Pricing in peer-to-peer retail

Pricing is one of the 4p’s of marketing, and in person-to-person retail (such as Etsy.com) it’s an interesting area to investigate. Why? Well, first because users set their own prices – so it’s a window into how real people think about value creation and value capture. And second? There might be a revenue opportunity in better understanding how your customers price.

To start, there’s a couple of accepted approaches to pricing:

• Cost + margin pricing
• Pricing relative to benchmarks
• Pricing at the willingness to pay

I believe Etsy’s marketplace uses all three methods of pricing, and that there’s a potential business opportunity in identifying what heuristics users use to price their goods.

• Cost + margin pricing is probably used on items that aren’t especially comparable to one another. Pottery, for instance, is an item that exhibits wide variation and pricing is probably a function of how long it took the craftsperson to create the item and the material cost of producing the item.
• Pricing relative to benchmarks is probably used for items where there exists clear price expectations from the brick and mortar world. Cufflinks, for instance, all seem to gravitate around two price points, $30 or $100 – i.e. mass market or high end. This roughly mirrors the prices for cufflinks at a Brooks Brothers or at a department store.
• Willingness to pay – this is most likely used for customers selling prized pieces of art, where the value comes from the appreciation of the piece rather than the materials used to make it. Incidentally, someone has listed their college diploma on Etsy for $50K.

Where’s the business opportunity here? Well, Etsy currently charges customers two flat fees: $0.20 to list, and a 3.5% transaction fee. The flat transaction fee might not be the most effective means of capturing value for Etsy. What if they changed to a fee based on category? That way, items where the seller is pricing to cost the fee could be lower so as to not eat into their margins. When the seller is pricing to the customer’s willingness to pay, the fee could be higher so as to capture more value. A more complex system indeed, but perhaps more profitable?