Above the Crowd

A Rake Too Far: Optimal Platform Pricing Strategy

April 18, 2013:

In a casino, the term “rake” refers to the commission that the house earns for operating a poker game. With each hand, a small percentage of the pot is scraped off by the dealer, which in essence becomes the “revenue” for the casino. While casinos use the term “rake,” a plethora of interesting word choices exist which all describe the same thing – keeping a little bit of the revenue for the company that is running the service. Examples include “commission,” “fee,” “toll,” “tax,” “vig” or “vigorish,” “juice,” “the take”, and “graft” (although this last one is typically associated with corruption in politics).

Many Internet marketplaces also have a rake or vig. The percentage rake is the amount that the marketplace charges as a percentage of GMS (gross merchandise sales), which typically represents net revenues for the marketplace. As an example, eBay’s 2011 marketplace revenues were approximately $6.6B against GMS of approximately $68.6B for a rake percentage of just under 10%. It may seem tautological that a higher rake is always better – that charging more would be better than charging less. But in fact, the opposite may often be true. The most dangerous strategy for any platform company is to price too high – to charge a greedy and overzealous rake that could serve to undermine the whole point of having a platform in the first place.

Before discussing the merits of low rakes versus high rakes, let us first take a look at current examples of different rakes across the Internet. The table above shows estimated rakes for several online businesses as a percentage of GMS. Do not assume that these numbers are specifically accurate as some vendors make these very hard to deduce.*  There is also the added noise of kick-backs that are common in industries like ticketing. You can see very high rakes in the case of iTunes, Facebook, and GroupOn down to especially low rakes for the likes of OpenTable and HomeAway. Amazon marketplace fees are published on their website, and vary by category, but they basically range from 6-15%, so lets say the average is approximately 12%. eBay recently launched an aggressive campaign attacking Amazon’s rate table on a vertical-by-vertical basis (those percentages can be found here). One company with an astonishingly high rake is recently IPOed Shutterstock, a photo-purchasing marketplace where the content owner receives only 30% of gross receipts. As we will argue below, this could in fact be a very fragile situation.

When evaluating new marketplace investments, we are naturally biased towards entrepreneurs who understand the strategic rationale behind the argument for a lower rake. If your objective is to build a winner-take-all marketplace over a very long term, you want to build a platform that has the least amount of friction (both product and pricing). High rakes are a form of friction precisely because your rake becomes part of the landed price for the consumer. If you charge an excessive rake, the pricing of items in your marketplace are now unnaturally high (relative to anything outside your marketplace). In order for your platform to be the “definitive” place to transact, you want industry leading pricing – which is impossible if your rake is the de facto cause of excessive pricing. High rakes also create a natural impetus for suppliers to look elsewhere, which endangers sustainability. These reasons are likely behind the struggles in GroupOn’s core Daily Deals business (North America Third Party Revenue is down in Q4 both YOY and QOQ). With a rake of approximately 38% (and this is “after” asking the merchant to underwrite a 50% discount to the consumer) the recovery from each transaction for the supplier is only 30%, representing an “effective” rake of 70%.

High volume combined with a modest rake is the perfect formula for a true organic marketplace and a sustainable competitive advantage. A sustainable platform or marketplace is one where the value of being in the network clearly outshines the transactional costs charged for being in the network. This way, suppliers will feel obliged to stay on the platform, and consumers will not see prices that are overly burdened by the network provider. Everyone wins in this scenario, but particularly the platform provider. A high rake will allow you to achieve larger revenues faster, but it will eventually represent a strategic red flag – a pricing umbrella that can be exploited by others in the ecosystem, perhaps by someone with a more disruptive business model. As Jeff Bezos is fond of saying, “your margin is my opportunity.”

Many people do not know this, but one of the most amazing Internet success stories is the European division of The Priceline Group, which operates under the brand Booking.com. Booking.com is the unquestioned leader in online travel in Europe, and represents a substantial portion of TPG’s astounding $35B market capitalization. Booking.com was not always the online leader in Europe – in fact they were a disrupter stealing the flag from other large incumbents. In the late 1990’s companies like Expedia and Travelocity had become enamored with what is known as the “merchant model.” Basically, these companies would “package” vacation offerings for the consumer and sell them as a bundled offering. The merchant model could produce a rake of well over 30%, and was therefore attractive to companies like Expedia. Booking.com took a much more aggressive approach (perhaps because it was the only one available) . They started with a 10% “agency model,” which not only represented a lower rake, but also provided better cash flow terms to the supplier. As such, they were able to signup nearly every small hotel in Europe. This resulted in more selection for the consumer and more support from the supplier base. Dennis Schall at  Skift.com has a wonderfully detailed account of how Booking.com came to dominate Europe, along with a more recent article addressing the lingering ramifications of the industry’s natural shift to the lower friction (lower rake) agency model.

It turns out that the average rake at Priceline Group  is even higher today, as they allow merchants to voluntarily bid up their rake for better placement in the network (you can see this in the table above). This is one of my favorite marketplace business model “tweaks.” You start with a low rake to get broad-based supplier adoption, and you add in a market-driven pricing dynamic that allows those suppliers who want more volume or exposure to pay more on an opt-in basis. This way no one leaves the network due to excessive fees, yet you end up with a higher average rake over time due to the competitive dynamic. And when prices go up due to bidding and competition, the suppliers blame their competition not the platform (part of the genius of the Google AdWords business model). This also allows you to extract more dollars from those suppliers who desire to spend more to promote themselves (without raising the tax on those that don’t).

