Marketplaces and pricing

An approach to building for growth through pricing

Marketplaces help demand and supply connect and transact, and in return, they extract some value from the transaction. One of the biggest levers that marketplaces have to acquire and retain demand is pricing. When the supply is still scaling and the low price — high demand flywheel hasn’t yet kicked in, pricing is typically hacked and has no correlation with reality. However, to build a sustainable business, marketplaces need to invest in understanding the pricing dynamics of their marketplace sooner rather than later and they need to be methodical about it. “Pricing products” can help them build this understanding and in the process, they can make pricing a differentiator.

I define “Pricing products” as products built in the service of using pricing as a lever to drive GMV growth

“Pricing products” manifest themselves in three levels:

The pyramid of “pricing products”

• Level 1: These are products focused on removing lack of pricing transparency as a barrier to decision making for customers
• Level 2: These are products designed to opportunistically deploy pricing tactics and influence customer decision
• Level 3: These are products designed to offer guaranteed pricing consistently on certain goods/ services, thereby locking-in customers

Level 1: Removing lack of price transparency

Bringing price transparency is the first step for marketplaces to start adding value beyond the obvious “allowing demand and supply sides to connect”. By doing this, they abstract away the noise in pricing inherent in a fragmented supplier base, and present the supply-side goods/ services to customers in a more consumable form. The idea is to make sure that pricing noise doesn’t become a barrier in customers choosing to use the marketplace.

The earliest scalable implementation of this was Amazon Buy Box which allowed ‘n’ sellers, all selling the same product ‘a’ to offer low price in result of their listing showing up as the default buying option whenever product ‘a’ showed up in search results. It was simple but it took off the burden on part of the customers to find the best price for the product ‘a’ they wanted to buy. eBay, on the other hand, still requires customers to figure out the best deal, thereby, earning the reputation of a flea market.

A more nuanced example is Amazon removing lack of price transparency across thousands of SKUs of CPG goods by distilling all pricing down to one specific unit of comparison — ounces. This is powerful because it has not only allowed Amazon to minimize decision remorse among buyers, but has also enabled it to successfully demonstrate to buyers the value of opting for CPG subscriptions as opposed to one-time purchases. Subscriptions, as anyone can guess, is a great business, leading to a much more stable revenue stream.

Amazon showing “per ounce” price for all toothpaste SKUs

Level 2: Deploying pricing tactics opportunistically

Pricing tactics are a collection of opportunities where marketplaces consider that by inserting themselves into the supplier pricing, they can fundamentally influence the customer decision. These are opportunistic insertions meant to drive goals on customer acquisition and retention, while maximizing the value they can extract from customers.

Uber/ Lyft, with their approach to surge pricing, have long been the visible leaders in pricing tactics. Their switch to upfront pricing is an extension of that tactic, giving them even more leverage. Not only does it address the problem of price transparency referred to above, but it also acts as the foundation for loyalty programs such as algorithmic push of promo codes that can make a customer’s ride to destination ‘x’ on Uber cheaper than that on Lyft, resulting in him/ her choosing Uber for that ride. Underlying that pushed promo code is the understanding that converting the customer to choose Uber for that ride is net positive (higher LTV) for Uber.

Level 3: Acting as a price guarantor

Pricing guarantee is the act of marketplace offering fixed pricing for certain goods/ services. It differs from the pricing tactics above in that these price guarantees persist for days or months and are intended to lock-in customers for those goods/ services, and possibly beyond.

While Amazon Prime has been one of the earlier implementations of a price guarantee (in this case shipping price), Uber/ Lyft are more interesting examples. Uber launched a monthly pass while Lyft caps the price of rides in SF. These are initiatives designed to build/ retain the demand base with the hope that supply base will scale to meet the demand, in process reducing inefficiencies and creating an incentive for suppliers to fund the discounts inherent in guarantees themselves.

Lyft’s fare fencing in SF

The ability of a marketplace to execute on the three levels of pricing products mentioned above would typically increase as it matures and captures more data. However, if done the right way, these products should be built in a particular sequence. It is hard to become a price guarantor without having experimented with pricing tactics to understand customer response. Similarly, it is hard to experiment with pricing tactics without removing price ambiguity in decision making. The first step in removing price ambiguity is to understand what the marketplace is selling and how suppliers are pricing it. The earlier marketplaces get started on that, the better.