A Rake Too Far: Optimal Platform Pricing Strategy

April 18th, 2014 / Comments Off on A Rake Too Far: Optimal Platform Pricing Strategy

By Bill Gurley

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.

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