Why You Shouldn't Be Scared to Increase Your Marketplace Commission

Imagine this: You've launched your marketplace, it's gaining traction, but there's this nagging feeling in the back of your mind about your commission rates. Set in the early days of your startup, these rates were more of an educated guess than a calculated decision. Now, as you're steering through the complexities of marketplace dynamics, a question emerges – should you adjust your commission rates upwards?

As a serial marketplace builder, I know that feeling. For the last 7 years, I have specialized in building marketplaces and digital products. In 2017, I became the co-founder & CTO of Radar, a driving schools marketplace in Eastern Europe, which was sold in 2020 to one of the local market leaders. From 2020 to 2023, I was also the Managing Director at itBoat, a global yachting marketplace with 10 years of history, 3x increased traffic, 10x increased partnership network and gained record-breaking sales through our platform.

For many marketplace founders, the thought of increasing commissions represents a desirable change, but a really controversial one. On one hand, there's the undeniable need for financial sustainability; on the other, the fear of ruining the entire business model and relationships with partners. It's a dilemma that goes beyond just numbers; it goes into the core of value proposition, customer relationship, and your long-term strategy.

In this series of articles, we're diving into the why's and how's of raising commission rates in your marketplace. In this article, we'll address the reasons to raise your commission and common fears associated with this process. And in the next article, we'll also look at a real-life case where doubling the commission paid off and exact strategies how to implement this change. So, whether you're contemplating this move or just curious about marketplace economics, let's unravel this together.

Why Raise Commission Rate?

When you first launched your marketplace, setting the commission rate probably felt like a shot in the dark. You wanted to be competitive, yet sustainable; attractive to users, yet profitable. But as any seasoned entrepreneur knows, the early days are about testing hypotheses, often with limited data on hand. Now, as your marketplace matures, it's time to revisit those early assumptions.

Adjusting for Initial Estimates

That’s in my opinion the most important point here for early-stage marketplaces. Early-stage marketplaces often set commission rates based on limited information. The rate you chose initially may have been a best guess under those circumstances. But as your platform evolves, so does your understanding of the market and your users' willingness to pay. Reassessing your commission structure with a wealth of data at hand means you can align your pricing more accurately with the value you provide. This isn't just about increasing profits; it's about ensuring your commission reflects the true worth of your services.

Responding to Economic Changes

The economic landscape is always changing, and a static pricing model may soon become outdated. Changes in market conditions, user expectations, and competitive environments necessitate a responsive approach to pricing. If your commission rates are frozen in time while everything else moves forward, you risk falling behind, both in terms of profitability and market relevance. Adapting your commission rates to the current economic reality is a crucial step in maintaining a healthy, thriving marketplace.

Funding Platform Enhancements

Higher commissions open up ways for reinvestment into your platform. This isn't just about padding the bottom line; it's about enhancing user experience, improving technology, and providing better services. Partners are more likely to accept a commission increase if they see tangible improvements in the platform – be it through more marketing features, more robust product features, or faster customer service.

Preparing for Future Growth

Finally, consider the long-term trajectory of your marketplace. As you scale, diversify, and tackle new challenges, you'll need a solid financial foundation. A well-thought-out commission increase can provide the necessary resources to fuel future growth, helping you to expand, innovate, and stay ahead of the curve in a competitive digital marketplace landscape.

What if...? Addressing Fears Associated with Raising Commission

Raising commission rates can be a nerve-wracking decision, primarily because of the potential impact on your sellers, who are the backbone of your marketplace. Let's address these fears and explore how to turn this challenge into an opportunity for strengthening partnerships.

Fear of Losing Sellers

The most immediate concern is the potential loss of sellers. They are, after all, your partners in business, and a hike in commission might initially seem off-putting. The key here is not just transparent communication about the increase, but also articulating the value they gain in return. Explain how the increased commission is reinvested into the marketplace to bring more buyers, enhance platform features, and ultimately boost their sales. When sellers understand that the increase is a move towards mutual growth, they are more likely to stay on board.

The Dread of Initial Backlash

Any significant change can provoke a strong reaction, and the fear of backlash from your current partners is valid. However, this can be mitigated with the right approach to communication. Set up meetings with your core partners to discuss these changes and gather feedback on the change.

Be upfront and transparent about the reasons for the increase. More importantly, frame this change as an investment in the marketplace that benefits them directly. Highlight how this move will enable better services and a stronger platform, which in turn can lead to more business for them.

In addition, this change presents an opportunity to deepen your relationship with your sellers. Engage in open dialogues, address their concerns, and gather their input. This not only helps in smoothing over any initial resistance but also makes your partnership more collaborative and productive. Sellers who feel heard and valued are more likely to be committed to your marketplace, even with a commission increase. Marketplaces are all about communication with your partners and users.

Concerns Over Competitive Disadvantage

With higher commissions, there's the worry that sellers might flock to competitors with lower fees. Counter this by highlighting what sets your marketplace apart. Emphasize the unique value you offer – whether it's a larger customer base, superior marketing support, or niche market access. Remember, it's not always about being the cheapest option; it’s about offering the best overall value. Your marketplace should strive to be indispensable by providing unmatched services and benefits that justify the commission.

Transforming Challenge into Opportunity

While the fear of a negative reaction is understandable, remember that this is also an opportunity to reinforce the value of your marketplace. A well-explained increase in commission, backed by visible improvements and benefits, can strengthen the trust and loyalty of your sellers. It's about reframing the narrative from a simple cost increase to a strategic move for collective progress and success.

Conclusion

As you can see, changing marketplace commissions is a really complex question, but it's an addressable one. Next time, we'll discuss more in-depth strategies on how to increase commission rates, along with a case study from my first marketplace, Radar, a marketplace for finding a driving school.

For more insights into marketplaces, ideas about AI, startups, innovations, and sales automatisation, feel free to follow and connect with me on LinkedIn or here at Hackernoon.

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

The sculpture on the cover image, created by Oscar Estruga, is located in Vilanova i la Geltru, Spain.