{"id":16023,"date":"2022-06-06T08:31:00","date_gmt":"2022-06-06T12:31:00","guid":{"rendered":"https:\/\/einvestingforbeginners.com\/?p=16023"},"modified":"2024-04-17T10:43:12","modified_gmt":"2024-04-17T14:43:12","slug":"take-rate-daah","status":"publish","type":"post","link":"https:\/\/einvestingforbeginners.com\/take-rate-daah\/","title":{"rendered":"Take Rate: Its Importance in the eCommerce and Fintech Industries"},"content":{"rendered":"\n
Updated 4\/4\/2024<\/em><\/p>\n\n\n\n Today’s marketplaces and finance industries are changing rapidly. The rise of eCommerce and Fintech disrupts how we buy and sell merchandise, car rides, banking, and groceries. With that rise come new terms that help us determine how profitable these companies are and how to define their pricing power.<\/p>\n\n\n\n The take rate has been around for a while, but the term has risen in popularity more recently with the rise of companies such as Paypal, Airbnb, Shopify, and Etsy. However, companies such as Visa, Mastercard, and American Express have used these terms to define their revenues for decades.<\/p>\n\n\n\n Defining the take rate and understanding its importance in Fintech and online marketplaces helps investors translate how these businesses, such as Amazon, eBay, and PayPal, generate revenues and grow their user bases.<\/p>\n\n\n\n For example, recognizing the strength of the online marketplaces, Paypal purchased Honey.com in 2019 to capture more take rates via the marketplaces and move beyond processing payments.<\/p>\n\n\n\n In today’s post, we will learn:<\/p>\n\n\n\n Okay, let’s dive in and learn more about the take rate.<\/p>\n\n\n\n <\/p>\n\n\n\n A take rate is a fee a processor or merchant charges on a transaction, either by a third party like Amazon or a service provider like PayPal<\/strong>. Those take rates are the primary source of revenue for companies such as Paypal, Shopify, Etsy, eBay, and many more.<\/p>\n\n\n <\/p>\n\n\n\n A simple formula for determining a company’s take rate is to divide the revenue generated from those fees by the total merchandise or transaction volume. More on this in a moment.<\/p>\n\n\n\n\n\n\n\n The take rate multiplied by the total volume transacted on the platform generates revenue for the company. <\/p>\n\n\n\n Take Rate * Total Volume = Revenue<\/strong><\/p>\n\n\n\n For example, one of Shopify’s strengths is its ability to keep customers on its platform by allowing two-sided transactions. As a result, customers can shop and buy on Shopify’s platform, which generates revenue for the company from the fees to process the transaction and from the fees it generates from the merchants selling their wares on the platform.<\/p>\n\n\n\n The take rates differ across platforms. For example, Amazon and eBay charge anywhere between 5% and 20% on their marketplaces, fees they collect from their third-party sellers, which generate revenues for Amazon and eBay.<\/p>\n\n\n\n Service providers such as Airbnb and Uber charge 15-25% fees for their platforms, which they charge to the service provider, driver, or homeowner to generate revenues. These higher fees result from the lower transaction activities, compared to Shopify, for example.<\/p>\n\n\n\n The higher transaction frequencies, such as online merchants, Shopify, Amazon, and Etsy, can charge much lower take rates than Airbnb, which has far lower transaction frequencies.<\/p>\n\n\n\n Conventional businesses like Walmart don’t work with take rates; their revenues are more old-school. Instead, their income statements reflect buying inventory, stocking shelves, paying employees, and customers depleting the store’s inventories.<\/p>\n\n\n\n A company like Shopify is a different model. They sell and process their payments through an online portal that allows the customer and merchant to transact virtually, and all the fees from buying and selling flow to Shopify as their revenue.<\/p>\n\n\n\n To consider evaluating a company like Shopify, Etsy, Airbnb, Uber, or Paypal, we need to consider the Gross Merchant Volume (GMV) or Gross Payment Volume (GPV) to understand the generation of revenues. Considering both the GMV and GPV helps us understand how much activity occurs on their platforms, and the take rate tells us how much revenue they can capture from that volume.