Back in the late 1990s, Expedia and Travelocity, which were the online travel leaders in Europe, would charge over 30% for certain travel packages. But Booking.com, now owned by the Priceline Group, managed to win over more boutique hotels and travel providers by charging only a 10% rate. This pricing strategy gave Booking.com an edge over its competitors, allowing the site to offer a greater selection for their customers, thus making them the leader in online travel bookings.
Pricing strategy affects revenue, but also the incentive structure for the marketplace ecosystem. It makes most sense that you should charge as much as you possibly can, but levying too high a fee can drive customers and suppliers away and cause you to lose out to a competitor that offers a lower rate. A low starting fee encourages more suppliers to list their products or services in your marketplace and lets you have more to attract and offer your customers. The higher the perceived value, the more likely users will adopt it.
You can adopt Booking.com’s pricing strategy, but really there’s no one-size-fits-all formula for all marketplaces. In order for you to determine how much you should charge, you need to know the factors that affect marketplace pricing:
How much value does your marketplace provide?
You can justify higher prices if the perceived quality of your marketplace offering is higher. Your marketplace could be more valuable to your customers if there are more providers and users (network effect), more products and services, or if there aren’t any other firms with a similar offering. Insurance and curation of providers through background checks can also enhance the value of your marketplace.
Pricing can communicate the value your marketplace provides, but the tricky part is getting the users to see what they are getting for the fee.
What are your competitors doing?
See what others are doing, and make it better. Many service marketplaces, including Uber and Lyft, subscribe to the claim that 20% is the optimal commission, but as you can see in venture capitalist Bill Gurley’s table below, the rates really do vary.
Photo credit: Above The Crowd.
So how can you use this information to your advantage? Even if your marketplace has a narrow focus — considering that the cost of building a marketplace business has decreased with the availability of SaaS marketplace platforms such as Arcadier Marketplaces — it’s unlikely that your marketplace will have no other competitors.
Competitive pricing can help you gain market share and even disrupt a market leader. Gurley wrote, “A high rake will allow you to achieve larger revenues faster, but it will eventually represent a strategic red flag – a pricing umbrella that can be exploited by others in the ecosystem, perhaps by someone with a more disruptive business model.”
Photo credit: Slideshare.
Transaction size and volume
The way most people perceive it is that the bigger the total size of a transaction, the smaller the expected rate. This is seen as fair practice, and it could encourage customers to make bigger purchases. If transaction sizes vary a lot in your marketplace, you can consider what Airbnb is doing: Airbnb charges varying rates for guests, and the bigger the total transaction, the lower the commission.
Your providers’ marginal costs
Think about the kind of products that your providers will sell on your marketplace. In highly competitive businesses such as restaurants, profit margins are relatively low. If many different products or services are being sold through your marketplace, you can consider adopting eBay and Amazon’s approach: they charge higher or lower fees depending on the product category.
Target the most successful providers
Instead of relying on monetising smaller providers, some marketplaces take a higher rate from sellers that can afford it. Now that Booking.com is the go-to site for travelers, its average rate is higher as it allows merchants to bid for better placement. This gives Booking.com added revenue from competitive suppliers who want more exposure.
You may choose to follow in Booking.com’s footsteps as your marketplace grows, as Expedia has done and as Etsy did with its Premium Seller Services. In its freemium pricing model, Etsy offers paid premium services such as direct checkout, shipping labels and promoted listings.
Photo credit: Skift.
Supply-constrained or demand-constrained?
Each marketplace has its own set of demand and supply challenges. If you are supply-constrained or having difficulty signing on suppliers, you can place a lower fee on the provider and charge the customers more. Airbnb had a hard time convincing people to rent our their houses to strangers, so its system requires guests to pay 6-12% of the total sum, while providers are only charged 3%. Conversely, if you’re having trouble getting customers to use your marketplace, you can charge your providers more.
The general rule is to focus more on increasing the value of your marketplace instead of maximising profits from your customers and suppliers, which could cause them to look elsewhere. As Bill Gurley states, “High volume combined with a modest rake is the perfect formula for a true organic marketplace and a sustainable competitive advantage.
“A sustainable platform or marketplace is one where the value of being in the network clearly outshines the transactional costs charged for being in the network. This way, suppliers will feel obliged to stay on the platform, and consumers will not see prices that are overly burdened by the network provider. Everyone wins in this scenario, but particularly the platform provider.”