Keep the take rate low
One of the hardest lessons in business
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Sometimes marketplaces are too hungry to eat.
They set their take rates so high that it becomes a point of friction to participants actually transacting.
Afterall, as Jeff Bezos likes to say:
“Your margin is my opportunity.”
One of the hardest lessons to put into practice as a business, whether it’s a marketplace, or really any model, is to leave more value on the table than you take off. If you do, good things tend to happen.
I’ve been obsessed with take rates and how they function as a way to either constrict or enhance demand. I dove into the theory of marketplace economics with Chuck Fisher, the CFO of Turo, the largest Peer-to-Peer car sharing platform in the world. This was a case study in how making short term cuts to your own economics can pay back in spades over the long term. Afterall, at the core of any successful marketplace is getting past the initial transaction, and building a place to play long term games with long term people.
Make it easy to become a participant
To get to scale, you need participants.
Our theory of marketplace economics is we want to keep the take rate as low as it possibly can be for as long as we can possibly keep it. The fundamental premise is put as much economics in the hands of the participants in the marketplace, the hosts, and the guests as you possibly can so that the marketplace scales. Let the flywheel start to spin, get momentum, grow, where every new participant coming into that marketplace, every incremental node attachment is adding value for all the incumbent participants in the marketplace. That's the theory. Just make it easy to attach, make it easy to become a participant. Whether it's host or guest supply and demand, it's always constantly pushing and pulling between those two forces.
Sometimes you should even LOWER your rate
A great business leader recognizes times of dislocation in the market, and makes structural changes to capture long term value.
“If you cast your mind back to the summer of 2021 when we were all coming out of lockdown and we were traveling, it was that summer of revenge travel. And there was the car apocalypse that people were talking about because all the traditional rental car companies had to de-fleet to stay alive in Covid and they had no supply, and then everybody's traveling like never before, most of it domestically because it was still kind of complicated to travel internationally. People are scared of airplanes. The demand was through the roof. We had to do everything that we could in that moment to meet that moment. It was a unique opportunity to acquire hosts and guests.”
And here comes the big move…
“And so the first thing that we did as we were kind of coming into the Memorial Day is we cut our take rate from host’s by five points across the board because we wanted to provide the economic incentive for hosts to add a second, a third, a fourth car, for a new host who was curious about it, but hadn't decided to pull the trigger yet to become a host. And particularly in certain markets where demand was extraordinary, like Hawaii, people were paying a thousand dollars a day for a U-Haul. It was through the roof. It was insane. But we increased supply in the state of Hawaii by something like 11x in a very short period of time.”
Turo met the moment by creating an on ramp to new hosts and guests. As a result, they tripled the size of their business in 2021, despite the fact that they cut take rate by five points across the board.
The decision to not take the last penny for themselves, but give it their hosts to grow their business, helped them scale their supply base.
It was a short term cut that many companies would be unwilling to make, but a smart long term play, since you now have a whole cohort of hosts and guests who you wouldn’t have acquired, and you now benefit from their lifetime value.
And when you do raise rates, it’s even better
As you add more value over time, you substantiate a claim to more economics. And if you wait long enough, you can spread that increased share over a larger base.
“If there comes a time when it becomes appropriate to take price, when you do that, you're doing it against a much larger base of customers so it's going to have so much more impact. A price increase with three and a half million guests is one thing, a price increase on 7 million guests is twice as powerful.”
That's great math - once you have more suppliers and customers on the platform, that small change, it gets spread out over more of them. It adds up.
Play the long game
The lesson I took away from talking to Chuck is that a.) Having the patience to play the long game, and b.) Having he courage to make bold moves when you spot a unique opportunity in the market, produce long term revenues. You organize in a way that allows you to keep take rate low so that the hosts flourish and can build really powerful businesses. You both win, and have trust and faith in the business model. And over time you can start to increase the benefit you get from making everyone successful, now with even more participants on the platform.
Run the Numbers
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Quote I’ve Been Pondering
“Patterns are funny things, for you can see them your entire life without ever noticing them. But once you finally notice, they appear everywhere.”
-The Innovation Stack by Jim McKelvey