Pricing is one of the classic “4 Ps” of marketing (product, price, place, promotion) and one of the key elements of every B2C strategy. As an online marketplace entrepreneur, creating a pricing strategy is the most critical decision you will have to make. In this article, we will understand the process to create the right pricing strategy for your marketplace.
Setting Pricing Strategy in Online Marketplace
As an online 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.
Every Marketplace needs to decide what is the rake it 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.
When you are creating a pricing strategy for your online marketplace, you need to consider the following 3 points:
Analyze what competitors 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 competitive pricing strategy.
- Create a pricing strategy and execute the plan.
Once the pricing strategy is to create and implement, 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.
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 has a huge difference in their marginal costs.
Network Effect: Network effects, which are also called demand side economies of scale, result when a product or service becomes more valuable as a function of the more people use it. It will be interesting to see how this relationship plays itself out in the real world.
Lyft prides itself on being the preferred option for drivers. It encourages its drivers to engage with riders and has a tipping feature that brings in more income for the drivers. There are a lot of informational effects among drivers that lead more drivers to turn to Lyft, and this leads to an increase in the number of riders that choose Lyft due to the corresponding network effects. However, Uber has a reputation for being the smoother, preferred ride amongst riders. This leads to more riders choosing Uber, which leads to more drivers driving for Uber to reduce wasted time.
Providers differentiation: 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.
Booking.com first took over the market with low pricing, but then started offering paid promotion services that increased take rates. When prices go up due to bidding and competition, the suppliers blame their competition, not the platform.
Transaction Value and Size: 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 operating 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 homestays 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.