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Growing platform take rates via distribution
Understanding Substack and Shopify's recent moves
In the past, I’ve written about the factors that determine what take rate a platform or marketplace can reasonably charge for its offering.
Today, I’ll be discussing one of these factors at length: the importance of driving additional distribution and how marketplaces can use it to sustain or increase their take rates.
Why distribution is important
It’s important for a platform to bring in customers for its suppliers. Without that, a platform is effectively just an infrastructure provider, which tends to limit what value of the transactions flowing through its platform it can charge.
If a platform doesn’t help those on it get more customers, a fair take rate it can get away with is usually only in the 3-5% range.
However, in cases where the platform is responsible for generating a lot of customers for its suppliers, it can usually charge 15%+ take rates on the total volume going through the platform.
Perhaps nothing makes this more clear than online course platform Udemy’s pricing model.
If a course creator sells a course directly via their link/store, Udemy takes a 3% cut.
If a course creator sells a course via Udemy’s platform features (search/discovery, etc), Udemy takes a 63% cut.
In this case, Udemy driving the customer for the course creator is worth an extra 60% cut on that transaction!
Now let’s discuss a few companies in depth that are making attempts at helping their customers drive additional traffic/distribution: Shopify and Substack
Examining Shopify’s moves
One of the famous tenets of Shopify’s strategy has been to “arm the rebels”. But in doing so, Shopify has largely built infrastructure to allow merchants to operate an online store, rather than a “marketplace” of sorts. But this also means that Shopify has quite a low take rate, as I have written about in the past:
Shopify provides merchants the tools to set up a store and process transactions but isn’t necessarily bringing them sales and traffic. Meanwhile, Amazon has aggregated 100s of millions of buyers, and sellers lose the ability to reach them on a given search (and potentially make an incremental sale) if they aren’t on Amazon’s third-party marketplace. Shopify’s effective take rate is ~3% while Amazon’s is 10-15% depending on the category of product.
But as it’s grown bigger and in a move to grow to take rates and help its merchants more with their primary problem – acquiring new customers – Shopify seems to be moving towards helping bring distribution/traffic to its merchants.
1/ Shop App Local Discovery
Last year, Shopify launched a discovery feature in its Shop app, which allows users to discover local merchants to support. While they made it clear that it isn’t meant to be a pay-to-play feature and that they weren’t going to charge additional commissions, it could be the start of a move towards being a more full-fledged marketplace where they help their users discover products or merchants (and then eventually charge for it).
It has even been testing features that allow for searching for a product and seeing which local stores carry it, very similar to Amazon’s search.
Over time, it seems that Shopify is inching the Shop app closer and closer to a marketplace.
2/ Shopify Collabs
Shopify launched Collabs earlier this year, which helps merchants partner with creators who can help use their large reach and followings to bring more traffic to merchants.
In this case, this can be viewed as an advertising channel for merchants, but by Shopify helping facilitate, they can charge a cut on the collabs and essentially increase their take rate on the portion of sales that are driven by creators (not to mention help their merchants make more sales in general).
3/ Shopify Audiences
I’ve written about Audiences in the past and should write about it more in-depth now that its launched more broadly, but Shopify audiences is a data exchange network that allows merchants who opt-in to share their ad data to benefit from the aggregated data across Shopify’s merchants about what users are likely to be interested in what product at a given point in time.
It essentially should reduce the cost of acquisition of a new customer via paid social media channels through more effective targeting.
Again, once it’s proven to work effectively, this can over time be charged for since Shopify is allowing its merchants to do more effectively drive sales than they would have been able to without it.
Examining Substack’s Moves
Substack initially served as largely an infrastructure player, making it easy for anybody to operate a newsletter, handling the production, sending, hosting, etc.
However, writers had to bring and grow their audience and Substack didn’t drive eyeballs to a writer’s newsletter as such.
Given that, their 13% take rate (10% + 3% for payments)on paid newsletters seemed a bit high and one that I believed would be hard to sustain.
However, over time Substack has been adding features that help its writers drive more subscribers than they might have been able to otherwise, which makes it more valuable and makes its take rate more defensible.
1/ Substack Recommendations
By allowing writers to recommend other newsletters, Substack has started to bring in subscribers to newsletters via the audiences of other newsletters.
Personally, about 10% of my total subscribers (and maybe something like ~20% of my subscribers since the feature was launched) came directly from recommendations.
And I’m not alone. Per Substack,
Today, the Substack network is driving more than 40 percent of all subscriptions across the platform, and 12 percent of paid subscriptions. That means you essentially get readers and money for free just by publishing on Substack.
2/ Substack’s “Leaderboard” and Inbox App
Substack has a leaderboard-style discover page where users can discover newsletters. While it likely results in driving traffic in a more top-heavy fashion, with Substack’s new reading app, they have the opportunity to add more discovery features and personalize them in the app as they learn about the reader, and it could drive more traffic through that.
3/ Substack’s acquisition of Yem
Substack acquired a small startup called Yem, which helps newsletter writers grow their audience and their paid subscribers via smart email marketing campaigns. Substack intends to integrate these features directly into the platform to make it easier for writers to grow their newsletters.
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