Why You Shouldn’t Let The Marketplace Choose Your Prices For You

The 2010’s are looking to be the decade of marketplaces in startup land. Big names like AirBnB, Uber, Lyft, Etsy, as well as veterans like Amazon are dominating the funding and growth conversations in tech.

Take eCommerce for example. Despite how large of a market it already is, it’s still the only $1T+ market growing at double digit %s. Online marketplaces have the power to make many industries more efficient, and the surface has barely been scratched.

While the concept seems fairly consistent across companies (buyers and sellers, marketplace takes transaction fee, etc), there’s one major difference that affects the dynamics of a marketplace both now and down the road: whether the marketplace or the sellers dictate the price.

On one end of the spectrum you have AirBnB, Etsy, and eBay, where sellers have full control over their prices and are responsible for figuring out the sweet spot that will let them sell quickly while optimizing profit. On the other end, you have Uber, Lyft, ClassPass, etc. where the marketplace dictates the price, whether it be a flat reoccurring fee (ClassPass), or dynamic pricing based on multiple variables (Uber, Lyft).

The good thing about marketplaces that dictate the price is that sellers don’t have to worry about optimal pricing, they just provide their product/service at the highest quality they can. It’s good for buyers because there’s no need to shop around, you just fire up Uber, tell it where you want to go, and see an estimate of cost, everything else is handled behind the scenes.

While this may sound pretty good for both parties, the downside of marketplace dictated pricing can potentially heavily outweigh the upside. By not letting sellers choose their price, a marketplace essentially eliminates the Invisible Hand effects that come with natural marketplace dynamics.

This is especially dangerous because as we’ve seen time and time again, many tech markets tend to be winner take all, and a marketplace with no competitors dictating prices will tend to result in monopolistic behavior very quickly. Because their revenue generally comes from transaction fee %, they want products to sell on their platform for as much as the market will allow, if the product or service is essential enough, they know that they can raise prices without losing too many buyers. On the flip side, if the marketplace has fierce competition, they can keep lowering prices to stay competitive, and the sellers are at the mercy of this.

Because of this conflict of interest problem, it’s generally a good idea to either price things as a seller yourself, or use a 3rd party platform that determines optimal price for you. The latter approach seems the best of both worlds, since the work is done for you, the 3rd parties interests align with yours, and buyers still get healthy competition among sellers.

With Denarri, we have plans to do this without requiring sellers to use 3rd parties by allowing you to pick a minimum price you’re willing to sell at, and adjusting the price accordingly if it isn’t hitting sales targets. In the fitness space, DIBS seems to be tackling this for studios that want dynamic pricing taken care of for them while still maintaining control. In hospitality, Beyond Pricing does this for AirBnB hosts.

Services like this will be increasingly important as more and more industries get the online marketplace treatment, and I’m excited to see what creative ways this problem will be solved.

Edit: Boris Wertz (Version One Ventures), someone who knows Marketplaces incredibly well, made a solid point to me after reading this post. With marketplaces like Uber and Lyft, the product being sold has very little differentiation (outside of things like driver ratings), so it’s much more efficient for the market to decide prices in order to keep things fast for both sides.

However, it remains to be seen what that’ll look like if any of the players reach monopoly status. I still stand by my point for more differentiated marketplaces like ecommerce, beware of the “sell it for me” features that have been popping up.