Digital Marketplaces: Mistakes Setting Pricing & Take Rates

What are the other mistakes that businesses typically make, in pricing and, specifically around the take rate?

There are a few things. One, on the pricing side, I would say that a lot of companies are not open to self-cannibalize. That was the strategy that Uber followed; they were much more comfortable self-cannibalizing their own revenue, for the long-term success of the business. It is very hard to cut your price, if your business is already growing very fast, at a certain price point. It’s very hard and requires a long-term vision, for you to cut the prices to this particular level, so that you can grow and create your network effect much faster. I would say, a lot of times, the complacency is one of the biggest mistakes that many of the businesses make. If they are successful at a certain price, they aren’t able to envisage what the success would look like at a different price point. That was one mistake.

The second thing is, being very open to experimentation at a different price point. It’s very hard to understand the consumer behavior or the price elasticity, until you have experimented in many different cities, with different customer behavior. So being a bit more open and being very quick to do those pricing experiments is very important.

On the take rate side, there is very good article from Bill Gurley, about what could make a very high take rate. The issue with take rate is, you need to balance between the right take rate. If you have it very low, it will be very hard for your business model to work and you will have a lot of losses and it’s very hard to move up. If you have a very high take rate, there will be a lot of friction in your marketplace, because it’s a very competitive field. If your take rate is high, obviously, the consumers can go to a different marketplace. Having that right balance between a take rate that is neither too high or too low, is very important. Also, being a bit more thoughtful about what you want to do. Do you want to charge the supply side or the buyer side, depending on where the frictions are, in the marketplace? For example, in our case, we rely on the fact that we are providing a lot of value to the sellers. It’s a very new platform, where we made it very easy for the sellers to sell their products and we are generating a lot of demand for them. So for us, it seems as if the 20% take rate is a good position for us, as opposed to having a 10% to 15% take rate as we are, ultimately, at the service of our sellers. If you are providing a lot of value, and lots of services for our sellers, a 20% take rate seems pretty reasonable.

Similarly, for Uber, a 25% take rate was required, because there was a lot of investment in R&D, technology and operations, which was required to support the marketplace they were creating.