👋 Hi, it’s CJ Gustafson and welcome to Mostly Metrics, my weekly newsletter where I unpack how the world’s best CFOs and business experts use metrics to make better decisions.
Marketplaces are a beast. I should know - I tried to start one.
At the heart of any (highly functioning) marketplace you’ll feel the pull of network effects. The more users there are on the product, the more valuable the product becomes. For example, AirBnB’s value depends on the number of properties guests can rent. And it will become a better product (and business model) over time because more people will add more supply. The converse is it’s not valuable at all when there are no good places to stay.
Network effects are a prized competitive moat - there’s an obvious defensibility as you get bigger. You can’t just fast-follow a marketplace business once it picks up steam. While marketplaces are difficult to start, once they get to rippppin’, they actually get cheaper to grow.
Author’s note: It’s important to point out that marketplaces are a flavor of network effects, not the other way around (social media and collaboration tools are also driven by network effects).
Dan Hockenmaier (Thumbtack, Faire) points out this CAC to LTV inversion that takes place. Unlike software, where it gets incrementally harder to acquire new customers and grow them, with a marketplace you are actually acquiring the marginal good fit customer over time. It gets better as it gets bigger.
I studied the business models of 35 marketplaces.
Here’s what you can learn from this analysis:
I. The Economics: How take rates are determined + figuring out who pays
II. Key Insights from Research: Mistakes and unlocks from real companies
III. Ways to Increase Take Rate Overtime: Adding services and differentiating
I. The Economics
Marketplaces monetize through a take rate. If you’re talking the lingo, other common names for this type of middleman compensation include:
Commission
Vig
Rake
This post was originally inspired by a piece that Lenny Rachitsky wrote on choosing a take rate. As a finance and business model nerd, I wanted to expand the data set and go one step further to arrive at an estimated total effective take rate that marketplace businesses achieve.
Why? Well, it’s very common for one side of a marketplace transaction to not even realize that the other side is also being charged, allowing the business to double up or subsidize one side to make it more attractive and increase throughput volume.
Here’s what I found:
II. Key Insights from Research
The supply side always pays:
100% of the marketplaces I looked at charge the Supply (Seller) side
This makes sense, as they are bringing them business
The age old debate is whether this is net new business (making the pie bigger), or hijacking offline demand and just bringing it online
Half of the marketplaces charge both sides
Of the 35 marketplaces I dug into, 19 (or 54%) monetized both sides of the transaction.
For some of these marketplaces it more than doubles their total effective rake they earn
It’s less likely for the demand side to pay more than supply
Of the 19 that charged both sides, 6 charged the demand side more than the supply side
Etsy
AirBnB
Hipcamp
Stubhub
Vacasa
Turo
And 4 charged the demand side at least 3x more
Etsy
AirBnB
Vacasa
Turo
Some marketplaces may be going too far
Oh, sick. I get to keep 30% of my own shit.
Shutterstock has long been criticized for the terrible unit economics it offers their photographers
Bill Gurley covered it nicely here in his piece “A Rake Too Far”
“High rakes are a form of friction precisely because your rake becomes part of the landed price for the consumer… In order for your platform to be the “definitive” place to transact, you want industry leading pricing – which is impossible if your rake is the de facto cause of excessive pricing. High rakes also create a natural impetus for suppliers to look elsewhere, which endangers sustainability.”
-Source: Bill Gurley, A Rake Too Far
The following rental marketplaces are frequently criticized for their sell side fees
Airbnb (rental properties) - 15%, but there are many instances where it’s been much more after adding in all the extra fees (see below)
Vacasa (luxury, fully managed rental properties) - up to 50% of the total price
Turo (luxury rental cars) - up to 100%!? of the sticker rental price
Final price ends up being 100% of the actual nightly fee once you add in cleaning fees, service fees, and taxes. Must be a dirty ass house.
At the end of the day, the more work you do, the more juice you get
Source: Dan Hockenmaier
Dan Hockenmaier covered it nicely - there’s a spectrum of work and responsibility that’s taken on, and you are compensated accordingly
The 5% to 10% Range:
Amazon and Ebay are found on the far left on the “work” spectrum, generally serving as lead gen, and aggregating demand.
Another “light” example is Thumbtack: They charge the skilled worker a flat fee for the lead, ranging from $10 to $100, and then bounce, leaving it to the two sides to interact. They’re fully aware of the disintermediation that will inevitably occur when the plumber gives the home owner their business card on the way out, and therefore shaped their business model to contemplate this dynamic.
The 10% to 20% Range:
Somewhere in the middle you have the AirBnB’s and Etsy’s of the world who have generated trust on top of lead generation, making the transactions trustworthy and safe.
Another “managed” example would be StockX: They verify the authenticity of shoes before they send them to you, ensuring you don’t buy a fake pair of Jordans.
The 20% to 40% Range:
And then you have heavily managed marketplaces like DoorDash, Uber, and Lyft who went through the pains to build out entire logistic networks to serve the customer. This plays out in the take rate they’re able to charge.
Another “heavily managed” example would be Vacasa: They manage the properties on behalf of owners (toilet clogged?), unlike AirBnB who leaves it up to property owners to communicate with guests directly.
III. Ways to Increase Take Rate Overtime
From my research, marketplaces can increase take rate over time through “add ons” which make their existing service either:
Faster,
Deeper
Curated,
Ancillary,
Extra
Here are some real life examples:
TaskRabbit - Faster: TaskRabbit offers TaskRabbit Elite, a premium service that guarantees faster response times and provides dedicated support to users who require immediate assistance or have more complex tasks.
Etsy - Deeper: Apart from being a platform for handmade and vintage items, Etsy has introduced Etsy Plus, a subscription service offering sellers additional tools and customization options to improve their storefronts, marketing, and analytics.
Upwork - Curated: Beyond connecting freelancers and clients, Upwork offers services like Upwork Pro, which facilitates a more curated matchmaking process between top-tier freelancers and larger-scale projects. This premium service adds value by providing a higher level of expertise and support.
Airbnb - Ancillary: In addition to its core accommodation booking service, Airbnb has expanded into offering experiences, where hosts can provide unique activities and tours for travelers. This move adds value by curating personalized experiences for users beyond traditional lodging.
Turo - Extra: The peer-to-peer car rental marketplace offers a comprehensive insurance package for hosts and guests, providing peace of mind and addressing concerns related to vehicle damage and liability during rentals.
These additional services not only differentiate these platforms but also add significant value to users, fostering trust and loyalty within the marketplace ecosystem. Plus, from a financial perspective, they often have even better margins than the initial service being provided, adding to the bottom line.
