Last time, we navigated through why raising your marketplace commission isn't as daunting as it may seem. Firstly, we discussed the reasons to raise your commission rate. Then, we talked about the fears associated with such a difficult decision.

Now, let’s move into the practical side of things — how do you actually go about implementing this change without disrupting your marketplace's business model?

In this article, we're delving into the strategies for effectively raising commissions and balancing your marketplace's growth needs with the interests of your sellers.

Additionally, I'll take you through the use-case of Radar's marketplace, a driving schools marketplace in Eastern Europe, where we successfully doubled our commission, shedding light on the tactics and insights that drove our decision and the problems we encountered.

If you're considering a commission adjustment or just curious about the mechanics behind such a move, this part is for you. We’ll cut through the complexity and get straight to what really matters.

How to Raise Commission?

Deciding to raise your commission is one thing; implementing it effectively is another. This process requires a mix of strategic insight and the right communication with your partners. Let's explore the key steps to successfully raise commissions in your marketplace.

Understanding Seller Economics

Before making any changes, it's crucial to deeply understand your sellers' economics. This involves analyzing how much they currently spend on marketing and other operational costs. Dive into their unit economics – understand their profit margins, marketing budgets, customer acquisition costs (CAC), and overall business health.

The goal is to gauge the optimal price they can comfortably afford without hampering their business. This research not only informs your decision on the new commission rate but also helps in framing your communication to demonstrate an understanding of their business realities.

Assessing Your Marketplace's Needs

Concurrently, take a hard look at your own marketplace's unit economics.

• What are your current operational costs?

• How much do you need to invest in marketing, technology, and customer support to stay competitive and grow?

Understanding your costs is pivotal in determining the new commission rate. It's a balance between what's necessary for your marketplace's health and growth and what's fair and sustainable for your sellers. Remember, a commission increase should not just be about covering costs but also about fueling growth and improvements.

More often than not, such a decision is driven by the pursuit of a nice customer acquisition cost (CAC) metric for your unit economics. As I will demonstrate later, in the case of Radar, we began to need more investment in paid marketing in addition to our initial SEO successes. This made it necessary to adjust our commission rate.

Getting the Final Number

Combine both the seller's purchasing ability and your unit economy's needs to calculate a fair number that will be sufficient for both you and your partners. It's a difficult choice, but understanding your sellers' economics and your own needs will give you a certain range of possible new commission rates.

Pick the one that would be optimal and proceed to implement this decision.

Communicating the Change

Once you've determined the new rate, the next step is communication. This shouldn't be a surprise announcement but a well-thought-out message explaining the reasons behind the increase, how it will be used to enhance the marketplace, and, most importantly, the benefits it brings to your sellers. Consider using a variety of channels to communicate this change:

• direct emails to your key sellers
• newsletters
• webinars
• or even one-on-one conversations with key sellers.

Transparency and clarity are your allies here.

Implementing the Increase

The implementation of the new commission rate should be done thoughtfully. Consider a phased approach, giving sellers time to adjust. Monitor the marketplace closely post-implementation to gauge the impact, and be open to making adjustments if needed. Keep the lines of communication open to receive feedback and address any concerns that arise.

Case Study: Doubling Commission Rate at Driving Schools Marketplace

In 2017, I joined Radar, a marketplace for finding the best driving school, as a co-founder and CTO. Radar initially was launched in 2016 by talented entrepreneur and business developer Alex Katsalukha from whom I owe much of my initial experience in marketplaces.

Later in 2018, our then commission rate of 6% began to put pressure on our unit economy. As a result, we needed more funds to fuel our paid marketing efforts, pushing us toward a pivotal decision that would reshape our business model and trajectory.

Our journey from a 6% to a 12% commission rate is a tale of adaptation, strategic thinking, and learning to trust experienced advice.

Initial Commission Rate: A Guesswork

Like many startups, our initial commission rate of 6% wasn't the result of extensive research but more of an educated guess. It was a figure that seemed reasonable and competitive enough to build our partner base. And it worked – to an extent.

We successfully built a robust network of driving schools and a substantial user base, initially fueled by our strong SEO-based strategy, which generated an organic 100k monthly active users (MAU) on our website.

The Decision to Double the Commission

The decision to increase our commission to 12% came after much deliberation and was significantly influenced by the advice of our business advisor Eugene Bisovka, a serial entrepreneur with great expertise in marketing and business strategy, who brought a wealth of experience to the table.

Through countless brainstorming sessions, analysis of our unit economics, and further research, we realized that doubling our commission was not only necessary but also a strategic move to ensure our marketplace's growth and sustainability.

Scaling Challenges: Rethinking Unit Economics

So, as we began to scale and the need to invest in paid marketing arose, it became clear that our initial commission rate was unsustainable for our evolving business model. Our unit economics were strained; the cost of acquiring customers through paid channels was not sufficiently covered by the revenue generated from our 6% commission.

In our case, before addressing the commission raise, we conducted customer research to better understand the economy of our partners. Thanks to Alex's strong personal relationships with our core partners, we were able to have deep conversations with them. This, in turn, enabled us to go through their unit-economy figures.

One interesting insight is that while the majority of partners had fairly similar unit economics, there was a segment of partners (mostly non-priority ones) that did have tighter unit economics relative to their competitors.

This gave us the opportunity to better understand the entire driving schools market and understand who we should better focus our business development efforts on.

Implementation and Communication

Implementing this change required careful planning and clear communication, especially with our major partners. We reached out to them directly and via email newsletter, explaining our decision and how this increase was vital for further investments in marketing and platform enhancements.

Additionally, we launched a new landing page explaining our new offer in-depth for both our current and new partners.

The transparency and rationale behind our move were well-received by partners with whom we worked closely and frequently. Several partners with whom we worked less often refused our offer, but eventually, the most important of them returned after seeing our traction later.

The Impact: A Success Story

The result was more than encouraging. We saw our monthly revenue (MRR) increase by 2-3x in a short time, validating our decision. This shift in commission not only improved our financial health but also gave us the much-needed leverage to grow and expand our services.

It was a clear demonstration of how a bold decision, backed by thorough analysis and effective communication, can turn into a significant success for us then.

With this new pricing model, we managed to significantly increase our revenue and expand our reach into new regions. Later in 2020, we sold Radar to one of the market leaders in the region.

Conclusion

In the journey of building and scaling a marketplace, the decision to adjust commission rates is more than a mere financial maneuver; it's a strategic pivot that can set the course for future growth and sustainability, as demonstrated by the Radar experience.

Thoughtful planning and clear communication are key to making such a pivotal decision work in your favor.

For more insights into marketplaces, ideas about AI, startups, innovations, and sales automatization, feel free to follow and connect with me on LinkedIn or here at HackerNoon. If you need help with your product — reach out.

Your ideas, questions, and opportunities for collaboration are always welcome!

The illustration on the cover by Eugene Bisovka, made at one of the strategic sessions, summarizes the essence of the article: sometimes it’s better to strive for bigger opportunities than to stick with the current comfortable ones.