Pricing for platform companies like Uber, airbnb or eBay, where value is co-created by participants, comes with unique challenges. This short post compares and contrasts pricing models of platforms versus traditional businesses, and highlights key principles that strengthen platform ecosystems.

 

In traditional businesses, pricing strategies consider the price sensitivity of customers and the opportunity to differentiate prices across different customer and product segments. A mixture of value-based, cost-plus, and competitive benchmarked pricing is generally employed to maximise profit (all subject to the regulatory constraints in some sectors).

Platform-powered businesses must consider all of the above, but also need to deal with unique features linked to their business models. Since platform participants intrinsically contribute to the creation of value –by driving their car with Blablacar, renting their house on airbnb or selling their crafts on Etsy– pricing strategies need to shape behaviours of participants in a way that maximises the value of the entire ecosystem. In that light, pricing is no longer a necessary evil adding friction to transactions but a powerful incentive capable of supporting platforms’ strategic objectives.

Key platform-specific pricing considerations include:

1. Platform customers create value for each other when using the platform due to network effects and platform trust-building
2. Pricing on one side of the platform often impacts the other side of the platform due to cross-elasticity of demand across the platform
3. A critical mass of customers may be required to make the platform valuable to other customers
4. Lastly, and this is a profound difference, platform pricing truly shapes the behaviours of platform participants and therefore needs to be set to enhance the overall value proposition

Given the above, a successful pricing architecture will not only seek to generate revenue but also address broader questions on how to:

• Support rapid user growth by avoiding ‘pricing friction’
• Balance supply and demand on the platform through pricing
• Grow the quality of customer interactions and experiences
• Avoid disintermediation (i.e. transactions moving ‘off-platform’)
• Ensure that ‘sellers’ pricing creates a good customer experience for ‘buyers’
• Transition from one pricing model to another (in particular transitioning from a free model to a fee based one)

 

To achieve these goals, the platform architect should consider the distinct characteristics of their platform business model alongside the key design questions of platform pricing. These interrelated (sometimes overlapping) pricing design questions include:

• Which pricing model to follow? (e.g. charging platform users, advertising model, freemium / selling of value add services);
• Who to charge? (e.g. all users, one side, third parties, specific customer sub-segments on each platform side); and
• Which pricing structures to use? (e.g. one-off joining fees, annual membership fees, transaction fees – fixed amounts or proportional to transaction value -, donations as well as discounts & rewards where negative pricing is required).

 

The set of pricing tools and the objectives they contribute towards are diverse (see table below). The key is to build pricing strategies that enhance the quality of interactions on your platform by enabling and reinforcing desirable behaviours from your customers.

 

Matching Platform Objectives with Pricing Levers and Examples

 

OBJECTIVE	POSSIBLE LEVERS AND EXAMPLES
Rapidly grow platform membership	Freemium (SoundCloud) Transaction fees (Airbnb)
Encourage members to transact frequently	Membership fees with unlimited use (Match.com) Subscription for reduced fees (Artfire)
Balancing growth on each side of the platform	Credit Card rewards (Amex issuing) Surge Pricing (Uber)
Generate revenue for profit and cross-subsidisation	Credit Card merchant fee premium (Amex acquirer) Value-add features for reduced fees (Opentable)
Embed loyalty and discourage disintermediation[1]	Discounts for ongoing use (TaskRabbit) Lead generation fee only (Thumbtack)
Differentiate/Attract the most valuable customers	Ecosystem strategy (Iphone premium customers drive App store spend)
Improve inventory quality	Listing fees, (Spareroom) Super seller discounts (eBay TopRated sellers)

[1] Disintermediation is where customers bypass the platform in subsequent transactions after initially connecting through the platform.

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Next steps

We consider in more detail how pricing strategies can utilise – and combine – these levers to support the dual objective of growth and engagement in this follow-up post, and monetisation in the final part of this pricing series.

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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.