Platform businesses create value in very different ways from traditional linear businesses. They do so by attracting two or more groups of participants, in order to match them so that they can transact. Platforms can then capture and distribute some of the value co-created with the participants through a range of pricing structures and options which we described in a previous post. But in practice how do you cut through complexity and build platform pricing confidence? Laure Claire Reillier and Jenny Millar, both eBay veterans & Launchworks experts, have a wealth of experience in pricing strategies in a platform context and we thought you might enjoy their recent exchange.
Platform pricing is more complex than pricing for traditional businesses. Prices can be set by the participants themselves, or by the platform. For example, Amazon sellers set the price of their products. eBay buyers set the price of their auctions. And Uber sets the price of a ride. What else do you think makes the question of monetisation more complex for platforms?
Network effects play an important role when it comes to monetising a platform business. If customers create value for each other when using a platform, the impact of pricing can be felt beyond the participants who pay. For example, if Amazon increases its fees for marketplace sellers this could lead to more expensive items or a reduction in inventory. If buyers are then turned off by these higher prices or reduction in choice, they may leave the platform. As a result, it makes the platform less attractive to sellers. Hence the way platforms approach pricing needs to enhance the overall value proposition.
Just like with traditional linear businesses, there is no single pricing strategy that works for all platform businesses. Platform owners can choose to monetise one side or the other. Or occasionally both, as in the case of Airbnb which charges fees to both hosts and guests. Facebook thought that charging users would create too much friction and hamper growth and found a way to open the platform to advertisers rather than charge existing platform participants.
Are there any particular rules for choosing which side(s) a platform should monetise?
A good rule of thumb is to monetise the side that benefits the most from your platform. eBay and OpenTable make life easier for their users (buyers and diners), but it is the producers (sellers and restaurants) that initially benefited the most from joining the platform. Hence fees were charged to the supply side to minimise friction for buyers.
In some cases however the party benefiting the most can change over time… This happened to Airbnb who started as a supply-constrained marketplace since it was tricky to convince people to rent their houses out to strangers. The guests had less risk and benefited more from the unique value proposition. Therefore Airbnb initially decided to charge them. As the platform gained a critical mass and its value proposition became more balanced (thanks for host insurances for example), it started to charge hosts as well but the guests are still paying the bulk of the fees.
We often remind our clients that the creation of value and its capture are two different things. In some cases the platform creates lots of value (for example by matching buyers and sellers) but doesn’t manage to capture it (when they bypass the platform for the transaction). In these situations the platform has several options. It can try to find ways to minimise the leakage of value by keeping participants on-platform until the transaction happens. Or it can flex its value capture model to charge differently.
What pricing options make sense in this case?
Dating platforms are a good example here. The core transaction of ‘two people going on a date’ isn’t usually trackable on the platform itself. So many dating platforms charge a subscription model to capture the value upfront. This has the added benefit of encouraging members to interact with an unlimited number of potential dates to increase the chances of a successful outcome!
Another example would be platforms such as RatedPeople. Once the initial introduction is made, the platform loses visibility and control of the transaction (at least until after the work is complete and the homeowner is then invited to rate the service). That’s why such platforms don’t rely on transaction fees but prefer to charge a lead generation fee for connecting tradesmen with homeowners.
So, with more pricing options and possibilities than in a traditional linear business, how can business leaders build platform pricing confidence?
Business leaders need clarity on when and how to change prices, and how to leverage pricing to full effect. However, what constitutes “platform pricing confidence” is unique to each organisation and the individuals involved.
Platform owners want to be as certain as possible about the expected impact of their pricing on those customers paying fees. They also also need to understand the indirect effects for other platform participants. Pricing changes also tend to stack up over time. This is because pricing decisions made in the past will stick in the minds of longer-term customers.
I would say that business leaders need to be aware of their pricing’s ‘persona’. Is it saying all the right things about the brand? What are customers being encouraged to do? This is something that can be easily overlooked but it’s essential that your pricing and your brand tell the same story. For example, if a brand is described as flexible and approachable, can it be said that their pricing (and price framing) is also flexible and approachable?
Data can also play a big part in de-risking pricing decisions, but platforms need to get beyond revenue and user numbers and into the behavioural data. Examining how customers interact with the current platform and pricing choices will help anticipate how they will respond to new pricing. For those platforms who have made price changes before, looking at how customers reacted in the past can help refine elasticity assumptions and build platform pricing confidence in the decision making.
As you know digital platforms can produce and awful lots of data. This can be a blessing for gaining customer insights and making the right pricing decisions. But it can also be a curse when there is too much to analyse. What is too much data versus the right level of data? And what kind of data is really relevant?
In very data-rich environments there can be a risk of ‘analysis paralysis’. There is so much data that could be reviewed. Decision makers can give equal consideration to a vast array of analysis. This can end up stalling the decision-making process considerably and rarely leads to a more robust decision.
Before examining any data, decision makers should be crystal clear on the purpose of making pricing adjustments. Pricing is the most powerful lever for raising profitability but can also be used to drive sales, engage new audiences and solve problems. It’s only once platform owners have this clarity around the desired outcome that data can play its critical role in determining the way forward.
