How do you create a winning marketplace pricing strategy? Here’s all you need to know about the BEST marketplace pricing models.
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Ever asked yourself, “What is marketplace pricing?”
You’ve come to the right place. Today, we look at exactly how to set up a marketplace pricing strategy that will attract and retain marketplace users.
Ready to dive right in? Here we go.
Why the success of your marketplace depends on your pricing strategy
Why is your marketplace pricing strategy so important?
A marketplace business is one of the most lucrative business models. After all, you as the marketplace owner don’t have to pay for inventory or use your time on performing a service. Instead, you provide a platform and get paid based on every transaction or as a direct payment to you. Once you start scaling your marketplace, your income grows exponentially.
That’s not to say that marketplaces are a piece of cake. According to Harvard Business Review, one of the main reasons marketplace platforms fail is because businesses fail to recognize which user base should get charged and which user base should get subsidized.
Not understanding how to price your marketplace could mean that your business gets beaten by all the competition out there. Take Sidecar, which was one of the first ridesharing services. It grew slowly and steadily without much outside funding.
You know what happened next… Uber and Lyft took over because they understood how to attract both sellers and buyers with their pricing strategy. Sidecar never became a household name like these ridesharing companies.
Or look at Etsy. It strategically priced its commission (before 3.5%, now 5%) lower than Ebay and other competitors (often 10%). For Etsy, it made sense to price its commission like this to position itself as a champion of creatives.
That’s why understanding your pricing strategy is so important. The success of your marketplace literally hangs on it.
Here’s how to choose the right pricing strategy for your marketplace.
Which marketplace pricing strategy is right for you?
Marketplaces have different pricing strategies based on things like their business model and competition. The most common pricing strategy is commission-based pricing, ie. taking a cut of every transaction. But because there are other options, we’ll take a quick look at all of them.
Different marketplace pricing models
What are the different marketplace pricing models? Here they are:
A commission consists of a chunk of the transaction price. Commissions are relatively easy to implement and one of the most common marketplace pricing strategies. Most bigger platforms ask for a commission, such as Airbnb, Etsy, and Upwork.
You might create different commission levels. Premium sellers might get a reduction on their commission or other perks. For example, Upwork offers different commission levels depending on lifetime project value. Airbnb offers different types of perks for its Superhosts.
You could charge a subscription, which would mean that people pay you every month to use your platform. The most prominent service that works with subscription fees (although it isn’t a full-blown marketplace) is Amazon Prime.
You can charge a fee for listings. For example, Etsy charges a listing fee for every product listing.
Your customers can pay an ad fee to get more visibility on your platform. One marketplace doing just that is Yelp, which lets businesses buy ad listings to get higher up in searches.
Your marketplace can operate on a freemium model. So your platform is free to use, but you offer extra services (like insurance or customer service) for free. This marketplace monetization model works best for marketplaces for free services or products (think: a marketplace that lets people borrow products).
How to decide on your marketplace pricing strategy
You might be wondering:
How do you choose the right pricing strategy for your marketplace?
Here’s the thing: You shouldn’t just “set and forget” your price. In fact, companies that win at setting their pricing strategy (and maximize their profits) actively monitor their strategy after they’ve implemented it.
But how (and if) you change your prices depends on where you are in your marketplace’s lifecycle. The different phases are: The launch phase, the midlife phase, and the late life phase. The key to success is to set expectations for your pricing model and then track your assumptions through every lifecycle.
In the launch phase, you need to decide on a pricing strategy that brings in the most value in the long-term.
In the midlife phase, your marketplace has gained stable market acceptance and is probably one of the leaders out there. This is when “me too” products pop up and you face a lot of price competition. At this stage, you should analyze your pricing carefully and start looking at pricing models that could disrupt your business.
In the last phase, the late life phase, you have loyal customers who are comfortable with a price hike thanks to the value your marketplace brings them. For example, this is what Upwork did. Once it had established itself as a leader in the freelance marketplace space, it increased its prices.
During each life cycle, you need to evaluate your pricing strategy and compare it to other strategies to figure out which pricing strategy keeps you competitive and maximizes your returns.
What you need to know about marketplace commission as a pricing strategy
Commission-based pricing is the most common and often the most profitable pricing strategy for marketplaces.
But how do you decide on how much commission to charge? That’s what we’ll look at now.
One of the main things you need to keep in mind when you set your commission is your sellers’ marginal costs. You see, if your sellers don’t make a big profit on their sales, you can’t take a big commission. However, if they do, you can increase your commission.
Take ecommerce products, like handcrafted items. It takes time to produce these products, market them, and ship them to buyers.
That’s why a marketplace like Etsy can’t charge a huge commission. Oh the other hand, a marketplace that sells digital products can take a higher commission because sellers don’t have to recreate the products or pay for shipping.
What does your competition look like? If your market is more crowded, you will need to take that into consideration when setting your commission.
What commission can you charge that’s competitive but doesn’t start a race to the bottom? After all, if you start charging a low commission, you can be sure that a competitor will charge even less. If you only compete on price, you won’t be in business for very long.
Another factor that impacts your commission pricing is the network effect. The network effect means that the value of your marketplace increases for your customers when you have more providers. So the bigger the network effect, the higher your commission can be.
However, the network effect doesn’t apply to all markets, like local marketplaces.
Think about it: Customers who travel appreciate a lot of options at different prices and so Airbnb becomes a lot more valuable than a property rental website with 20 listings. But when a customer needs transportation within a city at the exact same price, it doesn’t really matter if a site has 20 drivers or 100 as long as both sites do an equal job in terms of offering transportation.
Different marketplace commission examples
So, as you can see, your marketplace commission depends on your specific marketplace. Curious to see a few marketplace commission examples?
Here you go:
Airbnb (vacation rentals) - Hosts are charged 3% of the rental price and guests are typically charged 13% plus taxes and charges.
Etsy (handcrafted goods) - $0.2 as a listing fee and 5% as a transaction fee.
Ebay (ecommerce) - Ebay’s commission depends on the type of product and it ranges from 2%-12%. Ebay also charges listing fees depending on the product category. Some of them are free and cost $0.35/listing after 50 listings, and some listings cost $20/listing.
Upwork (freelance platform) - Upwork charges 5-20% of the project rate from freelancers, as well as a $0.15 per project proposal.
Rover (pet care) - Pet sitters are charged 15-25%. Pet owners are charged a service fee of up to $12.
TaskRabbit (miscellaneous tasks) - The service fee is 15%.
Want to get started building your marketplace business?
There you have it. Now you know how to decide on your marketplace pricing strategy. What it comes down to is evaluating the different pricing models, making projections about your pricing strategy, and then following up on it over time.
Want to get started earning money from your marketplace? You need a marketplace platform that makes it easy for you to set up your payment plan.
Our own marketplace builder, Kreezalid, lets you set up your payment solutions right away with two different payment solutions that are tailored for marketplaces, Stripe Connect and Mangopay.