Bill Gurley on the 'Rake': pricing strategies for online marketplaces

Posted by Alex on August 28, 2019

 

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I came across this classic post on the "rake" by Bill Gurley written back in 2013. It's as relevant today as ever, and for anyone running a marketplace (or trading Apple or Amazon stock), it's worth a re-read. 

Gurley, General Partner at Benchmark Capital and one of the most respected VCs in the valley, highlights how transaction fees can create problems for marketplaces – even if the higher fees result in increased revenue in the short-term. 

Clear losing strategies

The "Rake", as he calls the total transaction fee, can create an opening for competition. In comparing examples of the time, he highlighted Freelancer.com and other oDesk competitors (now UpWork) which were eventually crushed by oDesk and its 10% fee (vs the 30% industry standard). The same happened at Booking.com, winning nearly all of the European hotel travel business by lowering its fees from 30%, the industry standard, to 10%. 

Taking what you should, means not charging excessive fees – he calls out the Apple App Store and Facebook's 30% fees; the iPhone and Facebook ecosystems would look quite different with a 5% or 10% fee. Because of the high fees, instead of working within the Apple eco-system, and investing more in the platforms, developers like TripIt (where I worked) and others (Evernote, Amazon, etc.) spend their time trying to get customers to buy off the platform – because it's worth it! Saving 25% of your revenue and in the case of software, 90%+ of your fixed costs is a major consideration. If they chose a fair fee – say, 10% – nearly all of those off-platform transactions would be eliminated. 

In a similar example, StubHub showed how terrible a high price strategy can be. By bundling fees into the total price, thinking this increased transparency would endear them to customers, StubHub sacrificed its position as the primary marketplace. This actually enabled competitors to emerge who previously either didn't exist or had less than 1% market share. Merely by showing a high price (in search engines like Google), StubHub destroyed 30% of its business and created a competitive environment where previously there wasn't one. 

Clear winning strategies

Taking what you should – not what you can – and pitting customers against each other emerge as the best strategies. An early low price creates the opportunity to gain marketshare and acquire more suppliers – rather than going for margin on day one. oDesk and Booking.com did this, charging 10% where others charged 30%. As Gary Swart, CEO of oDesk at the time, told me, "Who's going to try to undercut you at 10%? Nobody's going to move over to save 2 or 3%."

Amazon does this all the time. Whether it's devices (Echo, Kindle, etc.) that are sometimes 1/10th the Apple equivalent, or services like Prime, Amazon sets a low price to drive adoption, then (usually) doesn't raise it – unless they "have to". Apple's high priced (and late to market) "HomePod" has negligible market share; only a fool or fanboy would build apps for it. Echo has 61% marketshare, meaning it's probably in 30% of US households by now. Apple doesn't even register in the survey. 

The other winning approach is to pit your customers against each other. Google AdWords claims a huge percentage of revenue of its advertising customers because of the auction model.  Similarly, Booking.com sells higher placement in search results, reflecting suppliers willingness to pay more of a share – thus a higher "rake". Didi, the Chinese ride hailing app, will get you a ride faster if you offer a bigger tip to a taxi driver, competing with other riders at the time who want a ride but aren't willing to pay as much.  

Rake and dynamic pricing

Many companies look at dynamic pricing as a way to increase price – and most consumers dislike it for that reason. However, the smartest companies focus on reducing the most friction on every transaction – and that includes lowering prices whenever and wherever possible. 

For any marketplace considering pricing strategies, Bill Gurley's article is a must read. After all, he wrote it right around when he invested in Uber, a company that turned pricing into one of the most powerful and compelling growth tools ever. 

Topics: Price Optimization, Online Prices, Pricing, eCommerce, Revenue Management, Marketplace Pricing, Marketplace management, Pricing Strategy, Pricing Best Practices, marketplace fees