Here is another interesting story related to rakes. In 2006, Benchmark started spending time with Gary Swart and the team at oDesk. We were quite enamored with their marketplace for skilled global talent, and were amazed at how the tools in their online workplace allowed customers to hire, manage, and pay for work from distributed teams. Combined with a bidding and reputation system, oDesk had built an “ebay for work.” At the same time, there were several larger players in the market such as Freelancer and Rent-a-coder. After discussing competition at length, the team came upon the idea of lowering the commission from 30% (which was standard in the industry) to 10% of overall costs. We were excited to hear such aggressive strategic thinking from the team, and they were excited to hear from an investor with a long-term perspective (this change obviously reduced current period revenue to 1/3 of its current level).  The rest is history. By 2009 oDesk surpassed the nearest competitor, and they are now the clear leader (larger than their top competitors combined) in the rapidly emerging “online work” industry.

All of which leads us to two very interesting rake examples that are front and center in today’s Internet – Facebook and Apple. Both of these companies charge a hefty 30% fee for transactions on their platform. Because most of the developers building on these platforms make software, the developers do not experience immediate pain when they share 30% of top-line revenue. After all, marginal costs are near zero, and therefore the fee is tolerable. But the real question is: Does the 30% marketplace on top of the platform help to reinforce the strategic positioning of the platform itself? Or is it merely a revenue extraction exercise? And if so, is there a risk that a “rake too far” could be a net-negative from a strategic standpoint?
Let’s start with Facebook. For the first several years, Facebook’s application platform was a smashing success. The distribution power of their pervasive platform proved a remarkable vehicle for many companies; particularly games companies. The platform was so successful so quickly that many early adopters of the platform rocketed to hundreds of millions in sales. Zynga, which was particularly adept at surfing the Facebook wave, catapulted to $1 billion in revenue in its sixth year of existence! Everything looked incredible. Fast-forward to today (only a few years later), and games companies are no longer betting their whole company on Facebook. Oddly, they are aggressively and strategically looking to expand non-FB distribution.

It is really hard to pinpoint exactly what went wrong. One might question Facebook’s commitment to being a game platform. Some might also highlight the lack of breadth in its success, and argue that Zynga had it “too good” versus other players in the field. And some might point to the rise of mobile which created a difficult platform transition for Facebook (which we will address shortly). In addition to these issues, there is also a strong argument that 30% was simply an excessive rake.

When you consider that many of these same game companies were also large buyers of Facebook’s ad products, it suggests that the “actual” rake, the real cost of being competitive on the platform, was much higher than 30%. Given Facebook’s position as the leading global social network with high barriers to entry, there was no need to maximize revenue on day one. It was far more important to prove the platform as a viable and efficient distribution mechanism for a broad range of products and services, and to convince all partners of the unquestioned efficacy of the platform itself.

Last November, Zynga and Facebook together renegotiated their previous long-term business agreement. According to the old agreement, Zynga was required to shell out 30% of their revenue even if they generated revenue “off Facebook”.  That is a very aggressive rake. Now Zynga is freed from many commitments it had made to the Facebook platform, and is allowed to build independent revenue streams outside of Facebook. The reality is that Zynga is still highly dependent on Facebook. However, Zynga shareholders are now tracking Zynga’s percentage of revenue tied to Facebook and consider it a positive if they can reduce this dependency. The bottom line is that the entire gaming industry has lost some of its enthusiasm for the Facebook platform, and it will be difficult for Facebook to recreate the magic and momentum they once had.

The Apple case is more extreme as the impact is more consequential. Despite the fact that Apple had/has industry leading hardware margins on its incredible computing products, Apple felt the need to take 30% of the revenue that was created by its app ecosystem as well as 30% of the revenue from media rentals and sales. In retrospect, demanding to be paid on both sides was a sign of overconfidence. However, the truth is they made this work for a very long time. Many companies, thriving on the Apple platform, didn’t exist and wouldn’t exist were it not for iOS. For itself, Apple has created billions and billions of high margin revenue and corresponding bottom line profits as a result of the amazing success of its 30% rake. All of which helped catapult Apple to the very top of the business hierarchy – the largest market capitalization company in the world.

The single-biggest problem with Apple’s aggressively high rake was its impact on potential long-term strategic partnerships. Specifically, two companies that potentially could have helped to reinforce the success of the iOS platform blinked, paused, and then went on to support a competitive platform. Both Amazon and Facebook could have been and should have been BFFs with Apple. And if Apple could go back in time, they would surely opt to be BFFs also. The most threatening company for all three players was clearly Google. However, Amazon owns a digital media business built around Kindle. And Facebook, as discussed, has a 30% rake business helping game developers distribute and monetize games throughout its network. When Facebook and Amazon read the terms of service of the iOS platform, and came to grips with the reality of the 30% rake, they saw an instant road-block – a show-stopper to their potential success on that platform. It was very hard to imagine their business model and Apple’s business model coexisting, and so they eventually punted on a full commitment to iOS.

The bottom line is they could have been amazing partners. If Apple had a lower rake, or even had they been less obstinate about their existing rake, a partnership could have formed (ask anyone in Hollywood – “splits” can solve any problem). iOS could have been both the definitive Facebook mobile device, AND the definitive Amazon shopping device. They could have been integrated from the beginning at a deep level: your social network in contacts; your Amazon 1-click credentials a fingertip away. Jeff Bezos, Mark Zuckerburg, and Steve Jobs on a stage together talking about the truly amazing things these companies have done together. It could have been awesome. But it didn’t play out that way.

Instead, as you are aware, Facebook’s new Home mobile application is available only on Google’s Android, Apple’s key nemesis of the past decade. There are currently no plans to offer Home on iOS, and Eric Schmidt, Google’s esteemed Chairman, cheered along in appreciation at the recent Dive Into Mobile Conference, “I think it’s fantastic — I love it,” Schmidt said. Instead of becoming a platform differentiator for Apple, Facebook is now aiding and abetting Apple’s only real competition.

