Questions

What is the best pricing (business model) to apply to a marketplace?

There's so many different examples from Airbnb (12% host, 3% to renter), Uber (~15% to driver) to Craigslist (freemium w/ paid placement + posting) for pricing a marketplace. Is there a framework to follow when thinking through this model? Is there different pricing sensitivities per marketplace type (heavily curated vs. more open)?

7answers

Your business model is the difference between what the buyer is willing to pay, and what the seller is willing to accept. The key is pushing on both sides, getting customers to pay more (or pay more often), and getting sellers to accept higher fees, typically in exchange for moving more inventory.

Since you mentioned Airbnb, CL has apartment listing and it's quite popular, and there are no transaction fees. But it's a bit of a hassle to research a place, contact owner, schedule, make arrangements.

Airbnb makes is so convenient that people start renting apartments instead of hotel rooms. I didn't know they charge renters, but 3% is still much cheaper than hotel pricing.

At the other end, they deliver more booked days to property owners, you can take a surcharge if you help the property owner rent for more days out of the year.

So that's your typical business model: add convenience to one side, so you can move more inventory on the other side, for which you can charge a nice percentage.

As for open vs curated, consumers are risk averse, higher perceived quality results in more transactions and higher prices. Anything you can do to mitigate risk, whether its ratings/review, selective listing, insurance, etc.


Answered 6 years ago

Correction to Airbnb example: (it is 3% to the host and between 6 and 12% to the renter.
If the 'supply side' gets 100% payment, there is no incentive for 'supply' to encourage going around the service especially since they receive benefits of secured bookings and payments.

With freemium like Craigslist and Kijiji there are some advantages with a large number of users. However, the quality of supply (bare bones listings), responses (people not responding or not meeting when they say they will) can easily be over 50% which hurts customer experience.


Answered 6 years ago

I like to separate your question into 2 sub-questions:
#1 How do we determine which side to charge?
#2 How much is the right amount to charge?

On #1, my answer is that you can charge the side(s) for whom you add the most value. In your examples, Uber really solves a big problem for drivers, it's that they sit idle for a good part of the day, so are willing to pay a lot for new leads. (their alternative is no work) Consumers are charged more for the convenience of a private car but they are probably not so much willing to pay more for a taxi, even if they can hail one from their phones.
For AirBnB, it's a mix, it's a way for landlords to monetize idle capacity which they are willing to pay for, but it's also a way for a renter to pay less than they would normally pay for a hotel.

On #2 (how much), I like to triangulate a number of factors:
- What's the maximum amount I can charge one side, while still being a good deal for them.
- How much do I need to charge so that I can become profitable? (the economics are quite different if you charge 3% vs. 12%)
- What are comparable services charging for substitutes/competitive offerings?

I will just add that there is no formulaic way to determine pricing strategies (curated vs. open), and it's a lot more about what's the comparable and what the value delivered is.

That's how I approached the question while deciding the business model at ProBueno.com (my startup)


Answered 6 years ago

I think it's difficult to answer this question without more background on the type of marketplace you are trying to develop a pricing model for. If the marketplace involves businesses on one side and consumers on the other, it's standard to charge the businesses and not the consumers (think hiring platforms that charges business to post jobs and don't charge applicants for applying to jobs). If the marketplace involves two different types of consumers (Air BnB) then you might charge something on both sides, so it's important to make that distinction.

That being said, what's most important at first is growth (and balanced growth on both sides of the marketplace). Choose a pricing model that accelerates growth on the "dominant" side of your marketplace. When I say dominant, I mean is there one side of the marketplace that drives growth for the platform as a whole. Going back to my hiring platform example, the employers are the "dominant" side of the marketplace, because if you add more employers (and thus more jobs) to the platform, you gain more opportunities to show to potential applicants, driving candidate volume in turn. So in the hiring world, you would focus your business model on making employers as happy (and as willing to post new jobs) as possible so that you can scale your platform.

I hope this is helpful and if you'd like to chat more let me know!


Answered 2 months ago

Great question. Here is how I would approach it:

1. Charge 0% to both sides of the marketplace for your transactions up to $50,000. Use Braintree (by PayPal) as your payment processing system and your 3% credit card fees will be waived up to your 1st 50K in transactions.
2. See who you've demonstrated the most value to. Meaning, without demonstrating any value, don't charge anything to anyone. Your revenue are the use cases and lessons learned that you'll generate. While gauging value, get a feel for price elasticity.
3. Once you've learned your lessons, set your percentages (either split or one-sided) accordingly.


Answered 4 years ago

I have been working on a wedding planners market place. It has been fun trying out various combinations. Have a combination of free + paid on both sides

User side:

1. Basic service - make it free to drive the user base. A market place is attractive only when you have large user base

2. Value added services - Have a menu and charge accordingly.

3. Combo offers - always link the offers to the number of transactions with an expiry date. This will help you drive volumes

Supplier side:

1. Base service - No charge to supplier

2. Value added services - charge single digit , may be 2% or 3% per transactions

3. Combo offers - charge up to 7% or 8%

Most importantly, start having elements which will reduce bounce rate, if it is web based offering.
It would be better if you clearly define the service and the target market so that the various value streams can be mapped and the overall offerings can be worked out.
Hope this helps.
Best regards
Sridhar


Answered 4 years ago

There is a great article about this written by Bill Gurley.
http://abovethecrowd.com/2013/04/18/a-rake-too-far-optimal-platformpricing-strategy/.

Basically price is a friction factor in a marketplace. So you need to balance it in a way that creates less friction (lower prices) and at the same time keep your business profitable.

Basically there are several factors that determine the business model:
- Who pays. Generally the side that gets the most value should be charged, however some platforms split the payments between both sides.
- Marginal costs. If producing a good or service for your supply takes a lot of time or effort it will be hard to charge a high percentage for this. Think Etsy, suppliers need to buy material and craft a product.

At the same time if a product can be easily reproduced or resold, you can charge a higher percentage (e.g. ilustrations, templates, songs, apps). If you add to this a platform with big power percentage can be really high ( Apple appstore: 30%, Shutterstock: 70%. This is also why music creators hate Spotify as you need 336 842 plays to earn US minimum wage.

- Frequency and size of transactions
Typically the frequency and size of transactions are correlated. The larger the size of the transaction the lower the frequency.

Uber, for instance, has a huge frequency however each transaction is small. Airbnb, on the other hand, has a much lower frequency yet the size of the transaction is larger.

- Other revenue streams
You may also lower your transaction cost by implementing additional revenue streams like listing fees in case of Etsy.

- Market Position
Generally the stronger the market position of your marketplace the higher fee you can charge for this. However, this inevitably attracts competition.

Generally, there is no set rule for pricing you need to "figure it our" by experimenting or use a product like Priceintelligently that can help you out.


Answered 7 months ago

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