How e-commerce and marketplaces make money

First-party selling versus marketplaces, take rate, GMV versus revenue, the revenue streams, and an approximate cost breakdown.

Industry brief, with a one-minute summary: E-commerce and quick commerce

Key takeaways

An online retailer either buys goods and sells them itself (first party), or lets other sellers use its website and takes a fee (a marketplace).
First party (1P): the company buys stock from suppliers, owns it, sets the price, and sells it.
Marketplace (third party, 3P): independent sellers list their products and own the stock.
Hybrid: most large players do both. Amazon, for example, sells its own stock and hosts third-party sellers.

Key idea

An online retailer either buys goods and sells them itself (first party), or lets other sellers use its website and takes a fee (a marketplace). The two models can show the same sales to shoppers but very different revenue and profit.

The three models

First party (1P): the company buys stock from suppliers, owns it, sets the price, and sells it. Revenue is the full price the shopper pays. It carries inventory risk.
Marketplace (third party, 3P): independent sellers list their products and own the stock. The platform earns a commission and fees. Revenue is only those fees. It carries little inventory risk.
Hybrid: most large players do both. Amazon, for example, sells its own stock and hosts third-party sellers. Marketplace Pulse data from Amazon's reports show third-party sellers at around 60 percent of units sold in recent years.

Two terms you must separate. Gross merchandise value (GMV) is the total value of goods sold through the platform, before returns and cancellations. Revenue is what the company itself earns. For a marketplace, revenue = GMV x take rate, where the take rate is the share of GMV the platform keeps through commissions, fees, and advertising. Companies choose which number to put first. Always ask which one you are looking at.

Worked case

Same GMV, different revenue

The prompt

Two illustrative online players in Europe each have GMV of EUR 1 billion a year. Player A is a marketplace: it takes a 12 percent commission and earns another 3 percent of GMV from sellers' advertising. Player B is first party and sells at a 20 percent gross margin. What is each player's revenue and gross profit, in EUR millions?

Open this case to practice it with a partner

The structure

Revenue and gross profit by model
- Marketplace: revenue = GMV x take rate; gross profit is close to revenue, minus payment and hosting costs
- First party: revenue = GMV; gross profit = GMV x gross margin

Working it through

1. Marketplace take rate
Commission plus advertising.
Take rate (percent):12 + 3 = 15
2. Marketplace revenue
15 percent of EUR 1,000 million.
Marketplace revenue (EUR millions):1,000 × 0.15 = 150
3. First-party revenue
The full value of goods sold.
First-party revenue (EUR millions):1,000 × 1 = 1,000
4. First-party gross profit
20 percent gross margin.
First-party gross profit (EUR millions):1,000 × 0.2 = 200

The recommendation

Player B shows almost 7 times the revenue of Player A, yet its gross profit (EUR 200 million) is only a third higher than A's EUR 150 million of revenue (and A's gross profit is a little below that, after payment and hosting costs), and B must fund stock and carry the risk of unsold goods. Compare gross profit and contribution, not revenue, when models differ.

Revenue streams

Product margin (first party): selling price minus the purchase cost.
Commissions (marketplace): usually a percentage of each sale, often different by category.
Fulfilment and logistics fees: sellers pay the platform to store, pack, and ship their goods.
Advertising: sellers and brands pay to appear higher in search results. This is high margin.
Subscriptions: shoppers pay a yearly or monthly fee for free delivery and other benefits.
Delivery and small-order fees paid by shoppers, and payment or credit services.

Approximate cost structure of a first-party online retailer, percent of revenue

Approximate cost structure of a first-party online retailer, percent of revenue
Line	Approximate share of revenue	Comment
Cost of goods sold	65 to 80 percent	Lower in fashion, higher in electronics and grocery
Fulfilment (warehouse, picking, packing)	5 to 12 percent	Falls with scale and automation
Delivery to the customer (last mile)	4 to 10 percent	Depends on density, speed, and basket size
Marketing	3 to 10 percent	High when the brand is new or loyalty is low
Payments	1 to 3 percent	Card and wallet fees, cash on delivery handling
Returns	0 to 10 percent	Very high in fashion, low in grocery
Technology and overheads	3 to 8 percent	Mostly fixed

So-what

Online retail swaps store rent and store staff for warehouses, delivery, marketing, and returns. It is not automatically cheaper.

E-commerce revenue driver tree

Revenue
- Number of orders
  - Visitors (traffic from search, ads, app, direct)
  - Conversion rate (share of visits that end in an order)
  - Repeat rate (orders per active customer per year)
- Average order value (AOV)
  - Items per order
  - Price per item
- Key: Take rate (marketplace) or gross margin (first party)

Check your understanding

A marketplace reports GMV of USD 10 billion and a take rate of 10 percent. What is its revenue from those sales?

Terms in this lesson

Revenue Gross profit and gross margin Network effects AOV (average order value)Unit economics Economies of scale Gross merchandise value (GMV)Take rate First-party (1P) versus marketplace (3P)Return rate Last mile

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