In the first post of this pricing series, we set out some unique aspects of platform based pricing and identified six broader objectives that can be supported by pricing strategies. The second post addressed the first three objectives, specifically creating growth, balancing supply and demand and enhancing the quality of customer interactions.

We now turn our attention to the remaining three objectives:

• avoid disintermediation
• create good customer experiences for both producers and users
• ensure your pricing model can evolve to meet different challenges –in particular moving from a free model to a fee based one.

 

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How do you avoid disintermediation?

A risk for many platforms is that customers will make initial contact using the platform but then form an on-going transactional relationship outside of the platform (leakage). For example, simple, repeated tasks such as house cleaning may quickly move ‘off-platform’. This makes it difficult for the platform to share in the value created by these interactions. Responses include different pricing for first interactions and on-going use (e.g. TaskRabbit take 30% on the first interaction with a producer, and 15% subsequently) or simply monetising the lead/introduction (e.g. Thumbtack charges suppliers a fee per quote).

The more direct the connection between participants the greater the risk of disintermediation. Transactions requiring face-to-face meetings may lead to off-platform transactions, while anonymous mediated communication is likely to be more conductive to on-platform transactions. The type of product and services offered are therefore important since complex transactions for non-standard products are likely to require negotiation and rich communication between parties. Conversely, small value transactions for homogeneous goods will require fewer interactions and are likely to be easier to retain on-platform.

Pricing structures such as one-off joining fees can negate this risk but they may conflict too much with the goals of rapid growth and frictionless pricing. In these cases, a strategy of monetising value-added and complementary products & services may be appropriate.

The key is to understand the most valuable services provided by the platform in addition to search/matching, and offer them as stand alone products. Additional services could include insurance, reference checking, disputes and remediation services, simple safe payment systems and emergency on-demand services (e.g. a nanny platform may offer and monetise fully accredited and endorsed emergency nannies in addition to providing a free ‘regular’ nanny marketplace service).

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How do you ensure that ‘producers’ pricing creates a good customer experience for ‘users’?

A platform architect must consider not only the impact of the platforms’ own pricing strategies on interactions but also the impact of producers’ or sellers’ pricing structures. Understanding the impact of different pricing approaches from sellers is one of the factors that will guide the optimal level of openness in the governance of the platform.

One aspect to consider is the nature of the good/service itself. It is often argued that simple, standardised, low-cost and high-frequency services benefit from standardised pricing across all sellers. This is generally to make the customer buying experience efficient and reassuringly predictable. For example, Uber standardises its pricing to ensure a consistent experience for users.

There are however other considerations that are more related to the strategic design choices of the platform architecture rather than the nature of the product. In particular, the overall differentiation strategy of the platform and the customers it is targeting.

For many of the platforms that standardise seller pricing, there are often competing platforms offering greater pricing flexibility. The platform may be seeking to provide superior pricing innovation or competition amongst sellers, greater flexibility for sellers to differentiate their product/level of service, or improved customisation and negotiation options for buyers. It is therefore important to ensure that the level of control over seller pricing is aligned with the overall strategy of the platform, not just the nature of its products. For example, eBay introduced its “Buy it Now” option, in order to compete with other platforms and e-commerce sites offering a fixed price, while also keeping its auction model to allow more price-sensitive customers a chance to secure lower prices.

In addition, where sellers’ prices are highly standardised, the platform architect must consider tools to help balance supply in the platform. One example is Uber’s ‘surge pricing’ approach to demand management. These dynamic pricing tools can sometimes be seen in a negative light by customers, however. As a result, platform managers may want to make sure that customers see the link between the premium price and the service while retaining control over their purchase. When Uber increases its prices during a “surge”, customers can wait or upgrade/downgrade ride categories to avoid paying a premium.

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How do you transition from one pricing model to another (in particular transitioning from free to a fee based model)?

A common platform strategy is to offer services for free and then seek to introduce new pricing structures once a critical mass of customers is reached. Many successful or promising platforms have failed in part because they managed this transition poorly, like Myspace. While platform managers may not want to charge fees early on, they should have their pricing transition strategy in mind from the beginning.

Platform managers also need to understand that customers will often invest significant time into a platform community and so will see the initial pricing as a type of ‘social contract’ promising a long-term return on their investment. While the lessons on these transitions are still being learned, some patterns are emerging:

• Customers are highly sensitive to unexpected price changes and shifts from free to fees. For example, Meetup lost 95% of its listings after introducing fees[1]. Customers may only invest time into a platform community because they expect the current fee structures to continue. Clarity on whether a platform’s initial pricing is an ‘Introductory offer’ or a long-term strategy is therefore important to ensure that user growth and the monetisation model are sustainable.
• Where new fees are introduced, the platform should seek to provide new value to its customers as well. This will help balance out changes to the ‘social contract’ and so maintain the customers willingness to ‘invest’ in the platform.
• Offering highly relevant but optional fee-based services can enhance the value of the platform and provide revenue without upsetting the ‘social contract’ linked to the core interaction.

In general, it is risky to unexpectedly alter the pricing or scope of the core interaction of a platform. Only platforms with extremely high value compared to competitors are able to change the price of the core interaction, and even then they may choose to limit the change to specific customer segments. For example, Facebook has placed constraints on commercial pages to assist its paid advertising business, but personal users remain free from direct fees.

Transitional pricing strategies can be designed to leverage the core value proposition of the platform and build complementary businesses. Such an approach also opens the door to the monetisation of the wider platform-powered ecosystem rather than potentially disrupting the core interaction of the platform.

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In conclusion

Platform pricing has unique challenges. Many platform pioneers, who have been through many trials and errors, have provided us with useful insights into the effects of various pricing models. This has allowed us to identify patterns and infer high-level pricing principles for new platform businesses. When badly designed, pricing may stifle positive network effects and slow growth. However, the right pricing strategy can generate tremendous value while supporting the strategic objectives of the platform. Blablacar is an excellent example where pricing has been an enabler of growth and customer loyalty as well as a source of revenue. Blablacar’s exponential growth and success following a single pricing change is testimony to the importance of finding the right platform pricing model.

Platform pricing can sometimes be more an art than a science and experimentation to test high-level hypotheses remains key. We hope that these posts help provide a set of guiding principles that you can consider and adapt to develop winning pricing strategies for your platform-powered business. Of course each business is unique so feel free to give us a call or drop us a line if you’d like to discuss.

[1] Business Insider, May 24, 2013, Meetup Founder Scott Heiferman: Have Patience And Guts To See Your Startup Through

 

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Justin Coutts is a Platform Value Architect at Launchworks. He specialises in pricing and value proposition design for multi-sided platform models.