers paid premium administrations, for example, direct checkout, shipping marks and advanced postings. These administrations are particularly focused on towards the stage's premium dealers. Some experts in the field would  call this the freemium model for marketplace value pricing. By depending less on adapting the smaller merchants, the stage guarantees that these little dealers can bear to remain focused stage and contribute their tricky and extraordinary stock that Etsy purchasers need. Etsy then takes a higher rate from the enormous dealers that can most manage the cost of it because of their scale."



Transactions, how big and how many?

Pricing is about brain research. The one measure your suppliers truly think about is the number of cash you're removing from every exchange. On the off chance that they see it to be high, they will get to be suspicious.

Suppliers' wariness does not necessarily need to specifically correspond with commission rate. The greater the aggregate size of an exchange, the smaller the normal rate. In general, individuals see the marketplace to give certain quality by encouraging an exchange, and frequently individuals feel that the help of two exchanges worth $50 each was more significant than encouraging one exchange worth $100. All things considered, the marketplace accomplished more work for them there. Fiverr charges a 20% commission, however since a regular exchange size is just $5, it doesn't sound that enormous: it's after all just $1 per exchange.



On the off chance that exchange sizes shift a great deal in your marketplace you have to consider whether having the same expense for all exchanges bodes well or not. Airbnb's rates for guests vary from 6 to 12 percent based on the span of the aggregate exchange. The higher the aggregate total, the lower the commission. Along these lines Airbnb urges clients to make greater buys.

As a marketplace owner, you have to fabricate a sustainable business model by assessing your business sector closely: what number of potential exchanges would you be able to hope to get in a month, and what do you expect the aggregate exchange size to be? You can use a spreadsheet exercise by playing around with the diverse variables to locate the ideal value point for your own niche marketplace.

If you feel that your business sector is tremendous, you will presumably have more rivalry. This additionally implies you will probably need to keep your valuing low.



Quality and Quantity.

The way to keeping exchanges in your platform is to give however much esteem as could be expected for both sides of your marketplace. The measure of quality furnished normally connects unequivocally with your valuing. On the off chance that you give more esteem, the apparent nature of your offering is higher, which legitimizes higher costs. The better you are at conveying the high caliber of your offering to your clients, the simpler it is to charge more.



A decent case of how to give extra esteem—and therefore build quality—is with protection for rental marketplaces. In the event that the website is safeguarding the leased thing, it is simple for both the supplier and the client to acknowledge the cost identified with the exchange. They can unmistakably see what they are getting for the charge.

Confirming suppliers is another basic approach to improve quality. While a few marketplaces let anybody turn into a supplier, others minister the registration precisely, hand-picking every supplier and perhaps leading a record verification, or giving the clients the devices to do as such. This is particularly essential in a quality-escalated marketplace such as animal care, child care, dealing with the elderly, etc.



You have to choose whether you need to concentrate on amount—getting numerous suppliers to build your choice—or quality—curating your determination deliberately. In the last case, you're estimating ought to likely be higher to convey the worth you give, while in the previous case you have to keep your edges low to get whatever number individuals on board as could be allowed.

Some of the time both of these techniques can be connected to the same business sector. The reality of the situation will become obvious eventually which approach works best.



Start small and grow bigger

There are various components that influence the evaluating choice. As a straightforward structure, you can follow this pattern: begin from 10%, and after that investigate how your marketplace is situated as far as the seven components specified above. In view of that examination, change the rate.



Keep in mind that it's alright to change evaluating, and you most likely ought to emphasize on it as you go. Be that as it may, it's generally hard to raise costs, so beginning off with a higher cost and afterward lessening it if necessary is most likely a superior system than the a different way. In the event that you wish to get more supply in the first place by offering less expensive evaluating—which is regularly a smart thought—you ought to consider offering limited time rebates ("initial 6 months with half markdown on fees!"). It is essential to plainly convey that estimating will come back to ordinary levels after the underlying markdown period.





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