Four ways to achieve pricing excellence in retail marketplaces

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Third-party marketplaces are a growing force within retail. From department stores to grocers to big-box electronics and home-goods brands, many leading major retailers have launched a marketplace (or put doing so on their strategic priority list). Amazon popularized a model where the retailer does not control the product assortment and its selection and pricing, but instead third-party sellers—a mix of manufacturers, distributors, and resellers—own these decisions on the retailer’s platform. McKinsey research suggests 50 to 60 percent of retail revenue growth over the next three years could be driven by marketplaces.

The appeal is simple: consumers love a diverse array of goods, and third-party sellers can vastly expand a company’s assortment without the inventory and carrying costs of doing so independently. Department stores, grocers, big-box electronics, and home-goods brands have all gotten on board, and momentum behind marketplaces is likely to continue.

But this growth comes with a caveat. To navigate marketplaces, retailers have to manage new considerations with marketplace pricing, and therein lies the challenge. Retailers may operate the third-party platform, but sellers typically control what to charge. Left unmanaged, what they charge can vary significantly across channels. Those discrepancies present potential risks both for customers already feeling the squeeze of inflation costs and for retailers. Our research for one client showed that 70 percent of its customers would only buy an item on a marketplace if they believed they would pay the same or less than they would if they purchased it directly from the seller.

With many competing offerings to choose from and inflation on the rise, all it may take is one unsatisfactory encounter with a marketplace to drive a customer away for good. But while managing a marketplace may be more challenging than operating a first-party direct-to-consumer channel, there is a way for retailers to achieve pricing excellence. From our work with several top marketplaces, we have distilled four practices that have helped them—and could help others—avoid the potential pitfalls of uncompetitive pricing.

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1. Vet sellers before onboarding

Before they add a brand or seller to their marketplace, retailers need to know if the merchant will make a good partner or if they could introduce pricing risks. Fortunately, most merchants have an active e-commerce presence, which can provide them with key business intelligence. Acquisition teams in many top marketplaces use price-scraping software to scour the web and capture publicly available data on what sellers are charging for their products in different channels. They then use that information to determine whether a merchant is a fair candidate for onboarding and under what terms.

Contracts should clearly specify how pricing will be tracked, what constitutes egregious pricing, and what actions will be taken if agreed-upon terms are breached, including delisting. Communication is key. While retailers cannot control the prices a seller sets, they can help shape rules and incentives—for example, deprioritizing items in search that have increased prices by more than 5 percent over those of a basket of competing retailers.

Top retail marketplaces could also offer site placement guarantees to sellers that provide competitive pricing, and they could provide merchants with analytics and case studies that show the correlation between competitive pricing products and sales growth.

2. Encourage price competition among sellers

Leading digital marketplaces filter the items consumers see when they search, based on the items’ perceived value. Algorithms prioritize the most competitively priced offers, adding preferred products to the platform’s recommendation engines and streamlining the number of clicks needed for a consumer to purchase them. Amazon, for example, was the first mover in creating a “buy box.” When consumers search for an item, the leading offer is positioned in a single box with convenient, one-click “buy” or “add to cart” options nestled alongside it. Other sellers’ offers are clustered in a separate box further down the screen.

New retail marketplaces could consider similar strategies, potentially leading to sellers offering more-competitive pricing to the retailers and, ultimately, to customers. To do so, leaders not only need to invest in developing the pricing algorithms but to create processes that support this kind of pricing infrastructure—for example, allowing a diversity of sellers to offer the same item. They’ll also need to develop the back-end tools to find and match these items dynamically, so that when sellers add an item that is the same as an existing item, the listings are consolidated and seller-versus-seller price competition begins.

Five ways to ADAPT pricing to inflation

Five ways to ADAPT pricing to inflation

3. Consider rigorous, multilevel competitive scraping and tracking processes

Because pricing changes all the time, retailers may want to create mechanisms that allow them to monitor the price competitiveness of their marketplaces on an ongoing basis. The price-scraping tools used to evaluate the publicly posted prices of other sellers can also be used to track pricing performance more generally, helping retailers determine what percentage of sellers are adhering to pricing guidelines and which have evolved their pricing over time. Web-scraping and related pricing analytics are also available as an outsourced offering and could be considered—in close consultation with the retailer’s legal counsel.

To prepare the groundwork, retailers will need to identify the categories on their marketplace that consumers will look to as bellwethers, in much the same way as grocers identify known-value items, such as milk and eggs. Those whose marketplaces are new could use the volume drivers on their first-party sites and elasticity analyses as a starting point. Over time, retailers can expand the frequency and coverage of their price-scraping activity, for example, looking at a wider variety of competitors, marketplaces, and direct-to-consumer channels. Because sellers often have different competitor sets for their core products, retailers will need to fine-tune their price-scraping analytics to scan these relationships.

Achieving this level of sophistication could come in stages. In the beginning, retailers could focus on tracking prices for the categories that generate the top 10 percent of sales, then expand to the middle 20 percent, and so on. The frequency of web-scraping and data analysis can also build, from three or four times per week for top categories to daily, as the systems mature. A large marketplace revamped its pricing processes to ensure third-party price scraping became a top priority for their pricing analytics team. They included third-party items in their weekly reporting dashboard on price competitiveness, knowing that overall price perception was being shaped by both types of items. As a result of the changes, category managers began looking at pricing across first-party and third-party items and could make better decisions on price changes and vendor selection, and better discern where third-party items were impacting overall price perception.

4. Make it easy for sellers to participate in promotional and loyalty programs

Our work with clients has shown that promotional and loyalty programs drive customer engagement and sales. But consistency across channels is key. A retailer that launches a back-to-school sale with 30 percent discounts on select clothing, backpacks, and sundries may naturally want to include items from both first-party and third-party sellers to showcase the broadest offering and avoid disappointing or confusing customers. But this can be challenging in a marketplace setting. Retailers not only need to encourage sellers to participate in its own promotions and loyalty programs, they also need to ensure that sellers adjust their prices at the right time to align with the timing of the retailer’s promotion, and that their marketplace and its offers are included in the seller’s own promotional efforts.

Retailers should communicate their expectations with sellers up front, ideally in the contract, laying out the desired frequency and duration of promotional participation and the specific requirements of the loyalty program. In return, retailers should make clear how sellers can gain from participating in promotions, through sales uplift and enhanced customer engagement.

The easier and more rewarding a retailer makes it for sellers to participate in its programs, the greater the seller uptake, which leads to a much stronger and consistent customer experience as well as ultimately better pricing for consumers. Top marketplaces do the following:

  • release promotional calendars well in advance
  • create clear processes to canvas and secure seller participation
  • measure third-party participation during promotions to ensure fair share of traffic and sales is driven toward third parties
  • provide operational support to execute promotional programs (such as keying in promotional pricing on behalf of the seller)
  • establish account management services to track promotional performance and margin impact

Third-party marketplaces are becoming a major source of growth for retailers that understand the pricing fundamentals and ensure that the marketplace doesn’t negatively impact consumers or pricing infrastructures. Leading marketplaces will invest in the systems, structures, and practices that will allow them to optimize their price competitiveness and keep customers coming back.

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