Your marketplace pricing model will play a huge role in your success. Customers have so many options to choose from, so product pricing has become a key differentiator that helps them make a choice.
Of course, every marketplace owner has their own motivations behind their pricing strategy. We get into this business to make a profit. You can’t cut prices entirely.
The trick is to find a balance that keeps your customers happy while still making you money. Finding that place in the happy middle requires knowledge of your options and a clear strategy. We want to help you develop both, so we’ve put together this guide to optimizing your marketplace pricing.
Key Things to Consider When Building Your Marketing Pricing Model
Not all successful marketplaces follow the same strategy. There’s no silver bullet or magic formula. What works depends on your business model, product categories, and customers. If you want to find the right pricing strategy for your marketplace, you’ll want to understand your options and pick what fits best.
Your Marketplace Business Strategy
The marketplace business model leaves room for a variety of opportunities to make money. It really comes down to how you want to work with your vendors and structure your payments. Once you have that strategy nailed down, you can revolve the rest of your pricing model around it.
Here are 4 of the most common models:
- Commission based. Your marketplace gets a percentage of what the vendors sell.
- Subscriptions. Customers pay a set fee for access to get exclusive deals, perks, and benefits (think Amazon Prime).
- Listing fee. Vendors pay a set fee to list their products on the marketplace.
- Ads. Charge for priority listings and ad spaces.
Think about it: if you’re making a profit on ad sales, you may not need to take a commission from your vendors. That may incentivize them to lower prices. Likewise, if you charge your customers subscription fees, you may be able to save your vendors money from listing costs and allow them to find a more customer-centric price point.
Any of the marketplace pricing models can work. You just have to find the one that works best for you and your business.
Your Goals and Constraints
Knowing the specific things you want to get out of your marketplace will help you determine your pricing strategy. Some marketplace operators want to add a few vendors to their existing ecommerce sites. Others want to build a niche site where they don’t have to sell anything.
What exactly are you looking for in building your marketplace?
Having these kinds of set goals will also require recognizing the limitations. You might not have the energy to sell products if you want to build a large marketplace with an array of vendors. Knowing these constraints on your model will come in handy when you start to build your pricing strategy.
Your Target Audience
Most sales come down to knowing your customers. What are they looking for?
Think about a brand that sells luxury, high-class items. While those customers certainly want to find a deal, they also want are expecting to pay a higher figure for the higher quality. Too low of a price could actually scare them away.
Remember, your marketplace pricing strategy exists to benefit you and the customers. The more you know them, the more you’ll know if what you’re doing will actually make them happy.
4 Simple Pricing Strategies to Start With
Once you’ve built your strategies foundation, you can start thinking about the specifics. Marketplaces use all sorts of tactics to get a price that works for them and their customers, but we’ll highlight a few of the top ones here with a bit of the pros and cons that come with them.
Utilize Coupons and “Free” Options
Who doesn’t like a discount, right?
Digital coupon codes or a freemium model have become some of the most common marketplace pricing strategies. They work great when bringing in new customers or pushing that buyer on the fence about making a purchase. That’s the positive side of things.
Here’s the negative: customers can experience discount overload. Every online marketplace or ecommerce site has discount codes. Why would they go with you?
Additionally, customers have become more skeptical about discounts. Why? Because offering them shows that you could charge a lower price if you really wanted to.
Neither of these challenges means you have to throw out all your discounts. They just show that discounts alone don’t always cut it, especially for long-term customer retention and lifetime value.
Buy Now; Pay Later
The buy now; pay later model has more recently become a hot trend in ecommerce. Research from the Ascent shows that over 50% of surveyed consumers have utilized the service at some point since the end of 2020. Before that, only 37.65% of people had used it before.
That’s a 48% difference in less than a year.
The numbers make sense when you consider how much online shopping has grown since the COVID-19 pandemic. People have embraced the ecommerce market as they look for convenient, safe ways to purchase products. Having the opportunity to get a product now and pay for it later fits that criteria and customers have noticed.
Marketplaces can respond by making this service part of their pricing models and differentiating themselves from their competitors.
Competitive Price Index
A successful marketplace pricing strategy requires more than looking at your competitors and lowering the number a couple of cents. Pricing is more nuanced and fluid than that. Variables change. Competitors adjust. Prices fluctuate.
But that doesn’t mean you should leave your competitors out of the equation completely. Putting together a competitive price index can help ensure that you keep up with what others are doing.
To do this, you just add up your competitor prices and divide that final number by the number of competitors you have. This will give you a baseline for the average pricing for that specific product.
If you do utilize this model, remember to check back often to adjust for the natural fluctuation of pricing.
Don’t Start Slashing Too Quickly
It’s easy to believe that the lowest price is the best price, but customers don’t always think that way. Having a remarkably different price from your competitors could actually look bad or suspicious to consumers, not to mention it could cause you to lower your marketplace’s profit margins.
Instead of just slashing away at the price point to gain more customers, you can look for additional ways to save money and make up some of the difference you would have made up in sales.
Here are few possible metrics to look at to see if you can bring down the overall numbers:
- Customer acquisition costs
- Customer retention
- Operation expenses.
Closing Thoughts
Your marketplace pricing strategy can make a big impact on your overall success. Knowing how you will stay ahead of your competitors without breaking down your profitability is key for long-term success.
The more you understand your marketplace’s unique situation, the more you can develop a plan that fits your needs and allows you to offer the best prices for both you and your customers.