Guide to monetizing a marketplace platform (Part I)

What is a marketplace platform?

Marketplace platforms connect buyers and sellers while often including functionality to solve more pain points in the transaction beyond connecting. For example, while Uber helps connect riders with drivers, it also tracks user locations, enables financial transactions, and provides a ratings system to encourage good behavior.

When we use the term ‘buyers and sellers,’ we define that broadly because some marketplace platforms facilitate non-economic transactions. For example, Medium is a content platform that helps people discover blog content (buyers) while helping content creators (sellers) distribute their writing to readers. While content creators are not always explicitly selling a product, they are creating something in return for user attention. Similarly, dating apps like Tinder and Hinge are marketplace platforms, even though daters are not explicitly selling products or services.

Why are marketplaces difficult to monetize?

While marketplace platforms at scale offer durable competitive advantages due to network effects, they are notoriously difficult to monetize.

Marketplace platforms are challenging to monetize because:

• Value varies by customer. The value each customer gets from the platform can vary tremendously. For example, if you are on Tinder, you may get a ton of matches and dates (you good looking devil!) while someone else may struggle to find any dates on the platform.
• While the platform can nudge behavior to balance value distribution across their network, they do not directly control it. For example, while Tinder can make a dater easier to find by displaying them more frequently, they cannot control who connects with them
• Platform must simultaneously balance value across multiple sides of the market. Optimizing for revenue for one side of the market may have negative effects on the other side. Managers of a marketplace must constantly juggle value across all sides
• The impact of changes, especially pricing changes, may not manifest immediately. This makes fast iteration more difficult. For example, if you price a small customer segment too high and they leave, you potentially reduce the value to other customers who rely on that value. This may not hurt you initially, however it may cause some participants to churn. However, as more people churn, that can cause even more people to churn, resulting in a reinforcing negative loop.

These challenges require a thoughtful, adaptive, and data driven approach to pricing.

Six steps to pricing your marketplace platform

After spending many years pricing marketplace platforms, we have identified an approach to help founders, marketers, monetization strategists, and others price their platforms.

For each side of the market, you want to:

1. Understand the user flow and how your solution compares to current alternatives
2. Identify the variables that correlate to user value
3. Develop your pricing metric
4. Segment and segment some more
5. Estimate willingness to pay and set prices
6. Build, learn, and iterate

1. Understand how value gets created and where you sit in the overall transaction

First, get specific and tangible about how you create value relative to alternatives, for each side of the market. Ask how does value gets created today? Even if there are no technical solutions available, how does each side of the market solve this problem? Note that alternatives are not just direct competitors but are any solution a customer could use to solve that problem, including a hacky DIY solution.

One approach to getting crystal clear on this is creating a process flow maps that shows the steps a user takes from start to finish. You should have a view of this without your solution and with your solution. While you should start from your knowledge of the industry, it’s valuable to test and supplement this map with user research to understand how users currently solve their problem.

Let’s use a restaurant reservation platform like OpenTable as an example:

Within the platform:

• A restaurant lists on the website and includes reservation availabilities
• A potential consumer searches the website and if interested, select a reservation at a specific restaurant
• The restaurant books the reservation

Outside of the platform:

• The customer shows up to their reservation
• The customer orders, eats, and pays for their meal
• Profit!

Compare this to another approach for users – the user calls restaurants to check if they have reservations available at their desired time. Instead of the customer browsing a pre-filtered list of available restaurants, they now must call the restaurants and waste time when that reservation isn’t available.

While the detail in your map can vary, it’s important to get started and then incorporate more detail and iterate as you learn more. This map will create your foundation for identifying value metrics and pricing them.

As you view each step, you can now think through for which steps is your solution better, worse, or the same. And if it is better/worse/same, based on what criteria and for which types of users is this the case.

This criteria will inform your value metrics, which we’ll dive into in part II.