Understanding how paying customers are responding to your current pricing is a crucial first step. What behaviours do they display and what choices do they make? If pricing has changed in the past, examining how customer behaviours changed in the subsequent weeks and months may help anticipate what customers will do this time.
A handy approach for prioritising the data analysis to support a price change is to identify a number of leading hypotheses. These should capture how fee-paying customers would be expected to react (both in terms of behaviours and sentiment). Managers should also make hypotheses on expected indirect impacts across the platform ecosystem. This then signposts what data should be examined to validate or disprove each hypothesis.
Thinking beyond internal data, information should also be gathered on market performance, competitor activity and customer sentiment. This all adds to the armoury of insights to de-risk a price change and accurately anticipate how customers are going to react.
I’ve seen first-hand at eBay how pricing can be a powerful lever to encourage the right behaviours for a healthy ecosystem. We first encouraged sellers to sell more on the platform with volume based discounted fees. And then to weed out the worst sellers, we kept volume discounts only for sellers who were offering great customer experiences.
Pricing is a phenomenal lever to drive behavioural change. eBay has successfully used pricing as both a carrot & a stick to embed behaviours that are beneficial to the entire ecosystem. Another example would be when eBay began charging selling fees for the delivery costs for an item (as well as the item’s price). This successfully drove a step change in the availability of free shipping options for buyers on the platform. eBay had recognised this shift as a crucial requirement to keep pace with changing consumer expectations in eCommerce.
Uber uses dynamic pricing as a strategic lever to balance supply and demand. When the demand for rides exceeds the current supply of drivers, the cost of a ride is increased (“surge pricing”) until additional drivers become available. During the time of a “surge”, drivers are notified that demand is high. This is turn encourages them to come on the road to earn more. The surge pricing acts as a tool to re-balance the platform remarkably quickly.
How should business leaders think about introducing a price change? Sometimes, price changes may impact the livelihood of participants—taxi drivers, sellers etc. It is in the long term interest of platforms to be fair to their participants. Otherwise they leave! So how can platforms balance the interest of all their participants?
Platform participants are often wary of price changes and can jump to the conclusion that their own margins are about to be squeezed. Emotions run high when livelihoods rely on the platform in question.
Business leaders need to be sensitive to these concerns and the narrative is crucial. Perhaps there have been recent improvements to the platform that will save users time or grow their business. If prices are going up, it’s important to help users understand that the value they receive for their fees is also increasing. If prices are changing in order to drive behaviours that benefit the whole ecosystem, ensure customers understand the bigger picture.
Timing is also a key consideration. Platforms should be conscious of external circumstances or pressures on their users when planning the timing of a price change. Are there peak periods to avoid? Will the price changes require users to adjust their own systems which will take time?
You oversaw many significant price changes for large platforms, including eBay. In your experience, what would be your top recommendations for carrying out successful pricing changes?
Firstly, I recommend classifying changes on a simple matrix that captures the level of risk involved (High or Low) and the level of difficulty to rollback (Easy/Hard). Price changes that are high impact and difficult to roll back are good candidates for initial piloting. For example, testing in smaller markets can generate learnings that de-risk the rollout in larger markets.
Secondly, I believe the narrative is as important as the price points themselves. At eBay, we deliberately announced price changes for our B2B sellers as part of a package of updates once or twice a year. These ‘Seller Releases’ would include news about enhancements to other aspects of the platform, perhaps relating to Search, Billing or Customer Service. This enabled us to clearly articulate how the value equation was changing and the increase in price was justified by the platform providing more value to sellers. For example, if we were raising selling fees, we could highlight the corresponding increase in visibility or sales that our sellers could expect from other changes launched at the same time.
And finally, preparation is key to flawless pricing execution. Platforms need to consider every touchpoint that relates to pricing when preparing for a change. From fee pages to billing and customer service, they need ensure a consistent, accurate and well-articulated pricing narrative. All of these touchpoints play a role in how customers evaluate the value they receive from the platform. This in turn drives the health of the overall ecosystem.
Finally, are there any common mistakes or pitfalls people should be wary of before implementing a price change?
I think pricing changes which don’t go to plan can typically be attributed to three common causes. The first is where the value being generated for customers has been misjudged. A customer’s willingness to pay is rooted in their perception of what they get in return. So it’s important you have a clear grasp of what customers really care about. Validate your thinking with real customers and reflect this in your pricing decisions.
Another common pitfall is underestimating what it takes to deliver flawlessly when it comes to implementing a price change. Customers are fairly unforgiving when pricing is involved. It requires a complex cross-departmental effort to deliver flawless price changes. Ensuring the new pricing is communicated effectively and billed appropriately is just the start. Teams need to plan for related customer service queries, PR interest, monitoring customer behaviours and mitigation actions.
I’d say the third major cause of mistakes is misalignment between price incentives and long-term platform objectives. Let’s take the example of platforms that have opted to offer long-running incentives (such as free service for a year). They often find it extremely hard to re-price their service at the end of this long promotional period. Customers have forgotten that this was a time-bound arrangement. Pricing decisions made today therefore have a significant impact in the pricing decisions you make in the future.