Experimenting with pricing as a marketplace, how to do it right

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 marketplaces as well, albeit with different dynamics and challenges.

The Unique Challenges of Marketplace Pricing

In a marketplace setting, especially when your revenue model is based on transaction commissions, adjusting pricing isn't always straightforward. 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.

But despite these hurdles, experimenting with pricing is not just worthwhile—it's crucial. 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 and user satisfaction.

Transition to Monthly Subscription Model

In March 2020, we decided to shift from offering weekly and one-off rates to a monthly subscription model. Previously, mentees could pay on a weekly basis, but this frequent billing led to higher churn rates as users grew weary of constant transactions. By extending the billing cycle to a month, 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. However, implementing this wasn't as simple as tweaking a pricing plan. We faced challenges, particularly concerning our mentors.

Impact on Mentors' Payouts

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.

Solution: Enhanced Communication and Support

To address mentors' concerns, we prioritized documentation and customer support. We provided clear explanations about the new payout schedule, emphasizing the benefits of longer-term mentorships and more stable income over time. This transparency was key in maintaining trust and satisfaction among our mentors.

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.

Challenges with the Original Fee Structure

• Perceived Value: Mentors often felt shortchanged when they saw that, after fees, they received only $78 from a $100 session.

• Limited Flexibility: The fixed commission didn't allow us to experiment with pricing strategies, discounts, or promotions without affecting mentors' earnings.

Implementing a New Pricing Model

To overcome these issues, we executed a comprehensive migration to a new pricing model:

• Mentors Receive 100%: Mentors would now get the full amount they wanted to charge.

• Fees Added on Top: Our platform's fees were added on top of the mentors' rates.

Benefits of the New Model

• Pricing Flexibility: We could adjust our fees, run promotions, and implement psychological pricing (like ending prices with $9 instead of $0) without renegotiating with mentors.

• 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.

Key Strategies for Effective Pricing Changes

Based on these experiences, here are some actionable strategies for implementing pricing changes in a marketplace:

1. Build Flexibility into Your Pricing Structure

When launching a new marketplace, design a pricing model that doesn't constrain your future options.

• Agree on Flat Fees with Suppliers: Negotiate a flat rate that suppliers are comfortable with. This gives you the freedom to adjust your margins without affecting their earnings.

• Maintain Control Over Customer Pricing: By setting the end price for customers, you can experiment with discounts, premium pricing, or bundling services.

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:

• Offer Grandfathering or Opt-Out Options: Allow existing partners to continue under the old terms if they're uncomfortable with the new ones.

  • Case Study: After introducing a 7-day trial period, a few mentors opted out initially but eventually joined after seeing improved engagement and results.

• Transparent Communication: Clearly explain the reasons for changes, how they benefit all parties, and provide ample notice.

3. Explore Alternative Revenue Models

Don't limit your marketplace to commission-based revenue alone.

• Subscription Models: Platforms like MicroAcquire charge users a subscription fee for access, providing a steady revenue stream.

• Advertising Revenue: Companies like eBay generate significant income through advertising placements on their site.

• Premium Features: Offer advanced features or services at an additional cost, such as enhanced visibility for suppliers or premium support for customers.

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.

• FAQ and Documentation: Update your help center with information about the changes to preemptively address common questions.

• Feedback Mechanisms: Provide channels for suppliers and customers to voice their concerns, making them feel heard and valued.

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.

Conclusion

Achieving the right pricing scheme in a marketplace is not just valuable—it's essential for sustainable growth. While there are unique challenges inherent in adjusting pricing within a marketplace, especially one that relies on transaction commissions, the rewards of doing so effectively are significant.

By implementing a flexible pricing structure, communicating transparently with your partners, exploring alternative revenue models, and preparing for the operational demands of change, you position your marketplace for long-term success.

Remember, the goal is to create a win-win situation where both your platform and your suppliers benefit from pricing strategies that drive growth, enhance satisfaction, and increase profitability.

Additional Considerations for Marketplace Pricing

Monitor Market Trends and Competitor Pricing

Stay informed about industry standards and competitor pricing models.

• Competitive Analysis: Regularly assess how your pricing compares to others in the market.

• Customer Surveys: Gather feedback on pricing from both customers and suppliers to understand perceptions of value.

Leverage Data Analytics

Use data to inform your pricing strategies.

• Analyze Purchase Behavior: Identify pricing points that maximize conversions.

• Test Pricing Models: Implement A/B testing for different pricing strategies to see what resonates best with your audience.

Legal and Ethical Considerations

Ensure that your pricing changes comply with legal regulations and ethical standards.

• Transparent Policies: Clearly outline pricing structures and any changes in your terms of service.

• Avoid Hidden Fees: Surprise charges can erode trust and damage your platform's reputation.

By thoughtfully addressing pricing in your marketplace, you not only enhance your platform's appeal but also build a robust foundation for scalability and innovation. Pricing is more than just a number; it's a strategic lever that, when used wisely, can propel your marketplace to new heights.