Take-Rate Revenue Models
Instacart’s largest revenue segment is its marketplace and delivery business connecting buyers and sellers and facilitating delivery of purchased items. Instacart gets a percentage of every transaction as revenue; i.e., a take rate. Let’s hypothetically say that Instacart’s take rate is 5%. For every $10 purchase on its marketplace, Instacart generates $0.50 in revenue. The take rate can be charged to the buyer, seller, or both.
The take-rate revenue model allows companies to increase their revenue as the value they provide increases. This is good, but this revenue has an overlooked downside. As a former customer of various marketplaces and software companies that used take-rate revenue models, I’ve experienced it firsthand, and I’ve watched other entrepreneurs have a similar experience.
As a customer’s merchandise volume on the marketplace or software platform grows, the take-rate dollars become larger, even if the percentage is flat. The larger the take-rate fees become, the more visible they are to the customer’s internal decision-makers. Five percent of $1,000 is $50 and may be an overlooked expense. But 5% of $1,000,000 is $50,000, which is less likely to be overlooked.
Imagine that a customer reviews its P&L, and someone asks, why are we paying XYZ Company so much money every month? That amount could materially boost our margins or support growth plans. They do some forecasting and start thinking about ways to replace the marketplace or software provider (if possible) or reduce its fees. The customer’s perspective changes. It no longer views XYZ Company as a partner that provides more value than it charges for. Instead, it sees XYZ as a company whose cost exceeds its value. The customer wants the cost it incurs to better align with or be less than the value it feels it’s receiving.
When the customer’s perspective changes, the relationship and interactions change. When the dollars at stake are high, the relationship can become adversarial. If your biggest customers are constantly fighting you, it takes a toll on your team and in extreme cases can affect the culture of your company.
Take-rate revenue models work, but this dynamic is something founders considering them should be aware of. The good news is that take-rate revenue models can be crafted in various ways that prevent some of this tension with your largest customers.
Pivoting from B2C to B2B
I’m friends with an entrepreneur running an automotive service business focused on consumers. He’s been at it several years and is thinking about possibly selling the business one day. He would need to grow revenue and increase margins to make it attractive for acquisition. He has various ideas about how to do this, but his current model creates obstacles:
- Consumers need his service only once every five to ten years, so he must acquire new customers every month.
- Consumers view his service as an expense (i.e., its cost exceeds its perceived value) and negotiate hard, which negatively impacts margins.
- Managing relationships with consumers is a constant pain point for his staff and requires that he run at elevated staff levels, reducing margins.
- Each consumer has a different car, which adds operational complexity to servicing vehicles and reduces throughput.
He recently shared an idea he’s experimenting with. The automotive service he offers is something fleet owners can use too. Instead of continuing to focus on consumers (B2C), he may switch to targeting businesses (B2B). Here’s what he learned from some customer discovery:
- Small fleet owners are growing in his area.
- Each vehicle in a fleet needs to be serviced annually, so he could expect monthly repeat business.
- Down vehicles reduce revenue, so fleet owners view his service as helping them generate revenue (i.e., its perceived value exceeds its cost), which positively impacts margins.
- Working with repeat fleet owners simplifies relationship management, reducing the burden on his team and making it possible to operate with a smaller team, thereby increasing margins.
- Fleet owners buy the same vehicles, which simplifies operations and increases throughput.
Through trial and error, this entrepreneur has learned a valuable lesson: why some businesses are better suited to focusing on other businesses (not consumers) as their core customers.
It’s early, but I suspect this entrepreneur will pivot his business from B2C to B2B and finally reach the scale and profitability that’s eluded him thus far.
An Intriguing Strategy to Improve Your Decision-Making
Today I heard about an interesting technique. The objective is to improve your decision-making by getting feedback on the thought process you used to make a decision, not the outcome. The outcome of a decision isn’t a reflection of decision quality. Bad decisions end up turning out well, and vice versa, because of chance and randomness.
The technique involves sharing your thought process, including the variables you considered, with credible people who make good decisions. How did you think about the decision? What information did you factor in? The twist is that you don’t share outcomes with them (ask for feedback on decisions that have had good and bad outcomes). These people then explain the shortcomings and strengths they see in your thought process. They might even tell you how they would approach the decision if they were in your shoes. From all this feedback, you’ll learn how other people approach making decisions and improve your own decision-making.
This technique caught my attention because most people ask for feedback on decisions by leading with the outcome. This is completely different but makes a lot of sense to me (in theory). I’m curious to try it out and see how it works in practice.
Private Equity Consolidation of My Old Industry
A friend sent me an article about private equity consolidating segments of the automotive market, specifically tires and service centers. CCAW Automotive Group operated in this market, so I know it well.
I’m not surprised that private equity is targeting this market, because it’s fragmented and inefficient and requires significant capital to hold inventory. Rising interest rates are likely pressuring profitability of smaller players. This makes the market attractive to private equity funds looking to execute a roll-up strategy. In my opinion, it’s really the only viable strategy for this mature industry. Growth is slow (probably 3%–5% annually), so growing organically is hard because you mostly have to take customers from someone else. Buying smaller players and integrating them into a larger organization so economies of scale can be leveraged is a good strategy.
I wouldn’t be surprised to see private equity consolidate parts of this industry and then sell to a large upstream player (manufacturer, distributer, etc.) who could benefit strategically and financially. Then again, the consolidated segments could be taken public if market conditions are favorable. I’m curious to see how this plays out and hope the end result is a better experience for consumers.