The Amazon situation vis-a-vis Apple is more severe. In stiff-arming Amazon over its “30%” Apple not only alienated a key partner but launched a competitor. Amazon has obviously designed its Kindle Fire system on top of an Android variant. But that is only half the problem. Amazon, in true Amazon fashion, is now attacking Apple’s exposed business underbelly: the fat margins they receive by charging both high hardware margins and a high rake on content. As outlined in its recent Letter to Shareholders, Amazon does not believe that its customer should have to pay fat margins on hardware AND content. “Our business approach is to sell premium hardware at roughly breakeven prices. We want to make money when people use our devices – not when people buy our devices.” Amazon plans to subsidize the hardware platform and live solely on the content margin. The 30% rake basically launched a nasty competitor with a disruptive pricing model.

Number one on the list of Peter Drucker’s Five Deadly Business Sins is “Worship of high profit margins and premium pricing.” As Drucker notes: “The worship of premium pricing always creates a market for the competitor. And high profit margins do not equal maximum profits. Total profit is profit margin multiplied by turnover. Maximum profit is thus obtained by the profit margin that yields the largest total profit flow…” Most venture capitalists encourage entrepreneurs to price-maximize, to extract as much rent as they possibly can from their ecosystem on each transaction. This is likely short-sighted. There is a big difference between what you can extract versus what you should extract. Water runs downhill.

[After this post was written, several readers pointed out that perhaps the most amazing example of using lower pricing to disrupt a marketplace leader was Taobao vs eBay in China. If the pending IPO of Taobao's parent, Alibaba.com, is half as big as people expect, than this may have been the ultimate marketplace pricing win of all time.]

*Please let us know if you have other names you would add to the table, or if there are numbers you think need correcting. I will update the table and put the rolling updates in the answer to this quora post on the same topic.

71 Comments

  1. Ben Brabyn April 18, 2013

    Thanks Bill. What do you think is the best way for platform providers to develop their rake over time? As you point out, Apple in particular has done well out of its aggressive raking in the earlier years of its market’s development – should it have followed the oDesk example and reduced that across the board for all partners, or only offered “splits” to key partners like FB and Amazon?

    I founded http://www.bmycharity.com, one of the first providers of P2P online fundraising in the UK. Our rake was 4.3% on average in the early years of our market’s development and as the market matured we took the decision to reduce this to 0.7% and generate alternative non-raking revenues through corporate partnerships. The effect was immediate: volumes doubled in the first month though of course our cashflow was substantially reduced in the short term.

    Reply
    • bgurley April 18, 2013

      That is a great story and speaks to what is possible for the open-minded raker. I dont think giving certain deals to some and not others is a good strategy. That sets you up for an imperfect market.

  2. Jim April 18, 2013

    Fantastic article Bill. Thank you.

    Reply
  3. Alex Torrenegra April 18, 2013

    Thank you Bill. I agree with most of the article, specially with the analysis of Booking.com and ODesk, but I disagree with your analysis of the situation between Apple Facebook, and Amazon. I’m sure Amazon and FB didn’t run away from Apple because of the 30%. Do you think Apple would not be willing to lower the commission they usually get when dealing with other large players? Of course they would. In fact, they did. Amazon today is the provider of audiobooks of Apple.

    Anyway, it’s very interesting to see how Shutterstock is doing great. They bootstrapped for five years, then they raised a B round, and then they IPOed. Today they have 200+ people in NYC and are growing a lot. What do you think of them?

    Reply
    • bgurley April 18, 2013

      Certainly, a willingness to have a conversation is part of the issue. But these things are wrapped up in the same perspective — the attitude of the platform provider. Google splits is Play revenue with the carrier. Apple does not. I think Apple wasn’t receptive to lowering the rake in the first meeting. They were trying to get the money from Amazon AND compete in ebooks. It just didn’t work. By then, Amazon was working on a separate strategy.

  4. Brad Silverberg April 18, 2013

    Great article, Bill. In platform battles, my experience is that market share strategies beat short term profit maximization strategies. It’s a lesson that keeps on teaching. It’s a very delicate balance for platform owners between creating value for others vs. themselves, and the most successful ones realize the latter is a consequence of the former.

    Reply
    • bgurley April 18, 2013

      Very well said. This is the “real” essence of the iOS/Android debate. Google is willing to “share” more with others, and allowing “forking” is part of that sharing. It is “less intimidating” to FB and Amazon.

  5. Tim Raleigh April 18, 2013

    Great article. Thanks for this and the many you have written over the years.

    Reply
  6. Graham April 18, 2013

    Hi Bill smashing article there. Online sites work like any business where it’s possible to exploit economies of scale, but getting to that point where economies of scale are realised is difficult and involves clever pricing.
    We’re soon to launch a marketplace type site in Ireland and have set our rake at 5%, which is lower than our competitor in the UK’s 10%. It’s a newish marketplace where the numbers using online products to sell is currently low.

    What’s your thinking on adding in a SAAS element to the marketplace in order to double up revenue and sustain good content? Our thinking on this is that customers value a product more if they have to pay for it and as such it’s in their interest not to put up rubbish content into the marketplace.

    Just wondering if you think charging people to use the marketplace and the accompanying software is a bit over-zealous? Thanks

    Reply
    • bgurley April 18, 2013

      Hard to know without specifics. I assume you mean on the supplier side?

    • Graham April 18, 2013

      Yes so our plan is to charge the suppliers €xx per month to use the platform, which comes with a social CRM system and some other features, and charge them a 5% rake on each class or course they sell through the site.

  7. Mary Branscombe April 18, 2013

    The assumption from outside is often that all platforms are equal. For a small vendor, Amazon marketplace offers far more convenience than eBay (list an item once, it never expires, Amazon collects the money from the buyer and dispenses it to the seller, sell on the same page as the original item). Amazon sellers are businesses that value the convenience above the possibly lower fees, and those conveniences are built into the Amazon platform in a way eBay couldn’t offer if it tried. The value of the platform to the participant defines the level of rake they’ll accept – unless someone disrupts the market…

    Reply
    • David Justus April 18, 2013

      Along the same lines, it would be interesting to see a segmented version of the list.

