INFORMS Journal Marketing Science New Study Key Takeaways:
- Auctioning the top five spots on a cost-per-click basis and sorting items below the fifth position by expected sales revenue can nearly triple profits.
- Listing products by consumer preferences can hurt profits, because consumers will buy lower price products.
- The monetization of a marketplace requires a careful balance of merchant and shopper needs.
CATONSVILLE, MD, October 3, 2019 – An estimated $1.9 trillion was made on the top 100 online marketplaces around the world in 2018. In spite of the growth in online marketplace platforms like Amazon, eBay and Etsy, research is limited regarding their fee structure and ranking strategies.
New research in the INFORMS journal Marketing Science finds profits can be nearly tripled by changing both the pricing procedure and the product ranking system. The study, “Monetizing Online Marketplaces,” conducted by Carl Mela of Duke University and Hana Choi of the University of Rochester, used this economic approach to help retailers improve revenues for online marketplaces.
“Online marketplaces can make the most out of their service by charging vendors for item views, item clicks and item purchases or any combination of these. We find a hybrid monetization strategy that provides the highest revenues,” said Mela, a Finch Foundation professor of business administration at Duke.
Researchers looked at data collected from an online marketplace from May 2014 to February 2016. That is roughly 74,000 users, 238,000 visits to the platform, more than 6,000 products and 600 sellers. They found auctioning the top five spots on a cost-per-click basis and sorting items below the fifth position by expected sales revenue can improve profits by 181%.
This study considers ads and sales in the context of how product ranking decisions affect consumer browsing, clicking and purchasing. Price and number of pictures affect consumer preference the most. However, sorting items by consumer preferences leads to lower profits because low price items appear first. As the consumers’ average cost of browsing and clicking are $0.89 and $3.90, respectively, it is costly to search higher price items when lower price ones appear first. Sorting by expected revenue instead considers both preference and price.
“Our results could suggest that clicks have a branding value because they can generate future demands for the advertiser’s goods. Impressions generate little value beyond clicks in our data,” continued Mela. For this reason, marketplaces should consider charging merchants for clicks to supplement revenues from transactions.
About INFORMS and Marketing Science
Marketing Science is a premier peer-reviewed scholarly journal focused on research using quantitative approaches to study all aspects of the interface between consumers and firms. It is published by INFORMS, the leading international association for operations research and analytics professionals. More information is available at www.informs.org or @informs.
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Ashley Smith
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Catonsville, MD
[email protected]
443-757-3578