A delicate balancing act
The discussion board has been busy since we announced the introdution of fees last week, and I thought it might be worth linking to a an Economist article that seemed relevant.
The article is about pricing decisions in two sided markets - of which Zopa is one. The problem arises when a company is trying to appeal to 2 sets of potential consumers, for example:
Microsoft, for instance, knows that everyone who buys its Xbox 360 adds to the console’s appeal to independent game publishers. The games these publishers conjure up then make the console more attractive to other customers. This makes Microsoft’s pricing decision tricky indeed. How much it charges one side of the market—people who play games—has a knock-on effect on demand on the other—people who develop them—which has, in turn, an indirect impact on the first side. This … is more difficult than “setting the price of toothpaste”.
We have a similar problem - if we only charge borrowers (our initial model) then we end up with unattractive rates for borrowers…and hence unattractive rates for lenders. If we only charge lenders, then we end up with unattractive rates for borrowers. You see the problem?
We don’t know for sure that we’ve got the right answer (Indeed the intensity of debate suggest we might well not have), but we might have to suck it and see. The Economist admits “Economists are still learning how two-sided businesses set their prices, and they still don’t know where the see-saw should settle.” For once, I feel like an economist.
bc
Posted on April 8th, 2006 at 2:52 am
This might have been more useful if the link had been to something you can read without taking out a $30 subscription…
A point not addressed is how Zopa sets *its* price for financial intermediation. You talk of the difficulty of finding a charging structure that leads to mutually attractive prices in the market space between lenders and borrowers, and imply that the 50-50 charge split is the least unappealing of the options. Maybe true, but what makes the proposition unappealing from either perspective ultimately is that Zopa wants 1% out of a total transaction value of around 6% to 7% of capital - in other words, Zopa takes between 14% and 17% of the value of the interest transaction. It’s this price that is the real stumbling block.
Bearing in mind the very high costs of processing loan applications, isn’t it time for Zopa to stop agonising about the fee model and peddling the threadbare “fair and equitable” line, and instead plump for something logical, fair, and easily understood, like a 0.75% fee to borrowers, with a £75 minimum - which would help choke off the unprofitable smaller loans - or wouldn’t that be “non-banky” enough?