      The most obvious way to organize the list is by product category. Shutterstock would not be an outlier when compared to iStockPhoto, which imposes a rake as high as 85% (http://www.istockphoto.com/help/sell-stock/about-royalties).

      Other organizing principles are the platform’s costs and the platform’s value to suppliers and customers. Many companies, as the post points out, didn’t exist and wouldn’t exist were it not for the iOS platform.

  8. Brad Silverberg April 18, 2013

    Yes, that is the essence of the iOS / Android debate. There are many lessons from Microsoft Windows (mid 90′s), Windows late 90′s and beyond, Sun Java, Twitter, Apple in the Mac days, Apple in the iOS days, Facebook, and many of the marketplaces you mention. Too often a platform owner, once successful, starts to think about what the customer can do for them rather than they can do for the customer. That’s usually the beginning of the end. What’s refreshing about Bezos’ shareholder letter is that, after all the success, he is still focused on creating value for his customers, not extracting the maximum rent.

    As you say, it’s all in the attitude of the platform provider.

    Get the balance right, and the virtuous cycle takes off, fueling ever increasing value for all involved. Too much control, too much value going to you relative to your platform customers, and you choke off others’ investment in the platform and they seek alternatives. Too little control, and you get fragmentation and too little value going to you (eg, Sun with Java). Watching Twitter over the years shows they are trying to figure it out, going from one extreme (too little) to still trying to find the right balance.

    Reply
  9. David Miller April 18, 2013

    In the famous Mossberg/Swisher – Jobs/Gates interview from a few years back, Jobs said that the one thing he could have learned from Bill Gates and Microsoft was how to be a better partner. I couldn’t help think about that statement as I read your comments about Apple.

    Changing a culture is extremely challenging, especially for a mature company like Apple, and it would seem that Apple hasn’t really changed even if they realize they need to. They seem to still be a poor partner.

    They had an early lead on the desktop only to squander it to IBM/Microsoft and they had an early lead in mobile they are in the process of squandering to Android. It seems like history is about to repeat itself.

    Reply
  10. Alan Wells April 18, 2013

    A couple transportation startups to add to the list for comparison:

    Uber: 10%
    RelayRides: 25%
    Getaround: 40%

    I’ve been testing Getaround and RelayRides head to head (as a car owner in SF) and am finding that RelayRides has more activity and drives more rentals for me, so anecdotally the lower rake seems to be working for them.

    Reply
  11. John S. Wilson April 18, 2013

    30% is too high yet Microsoft, Android, Facebook, and Amazon charge that amount or similar? Also your presumption is that only price held back large developers from further investing in Apple’s ecosystem. That’s not true. How do we know? Look at Google. While they did buy Android prior to working with Apple on the iPhone, they still were able to learn a lot from their extremely close relationship with Apple which assisted them in making Android a powerhouse.

    So my point is that if Google felt the opportunity was there to build Android in spite of their close relationship with Apple, then why wouldn’t other large companies do the same? No company as large as FB, Amazon, or Microsoft is interested in another company defining or limiting their opportunities in the mobile space. Just not a credible take on what’s happening right now.

    Reply
    • bgurley April 18, 2013

      Well Amazon runs its own version of “PlayStore” so it doesn’t pay 30% on Fire. Plus, Google readily gives away the 30% to distribution partners (which could include Facebook and Amazon). They rightly care about search (and maps).

  12. Jeff April 18, 2013

    Facebook Home is a free app. It’s not available on iOS due to technical obstacles, not due to a 30% rake.

    Reply
    • Grant May 3, 2013

      This was my problem with the article. Facebook doesn’t sell anything – even on Android. The reason Facebook Home is not on iOS is because Apple has locked down the iOS UI – nothing to do with Apple’s rake on a free app.

      Additionally, Amazon could not have started with iOS to make the Kindle Fire. iOS is not open source, but Android is. Again, nothing to do with rake.

      What Apple’s rake has affected:
      - Not being able to buy books through the Kindle store on iOS.
      - Microsoft so far holding out on Office on iOS (rumored). Though those rumors also point to MS capitulating on that this fall.

  13. Dan Cox April 18, 2013

    Excellent analysis. I do have a hard time thinking Apple’s high rake was the sole or even primary driver behind Amazon’s decision to enter the tablet market. I’d suggest that Amazon’s and Google’s actions were (separately) aimed at preventing a monopolization of the mobile/tablet market which would leave them with not only high tolls but Apple as a competitor with a significant marginal advantage, control over a closed platform and hardware, app ecosystems, and take-it-or-leave-it contractual terms.

    As support to this position I would note that Amazon and Google are competitive on iOS but don’t sell directly through the app store: there has always been a reasonable option for avoiding Apple’s 30%. What I would suggest Amazon’s true strategy was and remains today is to shift the market away from being an Apple monopoly by competing with (1) a hardware model in which Amazon operates on a break-even basis thereby *attempting* to push market prices towards an equilibrium in which margins are low/unattractive (thus either cutting into Apple’s market share with a significant price advantage, or forcing them to lower profit margins), and (2) with a be-everywhere app strategy which keeps them present and highly competitive on iOS devices (while avoiding Apple’s rake) and operating business-as-usual on Android systems.

    Google, however, is surely working to equalize both the mobile OS and hardware markets to keep Internet device markets as open as possible, which is the primary condition in which they have so far been best at dominating in. Preventing double marginalization is another solid theory as well (http://elidourado.com/blog/theory-of-google/).

    tl;dr: I would humbly suggest it may not have ever mattered what Apple’s rake was – Google and Amazon minimizing Apple’s monopolist positioning is the only strategy that gives them a competitive advantage.

    Reply
    • bgurley April 18, 2013

      Its hard to imagine the Kindle business model if they have to give 30% to Apple. Impossible actually.

