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How Are Marketplace Take Rates Determined?
Former SVP/ GM of Supplier Network and Financial Services, Ariba
Founder and Partner, Tidemark
There’s something about marketplaces! Vertical SaaS vendors (VSVs), which usually monetize at less than 1% take rate, always look enviously upon marketplaces which typically monetize at 20% or greater.
Today we explore the role marketplaces play, and why they monetize at these levels. It’s instructive as we explore the opportunity for VSVs to extend to marketplace functionality over time.
Our friend Bob Solomon, former SVP of Ariba and supplier network/B2B marketplace ninja, explains below.
Take Rate Drivers
Four very basic truths determine take rates for B2B marketplaces and platforms.
- Search to Settle (S2S) and Lead to Cash (L2C). In every transaction between a buyer and a seller, the buyer engages in a search-to-settle process. That is, they search for what they want to buy among various options, they decide to buy it, and then they pay for it. The seller engages in an equal and opposite lead-to-cash process. They market their goods/services to get noticed, they sell the good or service, and ideally they get paid for it!
- Take-Rate Layer Cake. The more of this process a platform, or marketplace, takes on for both sides of a transaction, the higher its take rate will be. You can think of each additional point of take rate as a layer on a cake. The more layers you “eat” the richer your taste (aka take rate). Marketplaces, which introduce new buyers and sellers to each other, have the highest take rate, as the take rate includes an implicit sales commission. (See also here and here.)
- The Richness/Reach trade off. The deeper a platform goes into adding value between buyers and suppliers in the S2S/L2C processes, the higher the take rate, but the more vertical a solution will be and the smaller the GMV or TAM will be. That’s the tradeoff: the more features and functions you add for a specific type of buyer/supplier interaction, the more you have to sacrifice investment in horizontal functionality.
- Where will the journey lead? In evaluating a new B2B marketplace or platform, the question I am often trying to answer is: Where will this platform end up in this world of trade-offs? How high can the take rate become and how many types of transactions can this marketplace be used for?
The S2S and L2C Processes
I won’t spend much time on this topic as it is well understood and I have written about it elsewhere. The B2B S2S process can be very complex, especially for larger, more customized purchases. The process may involve RFIs, RFQs, RFQ response evaluation, contracting, procurement, invoicing, payment terms, and various forms of payment. Additionally, every industry has its own quirks throughout the S2S and L2C processes. Examples include:
- Trucking, which involves bills of lading, proof of delivery, and various types of surcharges;
- Legal billing, which has a specific format to accommodate case matter management and General Counsel needs;
- Complex, onsite services, which involve safety accreditation and invoices that must be matched against contracts.
A large enterprise will often have different software and marketplaces it accesses for the many different types of purchases it makes.
The Take Rate Layer Cake
A platform’s take rate will increase the more it does two things:
- Create new buyer-seller relationships
- Automate more of the S2S and L2C work, or “jobs to be done”
A16z called the platforms that mediated more of the processes between employers and candidates “deep jobs platforms,” but the notion of “deep platforms” applies to all B2B marketplaces and platforms.
Let’s first look at all the tasks a marketplace can take on to help buyers and sellers find each other and make a match. These range from simple search (such as Google) to highly refined parametric commodity-specific search, sourcing software, CPQ software, advertising, and so on. The more tasks the marketplace takes on in creating the match, the higher its take rate.
Here’s a visualization of these processes and the ever-expanding role of the marketplace:
Once a match between buyer and seller/item/service has been made, there is another layer of tasks associated with the transaction. The marketplace can step out of the rest of the transaction entirely (as some airplane parts marketplaces traditionally have) or it can help the buyer and seller with logistics, insurance, project management, payments, and financing. Again, as the platform adds these jobs, the platform expands its take rate.
The Richness Vs. Reach Trade Off
In 2000, the book Blown to Bits introduced the concept of the tradeoff between richness and reach. The basic idea is simple. Consider a sales process: A “rich” (some might say “deep”) sales process is a one-on-one meeting with an expert salesperson who can convey every possible nuance and customized piece of information about a product. However, this process is very expensive and can only reach so many people. Conversely, a 30-second Super Bowl Ad reaches 100 million people but conveys very little information about the product, and certainly not a message customized for each potential recipient.
The same trade-off between the richness or depth of the process a platform facilitates (and therefore, its take rate) and how much GMV it can touch is true in B2B platforms and marketplaces as well.
Take a look at the chart below (if you’re a nerd, also see the footnotes). The X-axis is the GMV of a wide variety of B2B platforms, payments companies, and marketplaces. And the Y-Axis is their take rate (with some adjustments described in the footnotes).
At the bottom right of the chart (denoted with green dots) are the document processors and payments players. These platforms only handle a small part of the S2S and L2C process. Many facilitate only a small part of the credit card payments process! (There’s even a take rate layer cake within credit card payments that describes why these issuers, acquirers, and closed-loop networks have varying take rates.) Most of these companies have net take rates below 1%, but their reach is extraordinary. Mastercard and Visa, for instance, are networks, not issuers nor acquirers. They have 20 bps take rates, but their GMV is in the trillions of dollars.
The upper left of the chart with red dots tend to be the marketplaces. These platforms make matches, and most of them handle project management, logistics, payments, insurance and many other aspects of the S2S and L2C processes for their buyers and sellers. These marketplaces have 10-30% take rates, but typically don’t have GMV of more than $10 billion. (To be fair, most of these marketplaces are still young and growing rapidly).
We could spend all day on this chart, and I have. Every dot, of course, has a journey over time to where it stands today. Some are very old platforms, while some have only been around a few years.
Take ACV Auctions as an example. ACV Auctions charges both buyers and suppliers a small fee when they consummate a transaction on the marketplace. This typically amounts to about 2% of GMV. But ACV has added logistics services, financing for dealers, data services, and insurance to its layer cake. These additional services now account for 55% of revenue and bring the total take rate to more than 4%.
Where will the Journey Lead?
When I’m asked to evaluate a new platform or marketplace, I’m typically using this lens, among others, to ask myself:
- What jobs is the marketplace currently performing?
- Which jobs can it add? What do the buyers and sellers in this market really need?
- How much GMV can this platform cover?
In the case of ACV Auctions, for instance, how much more can the take rate expand? And how much GMV growth is there to be had by geographic expansion alone? Can they also expand to other categories where auctions are common (e.g., motorcycles and powersports)?
Implicitly, I’m asking, where will this platform end up on the Richness vs. Reach chart?
Share your thoughts
If you are building a B2B platform, take a look at the pre-match and post-match “jobs-to-be done” diagrams, and ask the buyers and suppliers on your platform which additional services would add the most value. Sequence your product development accordingly and chart your own journey on the take rate-versus-GMV chart. If you are able to handle enough mission-critical tasks, you’ll watch your take rate soar upwards. If you want to have a brainstorming session about how to improve your take rate, feel free to contact us at firstname.lastname@example.org.
We love the idea of bringing together a community to explore the boundaries of Vertical SaaS and are excited by what we can learn from each other. If you have thoughts or comments or want to get involved, reach out to us at email@example.com. If you would like to keep updated as we publish these essays, sign up below.
Marketplace Take Rates
This chapter is part of:
Extend through the Value Chain
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