We all consider Amazon as an archetype of a perfect marketplace. But what makes Amazon the most popular ecommerce mammoth in today’s date? While we all applaud their wide gamut of products and free delivery, we cannot ignore one of their top crowd-pulling ingredients : providing the best value in the market.
With almost half of the consumers feeling content with Amazon’s pricing, this feature remains as one of the top five reasons why people shop from Amazon. So, long story short, a marketplace’s success can depend heavily on its pricing strategy.
As an online marketplace owner, you hardly have any role in deciding the products’ pricing. Whatever be your business model, it is primarily your sellers or providers who decide on the selling price. However, you cannot let your sellers quote just anything as you, too, need to keep your head in the competition.
Deciding on a good pricing strategy for your marketplace is difficult. But what is even tougher is optimizing the price of your products to make sure that you keep your marketplace and your customer base growing perpetually.
What we need to understand here is that we are not devising a pricing strategy in this article but a price optimizing strategy. A pricing strategy helps you set the best price for your products/services. A price optimization plan comes after you have chosen a pricing strategy and it is inherently a part of your pricing strategy. Price optimization brings in modification in your products’ pricing and directly impacts your sales, profits, customer satisfaction and business growth. Therefore, you need to optimize your price in a way that it meets your goals as well as stays unique in the market.
Sounds difficult? We’ll simplify it for you. Here’s how you can determine the best price optimizing strategy for your marketplace and take your marketplace to new levels.
What you need to do
Before brainstorming on an effective price optimizing strategy for your marketplace, you need to spend some time analyzing the market and your own marketplace. Evaluating your marketplace’s strengths and weaknesses and your value in the market will help you map a strategy that will be beneficial in the long run.
Determine your goals and constraints
One might consider that the ultimate motive behind price optimization is to make more profit from your marketplace sales. But, profit-enhancement is only just one of the many reasons why marketplaces reform their pricing strategies. A lot of marketplaces have different goals behind price optimization like customer retention, upselling, attracting new customers or targeting customers of a specific niche.
Constraints, too, are inevitable. Maybe, your sellers can’t drop the prices below a certain limit. Maybe, you can’t curtail the costs or budget of a certain department. Obstacles should also be considered while determining the goals. Whatever be your goals and constraints, you need to have them put straight forward. So, write them down before you devise your strategies.
Study your market and customers
Having your data ready is the first step before strategizing your marketplace pricing. This includes both qualitative and quantitative data.
Quantitative data comprises hard analysis of the market and includes information of the demographics of the area serviceable, market specifics, supply and demand, sales metrics, competitor prices, etc. Meticulous research is the key here.
Customer surveys can help in accumulating qualitative data. Speak to existing and potential customers and find out your competitive advantage and perceived value in your customers’ eyes. Measure your customers’ reaction to your deals, discounts, product bundles, programs and promotions. Converge all these data and then jump to further planning.
Analyze your marketplace
Your pricing strategies depend a lot on your marketplace’s internal affairs like your sellers’ profit margin, number of transactions, average transaction amount etc. Keeping marketplaces’ budget, estimates, expenditures, capitals and revenues at your fingertips is also very important.
Accounting for products and shipping costs, warehouse costs, marketing costs, employee salaries and other expenditures is an absolute must. It is crucial to know how much profit you need to make in order to meet these expenditures in the process of planning a pricing strategy.
Know your value metric
The difference between a surviving marketplace and a thriving marketplace lies in identifying and pricing along the right value metric. If you’re not acquainted with this term, let’s simplify it.
By definition, the way you measure the per unit value of your product is the value metric. In other words, it’s the way you charge your customers for the products or the services you sell.
So, for example, if you’re selling shoes, your value metric is per pair of shoes. If you’re selling SaaS (software as a service), then your value metric could be the features you’re providing or the number of hours you’re providing the service.
Knowing the proper value metric has a huge impact on your marketplace’s success. It determines the way your revenue increases. And that is the reason why you need to align your value metric model with your customer acquisition model.