  14. Mark Cramer April 18, 2013

    Great article, but this is not true: “High rakes are a form of friction precisely because your rake becomes part of the landed price for the consumer. If you charge an excessive rake, the pricing of items in your marketplace are now unnaturally high (relative to anything outside your marketplace).” Price is a function or supply and demand, not cost. If the rake was zero and seller could increase the price he/she would still do it to maximize profit. The rake has no impact on optimal pricing.

    Reply
  15. Archie Montoyo April 18, 2013

    Bill, you have the resources ever and I am so proud to be part of the oDesk Community. If you are looking for the best talent online workers here is all what you need ​ http://bit.ly/ContactCenterSupportOutsourcing .

    oDesk , I love the way you work!!!!

    Reply
  16. Mike April 18, 2013

    Interesting you didn’t mention Uber which extracts 20% by all reports .

    Reply
  17. Boris Wertz April 18, 2013

    Great post, Bill. Re Amazon marketplace: because of minimum / per-item fees and a hidden take on shipping rates Amazon marketplace has a take rate of up to 35% in the media category (where average selling prices are generally pretty low).

    Reply
  18. Ryan Best April 18, 2013

    Solid article. Almost so good I think I may change a service we provide to mimic the thoughts here. I can’t really argue the logic. The thing that bothers me it’s too simple and why I didn’t think about it first. Win win or no deal always ignored equals no deal… no brainer!

    Reply
  19. augusto April 19, 2013

    Good one.

    There are also flexible models where the fees decrease as the revenue of the “seller” goes up.

    Reply
  20. Michael Parekh April 19, 2013

    Bill, another “rake” to add to that great table is Microsoft’s take in the PC business with both Windows & Office over the years, vs. of course Apple’s rake on OS X & Productivity Apps in the Mac business. Great piece.

    Reply
    • bgurley April 20, 2013

      Microsoft is a tough one, because they actually charge a 0% rake to the development partners (Borland, Lotus, etc).

      However, they started at something like $15 out of a $5000 personal computer (3/10ths of a percent).
      As they went from DOS to Windows to NT, they raised this close to $100. Plus if you add in the “Office” stack you get closer to $200. AND the price of the PC kept falling to $1200 and even $1000. Now you are 20%!

      More importantly, they chocked off the oxygen to their platform. Linux was free for all. Better developer platform.

  21. Michael Parekh April 19, 2013

    On your discussion of what could have been in terms of BFFs, it brings to mind Apple’s very early licensing of Amazon’s 1-click for use in it’s then nascent iTunes store.
    Long way from there to Apple’s current quixotic attempt at it’s own online bookstore.

    Reply
  22. Spencer Wang April 19, 2013

    Great post and super on point as usual, Bill. On Amazon’s strategy, I think one question is if there is enough “content margin” to survive on if they break even on the hardware. They price aggressively on digital books and in movies, new release EST is basically 0% margin, catalog movies ~30%, but small volume. And Prime Instant Video has large upfront fixed costs.

    Reply
  23. William Mougayar April 19, 2013

    Hi Bill,
    Great analysis. AirBnB also charges from both sides, 3-6% from guests and 3% from hosts.

    Why not making it a 2 column list for the rake: Buyer and Seller.

    From your portfolio, how about Zillow and Dog Vacay?

    Reply
    • bgurley April 20, 2013

      DogVacay is 15%.

  24. Olumuyiwa Cliff Emiola April 20, 2013

    I think you have a wonderful analysis right here. When it comes to selling on a platform that has a little interest in it’s clients, the best thing is to use a longer stick to engage in business, so that when it’s obvious there is a cutthroat rake, one can easily bail off.

    Reply
  25. MacCruiskeen April 21, 2013

    And how does this compare to buying actual stuff in actual stores? Typically retailers buy goods from manufacturers at a discount of 40-60 percent (varies by industry and distribution system). Of course, the price offered to consumers can vary. Does the concept of “rake” only apply to digital products? And are all of these the same? Opentable, for instance, doesn’t really sell anything–it merely serves as a connection between buyer and seller. I’d guess its infrastructure needs are relatively modest. Whereas iTunes is actually reselling media files. Of course, because their business is entirely digital, they only need to maintain massive data farms, but not warehouses. Yes, Amazon and Apple could split their business profitably, but they don’t want to. The whole point of building that “ecosystem” is not having to share it with anyone. Think about it–Amazon’s Kindle uses a completely closed, proprietary format, and the devices can’t directly read a file in the open Epub format used by practically everyone else (even Apple, sort of). It’s possible to convert a file, but Amazon has no interest in making it easy to use non-Amazon content on their devices. I mean, there is obviously some point to what you say–I know many ebay sellers who are getting cranky about the ever-rising fees–but also that the reality is somewhat more complicated than just how much of a cut someone gets in a transaction.

    Reply
  26. Benign April 21, 2013

    If only American business would adopt a modest rake policy with respect to labor, instead of screwing us at every possible turn.

    Reply
  27. RV April 22, 2013

    Great post.

    Reply
  28. Pranav Dharma April 22, 2013

    You mentioned the dynamic rake model for the priceline group. Would’nt Google’s Adwords be an even more compelling example ? By letting advertisers bid on keywords, Google is not shutting out the smaller players, but at the same time, maximizing their rake ?

    Reply
  29. Adrian Meli April 22, 2013

    Great article Bill-a lot of good stuff in here!

    Reply
  30. Chris Hopf April 22, 2013

    Clearly Bill has captured a topic of interest to many and conveyed it in a manner to compel a number of comments and retweets.

    While I am tempted to break his post down with multiple thoughts, here are 5 quick thoughts on 5 excerpts . . .

    EXCERPT 1:
    The most dangerous strategy for any platform company is to price too high – to charge a greedy and overzealous rake that could serve to undermine the whole point of having a platform in the first place.

