A take rate is how much money a business makes from a transaction. Take rates help companies understand how well the business is doing. Typically, higher take rates indicate that a company is successful because it can generate more revenue.
By keeping a close watch on their take rates, companies can make better business decisions — for example, knowing when to allocate resources to maximize sales or increase their marketing efforts.
Although take rates are not new, the term has become more popular with the increase of companies like Airbnb, Shopify, Etsy, and PayPal. However, the card networks like American Express, Mastercard, and Visa have used take rates to define their revenues for many years.
What Is Take Rate?
Take rate is a formal term for ‘take a cut.’ Before explaining the concept, let us understand the background. Businesses follow many options to sell their products. New companies with less investment sell on third-party websites like Amazon, eBay, etc.
When these platforms help generate sales, they expect a portion of the revenue to facilitate the transaction. Apart from serving as a platform linking the buyer and the seller, the websites provide payment services, advertise for the client, and offer reverse logistic services.
Three different platforms charge these fees:
- eCommerce: These marketplaces facilitate transactions, thus reducing businesses’ need to maintain a separate website or app. Examples include Amazon, eBay, etc.
- Payment providers: Online shopping has been expedited to a great extent through online payment services. Payment gateways, e-wallets, etc., charge a fee for this. Examples include PayPal, Visa, etc.
- Service platforms: These marketplaces bring together customers and service providers. They collect a commission for acting as a link. Examples include Uber, Airbnb, etc.
The amount that a platform collects as commission depends entirely on its business and revenue model. It varies from website to website and relies on the nature of the service offered.
Some marketplaces collect a fixed rate, whereas others collect fixed and variable components. For example, the Airbnb take rate is 3% of the revenue from hosts. They also collect a 14% fee from guests, which is not usually considered the take rate (since the metric only applies to sellers).
Another example is that of Amazon. According to the eCommerce Marketplace, the seller has to pay two components – first, $0.99 per unit sold—and secondly, an 8-15% referral fee on the gross merchandise value.
How to Calculate Take Rate
Take rate calculation involves the following formula given below:
The gross merchandise value or GMV is the business’ total sales facilitated through that particular platform or service provider.
Calculation Example
Airbnb charges a service fee of 3% to hosts. Suppose Ryan is a host who charges Paul $500 for a day’s stay at his house. Here, the GMV from this particular transaction is $500. Ryan would have to pay a fee of $15 (3%) from the amount Paul pays him.
Take another example of Amazon. Leonard sells 30 pairs of shoes at $200 each. His revenue is $6000. He is charged a referral fee of 10%.
Commission charged by Amazon: ($0.99 x 30) + ($6000 x 10%)
= $629.7
Factors That Affect a Take Rate
When it comes to product marketplaces that enable transactions on behalf of third-party sellers, the take rate can differ based on the goods that are offered. As an example, the take rates Amazon charges vary based on the type of product it is selling. That means that the take rate for electronic items is not the same as the take rate for household products.
Chargebacks can also reduce a merchant’s take rate as a result of the penalties and fees that the merchant needs to pay back to its customers.
Additionally, the more transactions merchants process, the higher their take rates (and vice versa). That’s because many payment processors will offer discounts to companies with high-volume sales.
Importance
Marketplace take rates are an essential source of revenue for most companies. Lt us consider Amazon. It brings together buyers and sellers. It employs almost a million and a half people around the globe. The income from referral and affiliate marketing enables platforms like Amazon to charge a fee for their services and their role in commerce.
Now, there is a general conception that higher take rates are reasonable. A higher commission indicates that the platform can generate higher sales for the seller. But before a seller is ready to pay a higher commission, they should verify if the platform is worth it. Otherwise, giving up a portion of profits for less-than-expected sales will be a loss for the seller.
Due to these platforms and payment providers’ competition, they are forced to charge lower rates. A typical example in this regard is eBay. The company charged higher commissions, due to which sellers started opting for newer marketplaces with lower fees, like Etsy.
Also, when a payment provider takes a cut, they receive a partial commission. For example, if a seller gets payments through PayPal, but the buyer uses a credit or debit card, a portion of the commission amount collected would be paid to payment networks like Visa, Mastercard, etc.
FAQs
What is the difference between the take rate and conversion rate?
The conversion rate is another significant eCommerce metric that indicates the percentage of people who visit a website converted from visitors to customers. It is calculated as the ratio of total converts to total visitors. The take rate is entirely different as it determines the amount of commission to a third party.
Are take rates fixed or variable?
Take rates can be fixed or variable, depending on the platform or service provider. Some platforms charge a fixed commission rate for their services, while others employ a variable approach, incorporating factors like transaction value or volume to determine the fee.
Do payment providers also have take rates?
Yes, payment providers often have take rates in the form of transaction fees. They charge a percentage of the transaction amount for processing payments, making take rates standard in the payment processing industry. It helps them generate revenue for their services.
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