An online marketplace is a platform that allows two parties to meet and potentially undertake a transaction. A crucial aspect when setting up your marketplace is how you structure your pricing and payment. This article will explain:
- payment structures;
- how payment structures relate to pricing; and
- factors which may affect your decisions.
While the exact numbers, percentages and structures will be up to you, this article will explore your options and their implications.
Membership or Subscription
One way to structure payment is to require that customers, providers or both, pay a subscription or membership fee to sign up to your platform. This may be a one-off, upfront payment made when signing up or it may be a regular payment.
Alternatively, you could combine a membership fee with listing fees or commissions. Some marketplaces use a combination of both membership fees and commission fees.
A popular payment structure in marketplaces is a commission structure. You may take a commission payment as a percentage of the money paid from one party to the other, or as a fixed amount per transaction.
When determining your price or percentage for a commission payment, you should consider that:
- a lower commission on a higher payment may encourage customers to make a bigger purchase;
- your commission should not necessarily be as high as possible, as this may deter users; and
- your commission may be relative to the value you provide as an introducer or as a site where a transaction can take place.
Another way to make money from your marketplace is to charge for listing fees or paid promotions.
Factors That May Affect Pricing
Factors you should take into account when determining your pricing include:
- the cost margin per product or service;
- your competition. Look at your competitors and what they charge. Will a customer be able to get the same or similar product from another marketplace for less because that competitor’s commission is less than yours;
- the nature of the particular product or service you are selling; and
- who is setting pricing for the sale of the goods or services? It could be you, the seller or the buyer.
Streamlining the Sign-Up and Purchasing Process
The price of goods or services will have a big part to play in whether a user makes a purchase. Streamlining the purchasing the process may encourage users to continue using your platform rather than sidestepping your payment system. Some examples of factors which may reduce friction and encourage parties to use your marketplace include:
- integrating a payment and booking system into your website so that transactions stay within your site;
- using an escrow or credit-card pre-authorisation functionality to ensure that suppliers are paid at an appropriate time. This may be once a booking is made, at the start of the service or at the end of the service;
- website functionality which allows one or both parties to indicate that the service is complete;
- promising to intervene if there is a dispute between the parties. If you do not make this promise, then make this clear in your terms and conditions;
- curating the onboarding process of suppliers and providers to ensure that they meet an appropriate standard to sell through your site; or
- providing a messaging service for parties to communicate.
Considering pricing and payment is foundational when planning your marketplace. It can affect your profitability and how attractive you are to customers and suppliers. In addition, the way you structure payment will affect how you build your website and draft your terms and conditions. Carefully consider your competition and cost structures, and consider streamlining your payment system to encourage customers and suppliers to use your marketplace. If you have any questions about your payment structures, get in touch with LegalVision’s e-commerce lawyers on 1300 544 755 or fill out the form on this page.
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