    QUICK THOUGHT: It is always (yes, always) easier to lower your prices than it is to raise your prices. I would rather you start too high and carefully adjust down based on data and results than to price too low, dilute the value of your market/platform and then have to try to raise prices in order to remain a viable/sustainable business. So I get what Bill is saying within the context of his overall post . . but still, the “most dangerous strategy” is to price too low . . . yes, even for a platform company.
    ***
    EXCERPT 2:
    If your objective is to build a winner-take-all marketplace over a very long term, you want to build a platform that has the least amount of friction (both product and pricing).

    QUICK THOUGHT: All of you readers thinking Bill’s kind post applies to your business by default . . . hello, Bill is clearly a smart and experienced professional . . . I am sure he would agree, stick within the context of his overall post.
    Also, key words in the above excerpt are “winner-take-all” and “over a very long term”. Does that apply to you and the value of the marketplace or platform you are building / have built? How defensible are your value advantages over competitors, alternatives and new entrants?
    Additionally, he speaks to the “least amount of friction”, but this is within the context of your goals and the realities of your advantages and what sets you apart from alternatives. Keep in mind the “least amount of friction” from a pricing perspective is often assumed to be “free”. But as we know, “free” has its own challenges and friction . . . so do not assume that “least amount of friction” means the lowest possible price your business can handle.
    ***
    EXCERPT 3:
    In order for your platform to be the “definitive” place to transact, you want industry leading pricing – which is impossible if your rake is the de facto cause of excessive pricing.

    QUICK THOUGHT: My version: In order for your platform to be the “definitive” place to transact, you want industry leading VALUE. Competing on low prices or low rakes is sure way to dilute the overall value of the profit potential of the market you serve in. I know Bill uses the terms “excessive”, “greedy” and “overzealous” at times in his post, but depending on your business objectives and exit goals . . . profitability is critical to the timing , level and sustainability of your market success. If it is truly excessive the market decides and they won’t pay or not enough will pay (part of Bill’s overall point). It not about the price or size of rake, it is about the value you deliver and your value advantages over alternatives.
    ***
    EXCERPT 4:
    High volume combined with a modest rake is the perfect formula for a true organic marketplace and a sustainable competitive advantage. A sustainable platform or marketplace is one where the value of being in the network clearly outshines the transactional costs charged for being in the network. This way, suppliers will feel obliged to stay on the platform, and consumers will not see prices that are overly burdened by the network provider. Everyone wins in this scenario, but particularly the platform provider. A high rake will allow you to achieve larger revenues faster, but it will eventually represent a strategic red flag – a pricing umbrella that can be exploited by others in the ecosystem, perhaps by someone with a more disruptive business model. As Jeff Bezos is fond of saying, “your margin is my opportunity.”

    QUICK THOUGHT: Much I could comment on just his excerpt alone, but two quick thoughts . . . (1) Bill speaks to the critical balance that must be achieved with a marketplace / platform business. Focus on communicating the value, benefits and advantages of your marketplace or platform. If you focus on price or rake, so will they. (2) Your willingness to race to the bottom on low prices or rakes is not a sustainable strategy. Creating value is hard and creating sustainable value is even harder . . . lowering your price or rake is easy . . . and as Bill notes, easy for everyone . . . it doesn’t make it smart though and is the source of many regrets throughout history. Hopefully, not for you.
    ***
    EXCERPT 5:
    Most venture capitalists encourage entrepreneurs to price-maximize, to extract as much rent as they possibly can from their ecosystem on each transaction. This is likely short-sighted. There is a big difference between what you can extract versus what you should extract. Water runs downhill.

    QUICK THOUGHT: Again, be very clear and honest with yourself about (1) what your business objectives are, (2) the stage in the value lifecycle your particular market is in, (3) your value advantages today and your value roadmap for the short and long term future. This will better prepare you to determine how much Bill’s kind post applies to you or is more a commentary on the examples he covers.

    FINAL THOUGHTS:
    I have slightly modified a common reminder I offer to businesses . . .

    It’s not the price [rake] they don’t like, but what they understand they are (or are not) getting for that price [rake].

    Thanks again to Bill for the excellent post and to others for their thoughtful comments.

    Think of all the time and dollars you have invested into your business, products, services and solutions . . . I encourage you to best position yourself, your team and all your shareholders/stakeholders to discover your full market potential on an every day, every transaction basis.

    If you are a marketplace or platform business, take the time to understand your customers and what will generate the highest possible Return On Value or Return On Rake for all participants. Bill has helped you get started with this thinking.

    Be better than the rest,

    Chris Hopf
    PricingWire
    @pricing

    Reply
  31. Christian April 22, 2013

    Fantastic article, Bill – one of the best I’ve seen about marketplace economics. In terms of expanding – would be fun to compare this to the original “Rakers” – e.g. casinos and their online cousins as well as the financial guys – wonga, lendingclub, etc.
    Besides the rake, ebay has certainly mastered the add-on categories such as sponsored listings, etc. I’m expecting others, esp. Amazon to move deeper into that in the future as well as they start tapping ad revenue.

    Reply
  32. simon levene April 22, 2013

    great post, bill

    i have been thinking about how to determine the appropriate “rake” for internet marketplaces for a long time. Not just how to optimally set price; but also why/how those with existing liquidity could be vulnerable to attack

    perhaps the most interesting marketplace the piece doesn’t mention — one of the largest dollar-wise and the most opaque on the web today — is google’s adsense. there, every website other than their largest publisher/partners (who fix a rev share) are paid out without actually knowing what % of the gross advertiser dollars they are receiving. further, according to its terms of service, google has the right to change the rev share at will. Only insiders know how google sets prices, but at least the last time i looked at this (admittedly several years ago) it appeared that google was taking a 40-50% rake from most third party publishers. one would suspect these kinds of margins should theoretically make google vulnerable, but so far there has been only segmented pockets of supply of comparable liquidity for the spot-pricing of real-time information queries — and no booking.com-like wholesale disruption on the horizon

    another worth calling out is etsy (disclosure: i am an investor) where its founders devised a revenue model, similar in spirit to what you conclude, that they designed to be attractive relative to ebay. the rake was set at 3.5%, plus a nominal listing fee (20 cents) that helps to keep the marketplace clean from “spam” listings. the listing fee also originally doubled as a pay-for-placement fee, the “opt-in premium” you mention, with the most recent listing payment automatically securing top placement on a first-in-first-out basis. so if a seller wanted to remain at the top of the page in a given category, he or she needed to re-list frequently. the 20 cents started to add up to a lot of premium placement fees

    Reply
    • bgurley April 22, 2013

      Thanks for this. Yes Adsense seems like an anomaly. They do have an amazing amount of liquidity which helps. Only a monster (with a lower rake) could mount an offensive.