<\/p>\n\n\n\n The higher the volume on the platform, the greater the ability to grow revenues, which is why we need to look for GMV or GPV when searching the financial statements. Considering those metrics, take rates, and revenues will tell you how well the company performs.<\/p>\n\n\n\n <\/p>\n\n\n\n The calculations to determine the take rate for service and merchant providers are simple divisions. The bigger challenge is finding the information in the company’s financials to make the calculations.<\/p>\n\n\n\n First, let’s look at Paypal’s take rate. I will use the data from the latest 10-k, dated December 31, 2020. I found the information using the “ctrl-f” function to search for Total Payment Volume (TPV). Both of these charts help us calculate the take rate.<\/p>\n\n\n <\/p>\n\n\n\n Transaction revenues:<\/p>\n\n\n\n <\/p>\n\n\n\n Total payment volumes:<\/p>\n\n\n\n To determine the take rate for Paypal, we divide the net revenues by the total payment volume:<\/p>\n\n\n\n Take rate = net revenues \/ total payment volume.<\/strong><\/p>\n\n\n\n Let’s look at Paypal’s take rate over the last three years:<\/p>\n\n\n\n Year<\/p>\n<\/td> Net revenue<\/p>\n<\/td> TPV<\/p>\n<\/td> Take Rate<\/p>\n<\/td><\/tr> 2020<\/p>\n<\/td> 21,454<\/p>\n<\/td> 936,062<\/p>\n<\/td> 2.29%<\/p>\n<\/td><\/tr> 2019<\/p>\n<\/td> 17,772<\/p>\n<\/td> 711,925<\/p>\n<\/td> 2.49%<\/p>\n<\/td><\/tr> 2018<\/p>\n<\/td> 15,451<\/p>\n<\/td> 578,419<\/p>\n<\/td> 2.67%<\/p>\n<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n Simple, huh?<\/p>\n\n\n\n Okay, let’s look at one from the merchant side. We will try Shopify next, and using their latest 6-f, dated April 28, 2021; we can determine Shopify’s take rate for their merchant processing segment.<\/p>\n\n\n\n The company lists the Gross Merchandise Volume by using our friend “ctrl-f” about 29 times in the filing. We find that Shopify facilitated over $37.3 billion in transactions on the site in the quarter, an increase of 114.4% over the year-ago quarter.<\/p>\n\n\n\n To determine Shopify’s take rate, we find that the company’s merchant revenues for the quarter were:<\/p>\n\n\n\n Gross Merchandise Volume = $37,346 million<\/p>\n\n\n\n That was an increase from the 1.62% take rate in the first quarter of 2020, which was:<\/p>\n\n\n\n Now, let’s look at the take rate for Uber; we will use the numbers from the latest 10-k, dated March 1, 2021, and we will separate the main three drivers of revenue for the company by their take rates:<\/p>\n\n\n\n Segment<\/p>\n<\/td> Revenue<\/p>\n<\/td> Gross Bookings<\/p>\n<\/td> Take Rate<\/p>\n<\/td><\/tr> Mobility<\/p>\n<\/td> $6,089<\/p>\n<\/td> $26,614<\/p>\n<\/td> 22.87%<\/p>\n<\/td><\/tr> Delivery<\/p>\n<\/td> $3,904<\/p>\n<\/td> $21,314<\/p>\n<\/td> 18.32%<\/p>\n<\/td><\/tr> Freight<\/p>\n<\/td> $1,011<\/p>\n<\/td> $1,013<\/p>\n<\/td> 99.8%<\/p>\n<\/td><\/tr> Total<\/p>\n<\/td> $11,139<\/p>\n<\/td> $57,897<\/p>\n<\/td> 19.24%<\/p>\n<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n After all, we understand how to calculate the take rate for any merchant processor and service company. The biggest issue is determining the company’s metric to track the volume of transactions across its platform.<\/p>\n\n\n\n Keep in mind that the metrics, ratios, and numbers we are discussing are non-GAAP numbers, which means that no company is under any obligation to track these numbers to help investors determine profitability or growth drivers.<\/p>\n\n\n\n <\/p>\n\n\n\n Online merchants like Amazon and eBay collect fees and commissions from third-party sellers, tracking their take rates. For example, eBay collects fees for listing products and services on its website, plus the final fees it collects from a successful sale.<\/p>\n\n\n\n The key issue with the take rate in online marketplaces is the yin and yang between maximizing profits and keeping customers on the network. If a company tries to increase its take rate, as eBay has done by increasing its take rates and final fees to gain a bigger piece of the pie. But doing so opened the door for companies like Etsy to move in, offer lower fees, and lure away the more cost-conscious customers.<\/p>\n\n\n\n
What is a Take Rate?<\/h2>\n\n\n\n
How is the Take Rate Calculated?<\/h2>\n\n\n\n
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\n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n \n The Importance of the Take Rate in eCommerce<\/h2>\n\n\n\n