How to Increase Margin for Marketplace Business
Increasing margin is a burning question for most leaders in marketplace business. As business leaders, we should develop some tactics around our sleeves. The best way to develop some highly performing tactics, we should be on the ground, visit and talk to customers a lot. Based on frequent customer field visits, here are some of the few ways to grow margin
Invest in long-tail SKUs
Within Popular Categories
Investing in long-tail SKUs within popular categories can be a great way to increase margins for marketplace businesses. This is because these products are often complementary to the popular SKUs that customers are already buying. For example, if a marketplace business knows that Indomie Ayam Bawang is a popular product, they can invest in other brands and flavors within instant noodle category, such as Mie Gaga Ayam Bawang, Sarimi Ayam Bawang, or Bihunku Ayam Bawang. Customers are more likely to purchase complementary SKUs because they are familiar with the product category.
Rare but Highly Sought After
In addition to being complementary, long-tail SKUs can also be difficult to find from traditional retailers. This makes them more valuable to customers and allows marketplace businesses to charge slightly higher prices. For example, a marketplace business could onboard a popular bread brand that is not widely available in stores. Customers would be willing to pay a premium for the convenience of being able to purchase this product from the marketplace business.
Complementary Categories
Customers are less price-sensitive to products that they do not purchase frequently. This is because they are more likely to be focused on the convenience of being able to find the product they need in one place than on the price. Marketplace businesses can take advantage of this by expanding into complementary categories that are not as frequently purchased.
For example, a marketplace business that sells sachet coffee and cigarettes could also sell coffee cups, plastic utensils, and lighters. These are all products that are complementary to sachet coffee and cigarettes, and customers are less likely to be price-sensitive when purchasing them.
By expanding into complementary categories, marketplace businesses can offer customers a wider range of products and increase their overall sales. This can lead to higher margins, even if the marketplace business needs to charge lower prices on some of the complementary products.
Bulk break high value SKUs into smaller UoM (Unit of Measurement)
Bulk breaking is the process of dividing large quantities of products into smaller quantities. This can be a good way to increase margins on high-value SKUs, as it allows marketplace businesses to sell the products at a higher price per unit.
One reason to bulk break high-value SKUs is to make them more affordable and accessible to cash-strapped customers. For example, a customer who may not be able to afford to buy a carton of Indomie Ayam Bawang may be willing to buy a smaller quantity, such as a pack of 10 or 20. By bulk breaking high-value SKUs, marketplace businesses can reach a wider range of customers and increase their overall sales.
Another reason to bulk break high-value SKUs is to increase customer buyability. Customers are more likely to purchase products that are convenient and easy to buy. By bulk breaking high-value SKUs, marketplace businesses can make it easier for customers to purchase the products they need and want.
Leveraging bulk break into a bundle opportunity
Bundling promotions are a great way to entice customers to try new products or to purchase more of your products. Customers may be hesitant to invest in riskier SKUs or categories. Bundling promotions can entice customers and reduce their risk.
For example, selling a carton of Indomie Ayam Bawang and Indomie Soto Mie for Rp 110,000 is slightly more expensive than buying a carton of Indomie Ayam Bawang alone at Rp 105,000, but it offers the convenience of having two different variants. This is because the bundle saves the customer time and effort, and it also allows them to purchase both products at once, even if they are on a tight budget.
Based on our experience, bundling SKUs has resulted in higher margins and overall sales. Occasionally, we have found that bundle SKUs outperform single SKUs even with slightly higher prices. This is because bundling SKUs solves customers’ cash flow issues and provides them with more value.
Increase commercial terms for certain unprofitable categories
One way to increase profitability is to relook at the marketplace category portfolio and identify categories that are not generating profit. If it is deemed unfeasible to serve a certain category in the long term with the current commercial terms, then marketplace leaders may need to make the tough call to increase those terms.
For example, if a marketplace is losing money on a category because the products in that category are heavy and expensive to deliver, the marketplace may need to increase the commission rate or charging additional fees for those products. Even though this may lead to a decrease in sales in the short term, it can help to improve the profitability of the business in the long term.
In one instance, a marketplace found that a particular category was losing money because the products in that category such as Ready to Drink were heavy, low in value, and difficult to deliver. The most frequent buyers of these products were female, and they found it convenient to shop for these items online and have them delivered to their doorstep.
The marketplace hypothesized that if they increased the commercial terms and prices for these products, customers would still find value in the convenience of having these items delivered to their door. They took the bold move to increase commercial terms by 100%, and to their surprise, the overall margin remained constant while sales have dropped.
This example shows that increasing commercial terms for unprofitable categories can be a viable way to improve profitability, even if it leads to a decrease in sales in the short term. Please note that increasing commercial terms can be a sensitive topic, and it is important to carefully consider the impact on customers before implementing such a change.
Onboard local products and local principals
It is natural to want to promote well-known brands that are already top-of-mind for customers. However, marketplace businesses should also consider onboarding local products and local principals. Local products can often be a good substitute for well-known brands, and they are often available at a lower price. By onboarding local principals, marketplace businesses can charge slightly higher commissions, as they are providing additional value-added services by making these products available to customers.
In addition, marketplace businesses have found that local principals often offer superior product quality that is well-received by customers. By onboarding local principals, marketplace businesses can not only improve their own profitability, but they can also better serve the community.
Overall, onboarding local products and local principals is a win-win for both marketplace businesses and customers. Marketplace businesses can increase their profitability and provide customers with more choices at lower prices. Customers can support local businesses and have access to a wider range of high-quality products.
Here are some additional benefits of onboarding local products and local principals:
- Support the local economy: By onboarding local products and local principals, marketplace businesses can help to support the local economy. This can lead to job creation and increased economic activity in the local community.
- Offer unique products: Local products and local principals often offer unique products that are not available from well-known brands. This can make marketplace businesses more attractive to customers who are looking for something different.
- Provide better customer service: Local businesses often have a better understanding of the needs of their local customers. This can allow them to provide better customer service than well-known brands.
Overall, onboarding local products and local principals is a smart business decision for marketplace businesses. It can help to improve profitability, support the local economy, offer unique products, and provide better customer service.
Build ancillary revenue by enhancing value added to customers
Ancillary revenue is revenue that is generated from non-core products and services. It is a great way to increase margins and improve the profitability of marketplace businesses.
One way to build ancillary revenue is to enhance the value added for customers. This can be done by addressing customer pain points and offering services that make it easier and more convenient for customers to shop on your marketplace.
For example, if you notice that customers are requesting early delivery, you could offer a paid early delivery service. Or, if you notice that customers are having cash flow issues, you could offer a pay later service with a small convenience fee.
When building ancillary revenue, it is important to adopt a continuous test and learn approach. Don’t be afraid to experiment with different services and pricing models. The worst thing that can happen is not to try.
Here are some other examples of ancillary revenue that marketplace businesses can offer:
- Subscription services: Marketplace businesses can offer subscription services that give customers access to exclusive products, discounts, or other benefits.
- Advertising services: Marketplace businesses can sell advertising space to merchants who want to promote their products to customers.
- Financial services: Marketplace businesses can offer financial services such as loans or payment processing to merchants and customers.
- Logistics services: Marketplace businesses can offer logistics services such as warehousing, shipping, and fulfillment.
By building ancillary revenue, marketplace businesses can not only increase their margins, but they can also improve the customer experience and make their marketplace more attractive to merchants and customers alike.
So, what’s your thought? What strategies have you used to increase margin in the past? I would love to hear your thoughts on how to increase margin in marketplace businesses. I am always looking for new and innovative ways to help businesses grow and succeed.