      Etsy structure sounds quite smart.

  33. Ann Jones April 22, 2013

    I wish you wouldn’t use the word extract. This was how Enron thought – extract value from the customer. Why not instead think of what fee you can charge given the value that you deliver to the customer. If you deliver superior value, then you might be able to charge a higher fee.

    In other words you deliver value to the customer and the customer is paying a fee based on your positioning. I know this is a nit picky, but lots of people think of literally extracting value from the customer in a negative way. People in the energy industry used to hate it whenever the word “extract” was used simply because it was what Enron was trying to do.

    Reply
    • bgurley April 22, 2013

      It was used to highlight contrast — especially for the high rakers. I understand your point, and as my theme is chare more, not less, I am obviously in tune with your sentiment.

  34. umedro April 23, 2013

    good stuff, Bill. will there be a follow up with some suggestions for determining optimal rake? would you say Facebook/Apple could regain some lost mojo by lowering their rake? In a way, it does make sense to start high and keep lowering until finding that efficient rake frontier….

    Reply
  35. Rob Kornblum April 23, 2013

    Great post Bill.

    I think you should include the original and disruptive players in classifieds. The classified advertising “marketplaces” charged posting fees, which is basically the casino charging a vig just to sit down at the table. First Craig Newmark, then Indeed, disrupted that with a free and performance-based rake, respectively.

    Craigslist in particular took aim at ALL the margin by going with free listings.

    Reply
  36. David Shepley April 23, 2013

    Excellent Article.
    Mercadolibre – Founder and CEO Marcos Gallperin’s strategy is aligned with your thesis around marketplace pricing. The company charges a relatively low take rate of 5-6% with a view of the long-term.
    Etsy, does anyone know what they charge merchants? Seems like a terrific marketplace.
    Homeaway is a perfect example of your “tweaks” analogy. They started with a low base take rate and are now rolling our tiered pricing where you can pay a higher listing price to be viewed higher in search rankings. This strategy appears to be working well.

    Reply
  37. Alex Miller April 24, 2013

    Bill, Fantastic post.

    Have you looked Tencent’s rake on their mobile game platform? They use graduated system with no rake if you make under 100k RMB, 30% between 100K and 1M, and 50% between 1M and 10M.

    Reply
  38. Jeff Zaretsky April 25, 2013

    Wow, Bill. This analysis and context is super-helpful for us. Thank you for adding “rake” to my vocabulary :-). We’re providing the first flash sale marketplace where designers and brands launch their own sale events direct to shoppers. Think ‘eBay for flash sales’. One key leg of our value prop to sellers exploits the high rake assessed by retail flash sale sites (their margin is our opportunity ;-)).

    Part of our value prop to shoppers is no middleman markup. And also avoidance of de-facto price inflation from excessive rake by an intermediary, which I conceptualize and articulate better thanks to your post!

    BTW, I found your blog following a link from Fred Wilson’s blog. Fred had an excellent related post where he talks about Etsy’s model here: http://www.avc.com/a_vc/2013/01/mba-mondays-revenue-models-peer-to-peer.html.

    Thanks again!
    Jeff

    Reply
  39. Stephen Alfris April 25, 2013

    Very interesting article.

    I very much liked the reference to the five deadly sins. The truth for Apple is that it has been able to exist with high margins (form all directions) for so long because people believed in the product. They should survive without Home and Amazon if people continue to believe. The difficultly will be if users loose the faith.

    I also think one of the reasons that Apple charges significant rakes on both sides is because they do not want to take a punt on where the margin will exist in the future. This worked for them in the content vs hardware choice in the face of music piracy and the ipod and I think they are trying to replicate this optionality once again.

    Reply
  40. Ken O'Kennedy April 26, 2013

    Great post – thank you very much.

    Visa and MasterCard both charge a very low rake and business models, despite attempts to disrupt, are pretty entrenched due to the number of cards in circulation and acceptance by merchants creating a strong network effect.

    Ritchie Bros. Actioneers (RBA) charges 10% -11% all paid by the seller with a nominal buyers fee. They auction used industrial/construction equipment in unreserved auctions.

    Reply
  41. Ken O'Kennedy April 26, 2013

    *Auctioneers

    Reply
  42. link April 27, 2013

    apple and google were fantastic partners, with Eric Schmidt sitting on apples board.

    I venture that Amazon and Facebook would’ve pursued the same strategy despite the friendlier rake. Amazon, in particular already had the kindle and were banking on it for future strategy and market growth.

    Reply
  43. Matheus Riolfi April 30, 2013

    Hi all and thanks Bill for the great post. I liked the comments as well and it seems the consensus here is that low prices/margins are the critical to attract users in marketplaces. I think this is true in the case of two-sided platforms, where network effects are very high. However, I wonder if the optimal strategy in those markets is to lower prices first, to get the winner-takes-all rewards, and increase the price after that. In those markets the barrier to entry is so high that new entrants might not be able to compete even if they charge lower prices, since the amount a user saves is lower than the cost of having less/worse suppliers available in the platform.

    What are your thoughts?

