Platform unit economics: contribution per order and ad revenue
Work out contribution per ride, break-even volume, advertising revenue from CPM, and return on ad spend from CPC.
Industry brief, with a one-minute summary: Internet platforms, marketplaces and digital adsKey takeaways
- A marketplace makes money only if each order earns more than its variable costs, including incentives, and if there are enough orders to cover fixed costs.
- A higher take rate raises revenue per order only if volume holds. The supply side may leave or pass the cost to buyers, which can shrink GMV.
- Worked case: Contribution per ride for a ride-hailing app in Egypt.
Key idea
A marketplace makes money only if each order earns more than its variable costs, including incentives, and if there are enough orders to cover fixed costs.
Worked case
Contribution per ride for a ride-hailing app in Egypt
The prompt
A ride-hailing app in Cairo has an average fare of EGP 150 and keeps a take rate of 20 percent. For each ride it pays EGP 8 in rider and driver incentives, EGP 4 in payment and insurance costs, and EGP 3 in support and other variable costs. It completes 2 million rides a month. Fixed costs for technology, marketing, and offices are EGP 25 million a month. What is the contribution per ride, the monthly profit, and the break-even number of rides?
The structure
- Monthly profit = rides x contribution per ride minus fixed costs
- Revenue per ride = fare x take rate
- Contribution per ride = revenue minus incentives, payment, and support
- Break-even rides = fixed costs / contribution per ride
Working it through
1. Revenue per ride
20 percent of EGP 150.
Revenue per ride (EGP):150 × 0.2 = 302. Contribution per ride
Subtract incentives, payment and insurance, and support.
Contribution per ride (EGP):30 - 8 - 4 - 3 = 153. Monthly contribution
2 million rides at EGP 15.
Monthly contribution (EGP millions):2 × 15 = 304. Monthly profit
Subtract EGP 25 million of fixed costs.
Monthly profit (EGP millions):30 - 25 = 55. Break-even rides
Fixed costs divided by contribution per ride.
Break-even rides (millions a month):25 ÷ 15 = 1.67
The recommendation
The app should cut rider and driver incentives carefully, because each ride contributes only EGP 15, so it earns EGP 5 million a month and breaks even at about 1.67 million rides. First, incentives of EGP 8 per ride are the largest variable cost after the driver's share. Second, cutting them by EGP 3 per ride would raise monthly profit by EGP 6 million, more than double. The risk is losing riders or drivers to a competitor that keeps paying incentives. As a next step, test lower incentives in one district and track ride volumes.
Risks: A competitor price war would raise incentives; Fuel price rises may force higher driver earnings; Currency moves can raise the cost of technology bought in dollars.
A social media app in Indonesia has 50 million monthly users. Each user sees 20 ads a day, for 30 days. The average CPM is USD 1.50. What is the monthly advertising revenue, in USD millions? (Assume every ad slot is sold.)
An online shop in Mexico buys search ads at USD 0.80 per click. It gets 5,000 clicks; 4 percent of clicks buy, with an average order of USD 60. What is the return on ad spend (sales divided by ad spend)?
A marketplace raises its take rate from 15 to 18 percent. What should you check first?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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