Deciding on a pricing strategy for your travel marketplace is at the very centre of your business model. It’s what will define your platform in the long run, and most importantly, your relationship with customers and sellers going forwards.
To begin with, let’s take a closer look at what you need to consider before potential revenue streams are even put on the table.
Before you place any pricing strategy in place, it’s vital that you understand how your sellers are making money and what kind of profit margins they are working with. Setting your commission at an acceptable rate is going to be key to attracting and retaining sellers as you get started.
Generally in the world of travel, profit margins are thin because the competition is so fierce. Your sellers are likely to have plenty of overheads. Food, booking fees, transport, local taxes, excursions and accommodation can all be packaged together in a single product. So in other words, it’s likely that your sellers will not have a huge profit margin that you can freely skim from.
So the key takeaway here is preparation. If you want to attract tourism sellers into your marketplace, you’re going to need to understand how they work, where they make their profit, and how much commission is going to be acceptable from their end.
As well as having a good understanding of your vendors' profits, other competition is going to go a long way to defining your offering to prospective sellers. Sure, you can set a 40% commission rate on transactions, but if there are other marketplaces out there providing the same service for half the fee, you’re not going to get anywhere fast
Take the time to understand the sources of your sellers’ sales. Do they have arrangements with other marketplaces? Do they only sell through their own website? Do they only have a physical presence, a store that people walk into? The answers to these questions will give you a firm understanding of your sellers’ methods of distribution, and will inevitably help to shape your pricing strategy.
The term ‘Network Effect’ refers to the idea that a marketplace becomes more valuable to its users as it grows bigger. In travel, it’s easy to see why this might be the case. Accommodation services such as AirBnB offer the perfect example. More accommodation across more countries and cities gives a greater amount of choice to customers and therefore the platform becomes more valuable. More choice inevitably means more visitors to the platform, which, in a nutshell, is why strong network effects can justify higher commission fees. If your potential sellers will benefit from joining an expanding marketplace, they’ll be willing to pay for it.
In the world of travel services, the benefits are not so clear for your prospective sellers. Sure, if you can offer them a huge amount of exposure then they will be willing to accept a high rate of commission, but if throwing them among a bunch of their hottest competition actually loses them sales, they may not be so keen. Every marketplace is different, and you need to decide how the structure of yours will impact upon potential sellers.
Let’s suppose that your travel niche has been chosen. Now you need to approach potential sellers with an offer that monetises your marketplace without discouraging buyers or sellers.
Let’s take a look at your options. With travel marketplaces, the platform operator will generally produce revenue from the seller’s side. Customers are unlikely to accept paying for simply locating and facilitating travel and tourism services, while vendors understand that positioning themselves in front of your audience is worth paying a price for. On the other hand, attracting a good range of sellers is key to getting your marketplace off the ground. The amount of commission and the way that it’s taken need to be carefully thought through.
So how can you devise a sustainable pricing strategy that doesn’t alienate sellers or customers while driving the growth of your marketplace? Let’s take a closer look at some of the monetization models you can employ on the seller side without ruffling too many feathers.
So first up we have the transaction fee, which is as simple as it sounds. Every time a seller completes a transaction on your platform, the marketplace takes a small percentage. This is considered acceptable by most vendors, as they only incur fees when they’re actually making money, and can adjust their prices to account for the commission. Because of this, it doesn’t feel like they are out of pocket at any time. On top of that, the customers don't see all of this happening in real time, so won't therefore be put off by perceived price hikes.
Transaction fees have a few obvious benefits. First of all, they encourage vendors to join your marketplace. Or rather they don’t dissuade vendors by charging upfront or requiring a registration fee. Secondly, your suppliers carry less risk because they only pay you when a sale has been made. The last thing vendors want is for their products to sit on your platform and burn a whole through their pocket if the sales dry up.
The transaction fee model also scales nicely in the travel industry. The more trips your vendors successfully sell, the more your revenue increases. Everybody wins.
The difficulty comes in deciding what rate of transaction fee to go for. A small percentage is a good place to start, but you may want to arrange separate deals with each of your sellers, depending on their profit margins, the products they are selling and the quantity they are likely to sell through your marketplace. The bottom line is simple: If you can afford to offer a bespoke transaction fee to each of your sellers that takes into account all of these factors, you'll be in a much healthier position going forwards.
So with all of that in mind, why would you even consider listing fees, which would hit all of your vendors before a sale is even made?
Well, if vendors only need to pay to list items, they are free to rake in the full amount from sales, and are therefore encouraged to offer as many options as possible to your audience. On top of that, listing fees can help to ensure that your marketplace is only populated with quality, well thought out products. Sellers that need to pay to list on your site are more likely to create convincing, well-written listings. That can only be a good thing from the customer's perspective.
To bring in extra revenue from the listing fee model, many marketplaces offer extra things to sellers to give them an upper hand. These features might include a highlighted listing or pride of place on the homepage. If you serve a big enough market these add-ons can be lucrative.
Of course, you could charge per listing, in an effort to keep the quality of listings high, and per transaction. But this double-edged approach, although convincing on paper, may cause potential vendors to baulk and take their business elsewhere. Perhaps it's only something that should be introduced once your marketplace is established and has a clear offering to propose to vendors.
So you’ve decided to charge per transaction or per listing, or maybe a devilish combination of the two. But how do you go about selecting an appropriate pricing strategy? Even if you've chosen a niche in the travel market that isn't fully catered for, there’s still going to be an element of competition. Because of this, your marketplace needs to offer value to vendors, not simply be an expensive addition to their sales network.
Intuitively, it might seem as though you need to make as much money as possible from every transaction in your marketplace. You're running a business after all, so that instinct is understandable. But travel marketplace owners have to be aware of how a pricing strategy will impact things in the long term.
What could happen if you set your rates too high?
Well, to begin with, you'll quickly undermine the whole point of having a travel marketplace. Remember that an excessive take rate will always, inevitably, find it's way to the travellers you are eagerly trying to service. It only takes a little jump in prices across the board for your marketplace to become untenable for sellers and, by association, too restrictive for customers.
For that reason, a high rate of commission will be hugely damaging to your hopes of keeping up supply and attracting fresh buyers and sellers. Fees that are too high will encourage your vendors to look elsewhere, and your platform will, even if operating in a carefully chosen travel niche, become vulnerable to competitors with lower rates.
Strictly speaking, that's not really true. There is a right answer, but there is certainly no one-size-fits-all solution to setting up a marketplace pricing strategy. To hit the sweet spot with your vendors and still make a profit yourself, you'll need to understand how they operate, where they sell, and what kind of prices they can tolerate before selling through your platform becomes too restrictive.
To begin with, driving supply has to be your priority. For that reason, it's best to err on the side of caution and keep fees to a minimum as you get started.
Whether you go for a transaction fee or a listing fee, you'll need to build a marketplace that can offer an efficient, valuable platform to vendors and customers...
Travelshift software is a proven travel marketplace solution to get you started in the industry. Essentially, we've done all of the hard, (often tedious) and technical work for you. All you need to do is plug in your vendors, devise great content, and build an engaged community of users. Have a closer look at our product here.