Starting with an initial hypothesis and iterating toward an optimal price point is essential for attracting not just a large number of customers, but the right kind of customers. This principle holds true for any business, but for marketplaces, the dynamics are significantly more complex.
In a standard SaaS business, you might A/B test your pricing page and call it a day. In a marketplace, you are balancing the incentives of two distinct user groups – supply and demand – where a change for one side can have cascading effects on the other.
The Unique Challenges of Marketplace Pricing
In a marketplace setting, especially when your revenue model is based on transaction commissions, adjusting pricing isn’t straightforward. Unlike an e-commerce store where you can change the price of a t-shirt overnight, marketplace pricing often involves contractual agreements, long-standing user expectations, and the delicate balance of trust.
Many changes can only be applied to new users – for instance, increasing your cut from future transactions – or they might require renegotiation with existing partners. This rigidity can make pricing feel static, and as a result, some leading marketplaces have kept their commission structures unchanged for years, fearing that any move might upset the apple cart.
But despite these hurdles, experimenting with pricing is not just worthwhile – it’s crucial. Stagnant pricing models can leave money on the table and fail to capture the value you’re creating as your platform matures. Let me illustrate this with an example from my own experience with MentorCruise.
Case Study: MentorCruise’s Pricing Evolution
In 2020, MentorCruise underwent two significant pricing changes that reshaped our business trajectory. At first glance, these changes might not seem monumental, but they had profound impacts on growth, retention, and user satisfaction.
1. Transition to a Monthly Subscription Model
In March 2020, we decided to shift from offering weekly and one-off rates to a monthly subscription model.
The Problem: Previously, mentees could pay on a weekly basis. While this lowered the barrier to entry, the frequent billing cycle led to higher churn rates as users grew weary of constant transactions. Users would sign up for a week, get busy, and cancel immediately to avoid the next charge, often before seeing the full value of the mentorship. It created a transactional mindset rather than a relational one.
The Solution: We extended the billing cycle to a month. By changing the default billing period, we shifted the user mindset from a “quick fix” to a “committed engagement.” We aligned the payment frequency with the value delivery frequency (mentorship takes time).
The Result: We observed that mentorships lasted longer, providing more value to both mentors and mentees. This change wasn’t just about altering a payment schedule – it led to a 600% growth over six months. LTV (Lifetime Value) skyrocketed because retention improved drastically.
The Challenge (and Fix): However, implementing this wasn’t as simple as tweaking a Stripe plan. We faced challenges, particularly concerning our mentors.
With the new monthly model, mentors experienced delays in accessing their funds. Under the weekly system, mentors received payments within seven days. The monthly subscription meant they might wait up to a month to receive their earnings. This was a significant adjustment, and it required proactive communication.
To address this, we prioritized proactive communication and transparency:
- We provided clear explanations about the new payout schedule.
- We emphasized the benefits of longer-term mentorships and more stable income over time.
- We updated our dashboard to show “Pending Earnings” more clearly, giving mentors visibility into their future payouts.
This transparency was key in maintaining trust and satisfaction among our mentors.
2. Revising the Fee Structure
By September 2020, we realized that our existing fee structure was limiting our ability to grow and innovate. We were taking a 20% cut from each transaction, and mentors set their own pricing. While this model was transparent, it had drawbacks.
The Problem:
- Perceived Value: Mentors often felt shortchanged. Seeing a $100 charge turn into a $78 payout (after fees and taxes) felt like a loss, even if they agreed to it.
- Limited Flexibility: The fixed commission tied our hands. We couldn’t offer discounts to mentees without eating into our own thin margins or asking mentors to take a pay cut.
The Solution: We executed a comprehensive migration to a new pricing model:
- Mentors Receive 100%: Mentors would now get the full amount they wanted to charge. If they asked for $100, they got $100.
- Fees Added on Top: Our platform’s fees were added on top of the mentors’ rates as a “Service Fee” paid by the mentee.
The Result:
- Pricing Flexibility: We could now adjust our fees, run promotions, and implement psychological pricing (like ending prices with $9 instead of $0) without ever touching the mentor’s payout.
- Enhanced Transparency: Mentors knew exactly how much they would earn per session, leading to increased satisfaction.
- Growth Opportunities: The additional flexibility allowed us to explore new revenue streams and pricing strategies without friction.
Key Strategies for Effective Pricing Changes
Based on these experiences, here are some actionable strategies for implementing pricing changes in a marketplace without causing a revolt.
1. Build Flexibility into Your Pricing Structure
When launching a new marketplace, design a pricing model that doesn’t constrain your future options. Hard-coding a “10%” fee into your database and user agreements is a recipe for future headaches.
- Decouple Supplier Payouts from Customer Prices: Structure your database to store
supplier_askandcustomer_priceseparately. This gives you the freedom to adjust the margin between them. - Agree on Flat Net Rates: Negotiate a flat rate that suppliers are comfortable with. As long as they get their $50, they often don’t mind if you sell the service for $60, $70, or $100.
- Maintain Control Over Customer Pricing: By setting the end price for customers, you can experiment with discounts, bundles, or dynamic pricing based on demand.
Example: If you’re required to change partner agreements for pricing adjustments, consider undertaking a one-time migration to a more flexible model. This was crucial for us at MentorCruise to avoid constant renegotiations.
2. Provide Options and Communicate Changes Clearly
When changes affect your partners, transparency is your best defense against churn.
- Offer Grandfathering: Allow existing partners to continue under the old terms for a set period. This respects their loyalty and gives them time to adjust.
