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This post is a part of our three part series on pricing success, be sure to read the first post here!

Growing marketplaces have to compete with established platforms that have already garnered a loyal following, as well as other new marketplaces that are jostling for their position. When you’re still establishing your reputation, buyers have few ways to evaluate your marketplace apart from your prices. 

Online customers place pricing at the top of their list of demands. Sixty percent agree that price is the most important criterion for their buying decision, and that can rise as high as 80% when the economy is poor. Hitting the right prices is key to attracting price-conscious customers; without compromising on profits for your top sellers, who won’t stick around for long if their profits drop. 

marketplace pricing facts 2019
Getting your pricing right is more important than ever.

To create an effective price optimization plan, you need to utilize a whole host of tools at your disposal. We’re here to show you how to use them to design the right plan for your marketplace.

How to design your price optimization plan for growing marketplaces

In a growing marketplace, the key is to start experimenting with price elasticity and promotional strategies, as well as gathering price index data so that you can refine your price optimization plan as quickly as possible. 

1. Continuously monitor the price index

If you’ve read our previous post, you’d know that your price index is the backbone of your price optimization plan. It’s vital that you keep your optimal price index front and center at all times. 

And a lot of marketplaces will stop there. We’ve seen it happen a lot. Marketplaces that took the time to find out their price index and where their position is in the market tend not to revisit it often.

This is the exact opposite of what you should be doing!

Your competitors are always changing their prices and there are so many variables that can change every hour that you need to be tracking your price index all the time. 

Achieving this involves using automated tools to calculate average price index for your chosen categories and monitoring the way your sales are affected by changes in the price index. As sales rise and fall, you’ll grow sensitive to the relationship between price index and sales volume, and that will help you to set your own target price index. 

2. Experiment with price elasticity

Mastering price elasticity is key to your price optimization plan. Price elasticity can change really quickly, so it’s never safe to turn your back on it. Marketplace leaders have automated tools to monitor their product’s price elasticity at any given moment and can adapt quickly to gain the upper hand.

 A study by the National Bureau of Economic Research this year found that, for products on Walmart that could also be easily found Amazon, prices were changed 20% more often than products that could not be found on Amazon.

This disparity can be attributed to the constant monitoring between the two retail giants and the use of dynamic pricing strategies. This ongoing battle between Walmart and Amazon shows how much automated monitoring these marketplace leaders engage in and how much they pay attention to price elasticity.

So how can you keep up to date with the price elasticity of your products?

This requires ongoing experimentation. It’s best to price test a selection of products, to gather as much data as possible about price elasticity across various brands and categories.

Price testing

Time needed: 60 days.

  1. Choose categories to test

    Choose which categories to use in the price test. These should be one that sell at least 1 unit per SKU per day, so that you can analyze results easily. Let’s use toasters as an example.

  2. Choose a control group

    Once you pick a price test group, choose a similar category to serve as the control group. This should be a category with a similar growth pattern. We’ll use using kettles as a control group in this example. Keep prices steady on the control group, don’t change anything!

  3. Test!

    Make small changes in the price, to test market sensitivity. Run your price tests for between 30 and 60 days before you measure the results, to get enough sales for reliable analysis. Keep an eye on competitor data over that time period to serve as a benchmark for comparison.  price control testing 30-60 days

  4. Analyze

    Analyze results using simple variance analysis, which can reveal whether revenue and profit are rising or falling. Check for the difference between daily average profit and revenue both before and after the price test, and compare your test group and control group to discover how much the new prices affected revenue. An automated analytics tool makes this all a lot easier. 

You should test for different variables like availability of close substitutes, whether or not a competing marketplace offers the same product, the income level of your target customers, etc. As you grow more confident, you can also price test for variables like discount coupons of differing amounts, and bundling products in different combinations. 

3. Price optimization also includes promotional strategies

Everyone loves a discount, so it can be an effective way to increase sales and improve revenue. However, if you get promotions wrong and undermine profits. It’s important to take the time when your marketplace is still in the growing stage to experiment with promotional strategy. 

The first step is to set both an upper and a lower price limit for promotions. The upper limit needs to be below that of your competitors, while the lower price limit has to still be high enough that it doesn’t eat into profit margins. This doesn’t leave a lot of wiggle room – hence the need to experiment first. 

Here are some of the promotions that you should explore:

  • Long-term customer discounts, like offering a lower price for customers who pay for annual membership than those who pay monthly.
  • Free shipping is one of the most popular promotion options, with 73% of shoppers saying that it’s their preferred discount. Try out a few different ways to offer free shipping, like site-wide free shipping, free shipping over a certain price, and free shipping for standard delivery only. Amazon is famous for pioneering the 2-day free shipping offer, with customers able to pay for faster shipping.
the power of free shipping
Free shipping, it just works!
  • Flash sales are another option, leveraging on the natural fear of missing out (FOMO) instinct in customers 
  • Get creative! Amazon recently ran a “hidden gems” sales, which essentially reduced prices on items with low sales volume in order to attract customers and help sellers to shift their stock. 

Pricing strategy is your key to marketplace growth

Price is one of the few ways to differentiate your marketplace in its early days, so it’s vital to get it right as quickly as possible. Jump in to experiment with price index, price elasticity, and promotions to gather data on what does and doesn’t work for your products, sellers, and target market, so that you can refine your price optimization plan in the shortest possible amount of time.