From “landlord” to “franchise”: reworking the fee model (2002)

The shift that laid the ecosystem’s revenue base

The heart of this decision was that Rakuten put its hand to the very fee model behind its success while business was at its peak. A flat fee, whose revenue accumulated in proportion to the number of shops, had lowered the barrier to opening a store and pushed Rakuten to an early lead — but it was a structure in which growth would stop once shop numbers plateaued. By switching to usage-based charging linked to sales, Rakuten rebuilt the relationship so that its own revenue rose as its merchants’ sales rose, redirected its sales force from signing new shops toward consulting, and put in place a mechanism for growing together with its merchants.

The change carried risk. For high-selling merchants it was in effect a price increase, and if it drove them away it could halt the growth Rakuten had enjoyed since its founding. When Chairman and President Mikitani said he “was prepared to see it through even if the number of merchants halved,” it was a judgment made with that cost in full view. In the event, no exodus came: gross merchandise sales rose from $430.4M (¥52bn) in 2001 to $598.7M (¥75bn) in 2002, and the cash thickened by the fee revision became the seed capital for Rakuten Super Points, launched that November, and for the 2003 move into travel and securities.

The more successful a mechanism, the more a decision to remake it tends to be put off. Rakuten’s transformation of its fee structure — which it called its “second founding” — is instructive precisely because, by reconnecting its relationship with merchants through a link to their sales, it prepared the revenue base of the later Rakuten Ecosystem at an early stage.