How internet platforms, marketplaces, and digital ads work
Business models, network effects, the marketplace revenue tree, advertising basics, super-apps, and key metrics.
Industry brief, with a one-minute summary: Internet platforms, marketplaces and digital adsKey takeaways
- A platform connects two or more groups, such as buyers and sellers, or riders and drivers, or users and advertisers.
- Network effects mean a product becomes more valuable as more people use it.
- Advertisers buy either views or actions.
Key idea
A platform connects two or more groups, such as buyers and sellers, or riders and drivers, or users and advertisers. It earns a cut of each transaction or sells the attention of its users to advertisers. The more users on each side, the more valuable it becomes to the other side.
| Model | How it makes money | Examples |
|---|---|---|
| Goods marketplace | A take rate (commission) on sales by third-party sellers, plus fees for delivery and advertising | Amazon, Flipkart, Shopee, Mercado Libre, Noon, Jumia |
| Services marketplace | A share of each ride, meal, stay, or job | Uber, Grab, Careem, Airbnb, Urban Company, Upwork |
| Advertising-funded | Free service for users; advertisers pay for views or clicks | Google Search, YouTube, Facebook, Instagram, TikTok |
| Subscription | Monthly fees for content or services | Netflix, Spotify |
| Super-app | Many services in one app (rides, food, payments, lending), earning from each and cross-selling | WeChat, Alipay, Grab, Gojek, Careem, Paytm |
So-what
Many large platforms mix models. Amazon earns commissions, delivery fees, subscriptions, and a large advertising business.
Network effects mean a product becomes more valuable as more people use it. Direct network effects work within one group (a messaging app is more useful when your friends use it). Indirect network effects work across groups (more riders attract more drivers, which shortens waiting times, which attracts more riders). A new marketplace faces a chicken-and-egg problem: buyers will not come without sellers, and sellers will not come without buyers. Platforms solve it with incentives, by starting in one small area, or by supplying one side themselves. Network effects are weaker when users easily use several apps at once (multi-homing), as many riders and drivers do.
- Marketplace contribution
- Key: Revenue
- GMV (gross merchandise value) = orders x average order value
- x take rate (commission, fees)
- + advertising sold to sellers, subscriptions, and financial services
- Variable costs (minus)
- Incentives and discounts to buyers and drivers or sellers
- Payment fees
- Delivery or logistics, if the platform does it
- Customer support and insurance
- Fixed costs (minus)
- Technology, marketing, and head office
GMV is the value that flows through the platform; revenue is only the platform's cut.
How digital advertising is priced
Advertisers buy either views or actions. CPM (cost per mille) is the price for 1,000 ad impressions (views). CPC (cost per click) is the price paid each time someone clicks. Some ads are paid per sale or per app install (CPA, cost per action). Ad revenue for a platform is roughly users x time spent x ads shown per unit of time x the price per ad. Search ads are sold in auctions on keywords and usually earn more per user because the user shows clear intent. Retail media, meaning ads sold by retailers and marketplaces on their own sites, is one of the fastest-growing parts of advertising.
| Metric | Plain definition |
|---|---|
| GMV | Total value of goods or services sold through the platform |
| Take rate | Platform revenue divided by GMV |
| Monthly active users (MAU) and daily active users (DAU) | People who used the service at least once in the month or day |
| Orders per user and order frequency | How often each user buys |
| Incentives as a share of GMV | Discounts and bonuses paid to users and partners, divided by GMV |
| Contribution per order | Revenue per order minus variable costs per order |
| CPM and CPC | Price per 1,000 ad impressions, and price per click |
| ROAS (return on ad spend) | Sales generated divided by money spent on ads |
| ARPU | Average revenue per user in a period |
So-what
A platform can grow GMV quickly by paying incentives. Always check incentives and contribution per order before praising growth.
A food delivery marketplace reports GMV of USD 10 billion. What is its revenue?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and terms
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