- The “Opt-Out” Strategy: When we introduced a 7-day trial period, we allowed mentors to opt out. A few did initially, but eventually, most joined after seeing the data: mentors with trials got significantly more engagement.
- Explain the “Why”: Don’t just announce a price hike. Explain how the extra revenue will be reinvested into marketing, support, or product features that benefit them.
3. Explore Alternative Revenue Models
Don’t limit your marketplace to a simple commission model. The most successful marketplaces often layer multiple revenue streams to capture different types of value.
- SaaS-Enabled Marketplace: Charge suppliers a monthly subscription fee for access to advanced tools (invoicing, scheduling, analytics), regardless of their transaction volume. This stabilizes your cash flow and reduces reliance on GMV volatility.
- Listing Fees: Charge a small fee to post a listing. This can reduce spam and ensure suppliers are serious (e.g., Craigslist charging for job postings).
- Promoted Listings: Allow suppliers to pay for higher visibility in search results. This is pure margin and doesn’t affect the transaction price.
- Concierge Services: Offer a premium “Done-For-You” service where you manually match buyers and sellers for a higher fee.
4. Prepare for Increased Support Demand
Any pricing change will likely lead to an uptick in customer support inquiries.
- Strengthen Support Channels: Ensure your support team is ready to handle questions and concerns immediately after the announcement.
- Draft Templates: Prepare macros or templates for common objections.
- FAQ and Documentation: Update your help center before the change goes live.
- Feedback Loops: Provide a dedicated channel for feedback. Sometimes, your users will spot edge cases you missed.
Psychological Pricing in Marketplaces
One area that is often overlooked in marketplace pricing is the psychology of the price tag. When individual suppliers set their own prices, you often end up with a messy array of numbers like $52, $104, or $20.
As a platform owner, you can nudge this behavior:
- Smart Defaults: When a supplier types in “100”, suggest “99” or “97”. Prices ending in 9 or 7 often convert better due to the “left-digit effect”.
- Tiered Options: Encourage suppliers to offer three distinct packages (Basic, Standard, Premium). The “Goldilocks Effect” suggests that most buyers will pick the middle option, allowing you to anchor the price higher.
- Dynamic Fee Display: If you charge a service fee, experiment with how it’s displayed. Is it “Included in price”? Or added at checkout? Hidden fees kill conversion at the last step, but “all-in” pricing might make the sticker price look too high. Test this extensively.
Dynamic Pricing: The “Uber” Model for Everyone
While “Surge Pricing” is famous, dynamic pricing can be subtle and effective for many marketplaces, not just ride-sharing.
Supply/Demand Balancing: If you have too many buyers and not enough sellers in a specific category (e.g., “Logo Design”), you can automatically increase the minimum price or the service fee for that category.
- Benefit: It dampens low-intent demand.
- Benefit: It incentivizes more suppliers to join that category if you pass some of the increase to them.
Time-Based Pricing: If your marketplace involves booking time (tutors, cleaners), consider higher rates for peak hours.
- Example: A cleaning marketplace could charge 1.5x for Saturday mornings. This helps smooth out demand to weekdays where you have excess capacity.
The “Grandfathering” Trap
While I mentioned grandfathering as a good strategy to appease existing users, be careful not to create a permanent “legacy class” of users who are unprofitable.
If you lock in a 0% fee for your first 100 users forever, and they become your biggest sellers, you are effectively subsidizing your own competition. Instead of “forever,” offer a “legacy period” (e.g., 12 or 24 months). This gives them ample time to adjust or increase their own prices to cover the difference, without anchoring your business to an outdated model indefinitely.
Executing the Price Change: A Communication Template
Communicating a price increase is terrifying. Here is a structure that works:
- The “Value Sandwich”: Start with value, state the price change, end with value.
- The Reason: Be honest. “To continue investing in our support team…” is better than silence.
- The Timeline: Give at least 30 days notice.
- The CTA: Give them a way to ask questions.
Sample Email Subject: Investing in the future of [Marketplace Name]
“Hi [Name],
Over the past year, we’ve helped you generate [Amount] in sales and launched features like [Feature A] and [Feature B]. To continue building the best home for your business, we are updating our fee structure on [Date].
The new fee will be [X]. This change allows us to launch [New Benefit] next month.
As a thank you for being an early partner, you will keep your current rate for another 6 months.”
Why Pricing Flexibility Matters in Marketplaces
Embracing a flexible pricing strategy shouldn’t be hindered by the marketplace model. Instead, pricing should be a dynamic tool that enables you to:
- Attract High-Quality Leads: Competitive and strategic pricing can draw more customers to your platform.
- Optimize Supplier Earnings: By adjusting fees and pricing models, you can help suppliers earn more, increasing their satisfaction and retention.
- Adapt to Market Changes: Flexibility allows you to respond to competitive pressures, economic shifts, and emerging customer preferences without a complete platform overhaul.
How Twosided Can Help You Nail Your Pricing
Experimenting with pricing is risky if you’re flying blind. You need to know exactly how a 1% increase in fees affects your GMV, your user churn, and your bottom line.
This is where Twosided comes in. We are an analytics platform built specifically for marketplaces.
- Cohort Analysis: See if users who joined after your price change have a higher LTV than those who joined before.
- Real-Time GMV Tracking: Monitor the immediate impact of pricing experiments on your transaction volume.
- Supplier Retention: Track if your new fee structure is causing your power sellers to leave.
Don’t guess with your revenue. Start your free trial with Twosided today and turn your marketplace data into actionable pricing strategies.