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)?

8answers

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 8 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 8 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 8 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 years 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 6 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 6 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 2 years ago

Business model is not always enough. There are many things that must be attached to it make a business succeed. The term business model has especially grown in popularity since 2004–2005 and entered the everyday business language. Not surprisingly, several definitions of what a business model is have been introduced. However, going through different definitions they have very much in common: the business model is about value creation, customers, product or service, costs, and revenue. According to University of California, Berkeley lecturer, serial-entrepreneur, and angel investor Steve Blank “A business model describes how your company creates, delivers and captures value.” This is how Alexander Osterwalder defines business models: “A business model describes the rationale of how an organization creates, delivers and captures value”.
The building blocks of the business model vary slightly across different frameworks. However, the business model should always include a value proposition, customer segment, profit formula (or revenue and cost), delivery channel and key resources. A particularly important aspect of a business model is that it needs to be sustainable, i.e. the costs cannot be higher than the revenue over time. Revenue here is defined in its widest sense and includes donations, government support as well as payments from customers. With such a wide definition of revenue, business model frameworks can also be used with success by for-profit, non-profit and government organizations.
Business models do capture much of the same information as a business plan, but they are presented in quite different formats than the normal 50+ page business plans. However, there is a more fundamental difference between business models and business plans. Business plans are made for execution and follow a predefined plan – the implicit assumption behind the way we used to write business plans was that we could sit behind a desk and do all the research we needed and find all the relevant information and devise the perfect plan to success. Failure was due to poor planning. We now know that no business plan survives first contact with customers. Hence, producing heavy weight business plans for execution is a waste of time and money before we have a proven business model.
The business model is a lightweight representation of all the hypotheses we need to confirm to devise a business plan. Only when we have validated our hypotheses about our business model and turned those hypotheses into facts by testing them in the marketplace will we go on to prepare a business plan. If through validation you have arrived at a scalable, repeatable and sustainable business model, the focus shifts from iterative testing of hypotheses to execution on a plan and company building to extract as much value as possible from the business model. Leading global companies like GE, P&G, Nestlé, Telenor and others use business model frameworks to manage strategy or create new growth engines. One of the main benefits of using a business model framework is that it helps companies move beyond product-centric thinking and towards business model thinking.
So, are business models the same as strategy? Your business model is certainly strategic, but it is not the same as strategy. The strategy determines the position a company will have in its industry. How much of the created value an organization is able to capture is dependent on its strategic position in the industry it operates. Value is always created in a value chain before it becomes available for the customers. The structure and strength of the actors in this value chain together with the characteristics of the industry, such as competition, substitutes etc. will determine how much of the value the organization is able to capture.
Business model innovation takes place when the assumptions or content of one of the several buildings blocks are new or significantly changed. Business model innovation is about new ways of creating, delivering, and capturing value. Unlike product or process innovation, changes to the business model require changes to the foundational decisions upon which the business operates. Therefore, business model innovation will likely be radical, and in many cases, transformational. A well-designed business model has interlocking building blocks that reinforce each other. The Doblin group conducted a thorough analysis comparing the return on investment (ROI) of different types of innovation. Evidence suggests that organizations that harness innovation prosper in the marketplace. Companies that harness innovation achieved profit margin growth of 3.4 percentage points annually since 1995, compared to 0.4 percentage for the median Standard & Poor’s 1200 global company average. The group’s stock price also grew by 3 percentage points higher per year over the decade compared with the S & P average.
Different marketplace pricing models are as follows:
1. Commission: 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.
2. Subscription: 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 is not a full-blown marketplace) is Amazon Prime.
3. Listings: You can charge a fee for listings. For example, Etsy charges a listing fee for every product listing.
4. Ads: 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.
5. Freemium: 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).
These are pandemic times, which has brought the great recession back upon us, with huge job losses and staggering economies market place around the world had been thrown off balance so it is you who must figure out which is the best. Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath


Answered 7 months ago

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