Why This Metric is So Important for e-Marketplaces Like Alibaba & Shopee
IMPORTANT: Please read the disclaimer before continuing.
Shopee.
eBay.
Amazon.
Etsy.
Alibaba.
Mercado Libre.
What do they have in common? These are some of the world’s top eCommerce marketplaces.
These online marketplaces facilitate transactions between its buyers and its merchants.
There are two roles of a marketplace:
1) Serve as aggregators to assist buyers to find the right product from the right merchants;
2) Serve as a demand generator to help merchants sell to their desired customer base faster.
In exchange, merchants pay a small fee called take rate to the marketplace for facilitating a transaction.
According to Analysis Group, these are the take rates charged by some major marketplaces:
Different marketplaces have varying take rates because they provide different values, such as the availability of suppliers and the competitive nature of their products.
In general, a low take rate attracts more merchants to list their products on a marketplace while a high take rate repels merchants.
When a marketplace charges a low take rate, it does not earn enough profits to spend on marketing to attract more users to its platform or improve the user experience.
Currently, eCommerce players like Shopee and Lazada are charging low take rates as they are reinvesting heavily back to their growth. Eventually, both of them must charge a reasonable take rate to support the ongoing expenses of running a marketplace.
How Do We Calculate The Take Rate?
Firstly, we need to know what gross merchandise value is. It refers to the total value of merchandise sold on the platform over a period of time.
To calculate the take rate, the formula is revenue divided by gross merchandise value (GMV).
Let’s use eBay’s FY 2021 results as an example:
To get eBay’s take rate, we take $2.6b (revenue) / $20.7b (GMV). The answer is 12.6%.
Some marketplaces don’t just earn from facilitating a transaction. They also earn when they help to process payments for their merchants. This brings up their overall take rate.
How Does The Take Rate Impact Profitability?
We are going to run a few scenarios on a standard income statement of a company.
An income statement consists of:
A) Revenue
B) Cost of goods sold
C) Gross profit
D) Operating expenses
F) Operating Profit
Scenario 1 – Take Rate of 5%:
This is Company A’s income statement at a take rate of 5%.
Scenario 2 – Take Rate of 6%:
What if Company A decides to raise its take rate from 5% to 6%?
It is able to earn 20% more revenue without incurring any extra expenses.
This would allow the extra revenue to flow down straight to the operating profit level.
Revenue: ⬆️20%
Gross Profit: ⬆️ 38.46%
Gross Profit Margin: 52% ➡️ 60%
Operating Profit: ⬆️ 166.67%
Operating Profit Margin: 12% ➡️ 26.67%
Scenario 3 – Take Rate of 4%:
What if there is more competition and Company A is forced to reduce its take rate from 5% to 4%? How would that change its financials?
Its gross profit margin would fall to 40%. Company A would not be profitable because its operating profit margin is negative 10%.
Through these simple illustrations, you can understand how increasing take rates can change the profitability of a marketplace. The financials of many early marketplaces look terrible and most investors would naturally shun them.
For investors who are hardworking, they would track metrics such as site visits, engagement, time spent on the marketplace, and monthly active users to see if the marketplace is becoming more valuable or less valuable.
When the metrics are heading in the right direction, the marketplace would be able to raise its take rates, changing its financials drastically.
How Does The Take Rate Affect The Share Price?
When take-rate goes up, the profitability of the marketplace goes up.
When this happens, the marketplace makes more money and its share price would go up over time.
eCommerce marketplaces tend to scale much faster than the traditional brick and mortar stores, and it is a natural hedge against inflation as well. As their online business models operate like a “toll-booth”, their absolute earnings go up as the prices of goods sold on their platform go up.
Want to try out different scenarios of take-rate and see how it affects the profitability? Here’s how you can do it:
- Visit my Google spreadsheet here.
- Select File -> Make a Copy.
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