It’s simply inevitable that high-flying businesses have their growth rates moderate over time, as the universe of unaddressed consumers becomes smaller, and each incremental sales becomes more difficult or less of a natural fit. To counteract these forces, many technology companies attempt to offset their slowing growth in new customers by raising prices. In fact, the most successful (and quasi-monopolistic) software companies of all time have consistently used this as a page in their playbooks, Microsoft raised the price of Windows from just over $200 for Windows 95 to nearly $300 for Windows XP just six years later, and Oracle managed to raise rates by nearly 20% even during the grips of recession in 20081.
However, while one would assume that the natural network-effects of marketplace businesses would lend themselves to a similar potential for steady price hikes (which for a marketplace is the “rake” charged on the platform), analysis of various marketplaces tells a more nuanced story. Marketplaces that sell “digital goods” (such as courses or photos) are in prime position to raise their rake over time, while other marketplaces should seek to raise their rates over time only in conjunction with additional value added services.
We’ve classified a few marketplaces as “digital goods” sellers, including Udemy (online education), Shutterstock (stock photography), and Teachers Pay Teachers (lesson plans). In each of these cases, the goods offered by suppliers are essentially “non-perishable” and can be continually consumed by buyers without any additional seller effort. Contrast this with a labor marketplace such as Postmates, where a delivery person needs to get back out and work each time, and high-rakes decrease the marginal willingness to work more time. Once my lesson plan is up on Teachers pay Teachers, I will happily accept any incremental revenue, and even if the take-rate goes up, I have little incentive to cut off future income by taking the work down. This is the reason why Shutterstock has take-rates in excess of 70% and Udemy managed to significantly raise its rake to 50% and higher.
For other marketplaces, we’ve noticed a clear divide between the performance of companies that have raised their rates in conjunction with additional services and those that have not. Groupon’s take rate increased meaningfully from 41% in 2011 to nearly 55% in 20152 without much in the way of additional services for sellers, while at the same time it’s stock price fell by nearly 90%. On the other hand, Zillow has been able to grow its average revenue per subscriber from $258 in the fourth quarter of 2011 to $286 in the first quarter of 2014 by providing Premier Agent subscriptions, and up-charging for additional visibility of listings3. As we mentioned in the prior piece, we believe Etsy is on the right-track by boosting their effective rake through additional tools to power sellers. Finally, it’s important to note that without additional value-added services, marketplaces may be forced to lower their take-rate simply to maintain momentum. From Q2-13 eBay’s effective take declined from nearly 3.8% to just over 3.5%4, while the market cap of the company remained essentially flat. In the early days of marketplace growth, founders should focus first and foremost on ensuring that the rake doesn’t introduce undue friction while building liquidity. However, we believe that long-term marketplace success often requires the introduction of additional services to justify rake and created sustained performance.
3) Zillow 10Q
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