Start by all the pivots along which you can charge your customers. Remember, these axles need to add value to your product and should not be mere features. Next, send out surveys to your customers and determine what they think of your products/services and whether or not they ascribe value to your products. Once these are done, you will be able to evaluate the results and get a clearer picture of your value metric.
Strategies for the best price optimization plan
All the market research, surveys and collection of data stated above brings us to the culminating point – strategising the perfect price optimization plan. Price optimizing solutions are mainly mathematical programs and require a vast array of data and metrics in order to calculate the right price basis. However, these calculations are not that difficult as it might seem. Here we’ll be discussing 3 main solutions that will help you with the optimization process. So, get your excel sheets ready and let’s get started.
Setting a Competitive Price Index
This is the first and foremost thing that one needs to do in the optimization process. Setting a realistic yet competitive pricing index is very important as it lets you understand your position in the market competition. For this, you need to calculate the price index first. Here’s the formula for calculating the price index for any product:
- If your result is less than 1, your competitor is pricing cheaper than you
- If your result is more than 1, you are pricing cheaper than your competitor
However, this calculation needs to be done for all the products that you have across all the categories, brands and sellers and also against different competitors. Once you get all the separate data, bring out the average of those price indices and you will get your ideal competitive price index.
We hope now you have an idea why we asked you to keep your Excel sheets ready! 🙂
Ideally, your product’s price should be lower than your competitors’. But that might not turn out to be realistic every time. Your price doesn’t necessarily need to be always lower than others but the optimal price should be the one that generates the highest GMV (Gross Merchandise Value).
Maneuvering Price Elasticity
Price elasticity refers to the extent your sales will be affected with every price change. Working your products’ price elasticity in your favour is the key to a successful price optimization. Your products’ price elasticity will determine how much you can amend your pricing. Let’s see how to calculate the price elasticity of your product:
- If your result is between 0 and 1, your product is highly inelastic. Your customers will still buy your products even at a high price and there will be no significant change in demand.
- If your result is exactly 1, your product is proportionately elastic. It means that your product’s demand will change proportionately with the price change.
- If your result is more than 1, then your product is extremely elastic. With even a slight change in price, your customers might opt out from buying your product and there will be a loss in demand.
For an inelastic product, you can hike its price without thinking much as it clearly seems to be a highly demanding product. For products that are largely elastic, you have to be careful while increasing its price as it can negatively impact the demand of the product. Therefore, you have to carefully set the competitive price index for the same.
Again, price elasticity isn’t static at all. It can change with seasonality, promotion and even weather. A great example is the sudden shot of the demand for toilet paper rolls during the first few months of lockdown due to COVID-19. Sellers quoted considerably high prices for such competitive products and yet people bought them at high prices. Product demand can fluctuate even in a matter of a few minutes, so constant monitoring is extremely important here.
Automating Price Optimization Plan
While the above solutions seem easy, calculating these data for hundreds and thousands of products is definitely a tough task. And constant monitoring and changes in data means constant calculation. Manual monitoring and calculating is almost impossible. Therefore, automating the plans is an easier way to do the same. Taking the help of an automated price optimization software is a far better approach that will help you constantly monitor and optimize your prices with the ups and downs of the market.
There are quite a few price optimization tools like Competera and Price2Spy that will take off the burden from your shoulders and do the task for you. These tools analyze and integrate your marketplace data and suggest the optimal price options for you.
Once you prepare your perfect optimization plan, discuss it with your sellers. Let them know your optimal prices and encourage them to modify their prices accordingly. This might also need you to make amends on things like commission rate and other verticals as well in order to accommodate your sellers interest. Once a balanced point is achieved, go ahead and refine your prices.
Every marketplace is dynamic and so should be its price. However, incorrect optimizing could do more harm than good.
Inflating your price abruptly could lead to a disastrous abandonment by your customers. On the other hand, a miscalculated low price could cut your profit margin and also upset your sellers. Simply copying your competitors’ numbers isn’t good either as this can easily lead to a price-war. Finding that sweet-point is pretty crucial, but quite achievable. We hope this blog will help you set your pricing right and lead to incessant growth of your marketplace.
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