    Reply
  44. Tim Schwartz May 1, 2013

    Bill – one interesting emerging marketplace is electronic health records acting as marketplaces for third-party apps in healthcare. Market is very nascent with substantial differences between the rake various vendors are taking – will be interesting to watch how it evolves over the next several years.

    Reply
  45. Richard Brock May 25, 2013

    Great post. I agree with the final comments that the high rake is only going to lead to new competition. I am surprised that Apple have not reduced their rake in new areas of business and when selling physical items.

    Having worked in the digital media space there is a greater ability to charge higher rates. But when you start to sell physical items (books, movie tickets) your ability to maintain these high rakes gets harder.

    There is a great opportunity for people like Apple to differentiate rake rates and expand their market. This could be the first step towards a true ewallet solution.

    Reply
  46. Anton June 6, 2013

    Well structured and to the point post. I totally agree with the quote from Jeff Bezos – “your margin is my opportunity.” – and we can see in almost any industry that once a company increases prices to move up market and doesn’t have an offering for the low end market, then this creates a competitor who dominates the low end market and then moves up.

    Reply
  47. Jeremy Head June 11, 2013

    Really interesting post. Thank you. I’ve not read the forest of comments in detail… and others might have made this point… but I don’t buy your iOS example. I just don’t think Amazon and Facebook would have got into bed with Apple any more than they have done if the rake was lower on iOS. They are both big aggressivem, arrogant businesses that want to own the platform themselves. Kindle Fire would have happened regardless… Well, that’s what I think.
    It’s interesting to note how neutered the functionality of the iOS Kindle app is. You can’t purchase Kindle books using it. You can only read them once you have gone over to Amazon and bought them. Why is that? Who is stonewalling who? I honestly don’t know but as a consumer it sucks.

    Reply
  48. Rip Gerber July 2, 2013

    Bill, terrific to-the-point analysis on the give/rake balance. The discussion extends to traditional industries. I run a company that resells data from wireless carriers, location data specifically. The carriers are losing ground to OTT and innovative service and content providers. In response they are “opening up their networks” with access to subscriber data via APIs. It is the right strategy to compete against Google, Apple, Facebook and Amazon, and the next generation of innovators. The fatal flaw? The carrier rake is enormously long. The data that carriers could distribute has a cost of near zero, yet the rake ask is enormous, and thus prices the carrier data above market. Ask any Android or iOS developer seeking location data. One must ask why, since there are very smart people working at the likes of Verizon and AT&T. My thesis is internal financing models, antiquated from the network build-out days, driven on ROC spreadsheets. You mention this in your article indirectly: the key to optimum rake is a financing strategy that aligns with market strategy. VCs take a long-term view, public companies manage mostly to quarters. Is there a correlation between optimum rake and capital strategy?

    Reply
  49. Ray Cassidy July 6, 2013

    Since getting involved in the online marketing field. It’s always puzzled me how we justify the massively high rake on many of the services and “products” provided. I want to make a healthy profit without working myself to death, but I feel very uncomfortable charging the sort of mark up that many of the pundits and coaches advise. Picking up on Richard’s point just above here; can anyone explain why it is, that nebulous digital goods can sustain monster mark ups; when real 3D through the letter box stuff finds itself squeezed ever harder?

    Reply
  50. Michael Taus July 23, 2013

    Great article, Bill. While I agree with all of your comments, I think you neglected to point out the 3rd dimension of this pricing puzzle.

    As with any large market, there is always more than one winner. And the pricing relationship of each participant to the others is that 3rd dimension.
    For example, Apple’s pricing position is predicated on it’s elite and well-marketed brand (think glass and steel retail stores). Amazon by comparison is known as a value play (whose most effective branding might be the side of a cardboard shipping box).

    One could argue that regardless of Apple’s rake (which was “naturally” higher), Amazon would have identified a large opportunity and pursued a value-based strategy.

    Reply
  51. lyuben August 5, 2013

    Great post, tnx a lot

    Reply
  52. Eugene October 16, 2013

    Definitely a worth piece of text to look into. Thanks Bill.
    Especially Zynga – Facebook part was very informative to me.

    Reply
  53. Darwin Widjaja November 4, 2013

    We’ve tried a different rake formula for Friend Trusted, and the one that works well for contractors are $5 appointment fee and 5% referral fee. It’s been half a year since I read this article and I need to give you credit for inspiring us to lower the rake for maximum traction

    Reply
  54. Adam January 9, 2014

    Bill,

    Very much enjoyed the post. How has your opinion changed on this after Uber, Lyft and Sidecar have all implemented surge/demand based pricing, and have elected to have different agency models?

    Thanks for tons of continually good reads!

    Reply
  55. I think everything wrote made a great deal of sense.
    But, think on this, what if you added a little content?
    I ain’t suggesting your information is not solid., but suppose you added a
    title that grabbed a person’s attention? I mean A Rake Too Far: Optimal Platform Pricing Strategy | Above the
    Crowd | By Bill Gurley is a little boring. You could glance at Yahoo’s home page and watch how they create
    article headlines to grab people interested. You might add
    a video or a related pic or two to grab readers interested about what you’ve written.

    In my opinion, it might make your blog a little livelier.

    Reply
  56. Rus Nikita February 10, 2014

    Hey Bill there are very few pages that I bookmark even though I read a lot, about 2-3 books per week and thats not including all the articles I read online. Anywho after reading some of you content I choose to add you to my exclusive list of Bookmarked Sites and now my you will be one of my regular followed sites, Congratulations! Keep up the great work!

    Reply
  57. Ronnie Somerville July 12, 2014

    Great piece, but I think that having OpenTable perched at the top of the table as a shining example of “rake virtue ” is misleading!

    Apple are taking 30% of a digital good with zero marginal cost of production. OpenTable are taking 1.9% of a restaurant bill where the restaurant has to pay for the raw materials, staff, and overhead.

    If one assumes a nett margin of 10% then the OpenTable rake is more like 20%.

    Reply

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