Determining the right marketplace pricing is a crucial decision that you need to make, particularly when it comes to commission or subscription based models. You must figure out the optimal commission percentage, as this will significantly contribute to your overall revenue.
It is important to note that there isn’t a “one size fits all” solution when it comes to marketplace pricing strategies. What may be effective in one sector may not be suitable for another. As a result, it’s essential to examine various factors to determine the ideal pricing strategy for your unique situation.
When you look at current examples of marketplace pricing, you will find that service marketplaces like Airbnb charge fees to both hosts and travelers. Property owners pay a 10% commission, and guests pay only 3%.
However, when you look at a product based marketplace, such as Etsy or Amazon, the commission rates range from 3.5% to 15%. Rental marketplaces seem to have even more variance, with commission rates ranging from 10% to as much as 25%.
How to set marketplace pricing
To establish the appropriate commission rate for your marketplace, you will need to consider a number of factors, including competition, marginal costs, vendor differentiation, network effects, transaction size and volume, quality versus quantity, and who is bearing the cost.
Through your research, you should have determined if your marketplace is the only channel that your vendors will utilise. If you cater to a niche market with no alternatives, you can charge more. However, if competitors exist, you’ll need to price your commission competitively. To attract users from rival platforms, you should either offer better value or lower fees while maintaining profitability.
One of the most important things that you will need to consider is the profit margins of vendors using your service. If they operate with small margins, set a lower commission; if their margins are high, you can charge more. You may also want to implement a sliding commission scale based on product type for marketplaces with varied marginal costs.
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 sales.
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. The stronger the network effect, the higher the commission you can charge, particularly if your offering significantly surpasses your competitors.
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.
Quality vs. quantity
There are 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.
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.
Ideally, your marketplace will be the go-to place for people to do business. A good rule of thumb is to take as little as you need to remain sustainable. Start by considering a 10% commission, and then adjust it based on the factors discussed above. If your percentage is too high, it may be passed on to your customers, and you could price yourself out of the market.
Keep in mind that you can adjust your marketplace pricing if you feel the need to optimise it further. However, it can be challenging to justify a price increase, so if you’re uncertain, it’s better to start with a higher rate and lower it if necessary.
If you’re concerned that starting with a high price may deter potential vendors, be transparent about any introductory offers and specify that they will expire at some point, after which prices will rise. By doing so, you can test the market and make any necessary adjustments to your pricing strategy as your marketplace evolves.