Apple Savings Accounts Have Launched
Financial services for consumers and small businesses is likely the next big market for Apple (see my posts here and here). In October, Apple announced a new savings account product. And today, Apple announced that the product is live and paying a competitive 4.15% APY. Given the Silicon Valley Bank failure and the changing banking landscape, Apple may have decided to use challenges that traditional banks are encountering to its advantage.
I think the banking industry is prime for disruption. Banking has been slow to evolve, which frustrates consumers and small businesses. I can’t wait to see how consumers and the banking industry respond to Apple’s latest foray into financial services.
Looks like we’re one step closer to iBank.
Apple vs. Banks: A Digital-Wallet War
I’ve thought for a few years that financial services is the next big market for Apple (see my posts). It’s a massive market that the iPhone puts the company in prime position to disrupt.
Today I watched a Wall Street Journal video about the competition between Apple and traditional banks. The gist was that Apple’s digital wallet is gaining market share for consumer payments. That is, consumers are using this digital wallet to make more of their purchases. Banks have taken notice and worked together to create a competing wallet called Paze. Paze is young and there isn’t a ton of information about it out yet, but I’m curious to see how banks plan to convince consumers to adopt Paze. Distribution (getting the solution in the hands of users) matters, and it’s not clear to me how Paze will compete with the distribution Apple offers via the iPhone.
The stakes are high, and it will be interesting to see how this war plays out. Regardless, I like the fact that Apple’s presence is forcing banks to innovate and offer better solutions to consumers and small businesses.
What’s Your Negotiating Style?
I had a conversation today about negotiations—something everyone will encounter in their life. They can be as complicated as working out deal terms for a large investment in a company or as simple as a child trying to convince their parents they should have a later bedtime. The most common example I heard people talk about today was negotiating salary with an employer.
Books and strategies on negotiating abound. I don’t think there’s a right or wrong approach, only what’s ideal for the personality of the person doing the negotiating. (Note: there are some things everyone should avoid!)
Understanding the person you’re negotiating with is important. Understanding their negotiating style can inform how you negotiate. But it isn’t always easy to understand someone’s style. One of the people I chatted with shared a straightforward approach to quickly understanding someone’s style: at the beginning of the conversation, ask them: “What’s your negotiating style?” In his experience, most people will be caught off guard. Either they’ll tell you how they negotiate, or their response will give you clues about their style. For example, someone will say they’re a straight shooter. Someone else, to keep from showing their hand, won’t give you clear answers. Either way, you’ve learned something about their negotiating style that’s useful.
I like this direct approach and plan to use it when I negotiate with someone for the first time.
Carlyle Group Founder Created His Own Luck
Earlier this week, I shared a takeaway from an interview with the founder of Carlyle Group, David Rubenstein. I enjoyed that interview and had many more takeaways. Some of them were presented casually as simple, common-knowledge concepts that nevertheless take some people a lifetime to figure out. Understanding the power of some of the concepts David shared, and implementing them, can change your trajectory. Here’s another trajectory-changing takeaway: you can create your own luck.
When David was starting Carlyle, he didn’t want to build a firm that was all white males. He approached Gracia Martore, a female executive of Latino descent. She declined to join the firm but suggested he talk to Bill Conway Jr., who was transitioning out of a telecommunications CFO role. David had never heard of Bill, but he called him. They connected, and Bill became a cofounder of Carlyle.
The big takeaway from this story is that you can create your own luck. Luck is about the probability of a favorable outcome. You can increase the probability of good things happening, and create your own luck, by taking certain actions. In David’s example, he networked and chatted with people, which led to opportunities. Not the opportunity he was aiming for (Gracia), but a great one nonetheless (Bill).
If you want to achieve outsize success, you can increase the chances of it happening by creating your own luck.
Take a listen to David’s comments on creating your own luck here.
Financial Services Is Apple’s Next Big Market: Latest Move
I’ve been sharing my views about Apple’s push into financial services since 2021. I believe digital distribution will disrupt banking. I also believe the iPhone has positioned Apple perfectly to benefit from this change and become the financial services partner consumers and small businesses trust. Here are some of the moves I’ve noticed:
- Buy now, pay later in Canada
- Tap to Pay announced
- Apple high-yield savings account
- Pay Later loan product announced
Yesterday it was reported that Apple has expanded testing of its Apple Pay Later service to its employees. This is a big step that shows the company’s getting closer to launching this product widely.
Markets matter a lot. Big outcomes require large markets. Apple is an enormous company worth (i.e., with a market cap of) about $2.4 trillion as of this writing. Any new business that Apple pursues must be—or have the potential to be—a large market. Otherwise, it won’t move the needle for a company as huge as Apple. Consumer and small business financial services is an enormous market, and it’s been primed to be disrupted by changes in how consumers access financial products (digital vs. brick and mortar). This makes it an amazing and high-priority opportunity for Apple.
Don’t be surprised if iBank or Apple Bank dominates consumer and small business financial services within the next five to ten years.
Decisions by Poll
I listened to someone explain poll-based decision-making. When faced with a difficult decision, you reach out to people in your network and ask which choice they think is correct. Then you do whatever the majority “vote” for. For example, you ask one hundred people if it’s a good idea to put all your money into a single stock someone told you about. If ninety-nine people say yes and one person named Warren Buffett says no, this person would make the investment.
This thought process has several flaws. I’ll discuss two:
- Credibility – It’s good to ask for others’ perspectives. But it’s important to ask credible people, meaning people who have experience or a track record of success in the area. People who have no experience or success in the area aren’t credible, and their perspectives should be discounted or, in extreme cases, ignored.
- Independent thinking – It’s important to take the time to figure things out yourself and reach your own decisions. Letting other people do the thinking for you—following the crowd—can be dangerous. You can factor in the perspectives of others to make sure you’re not missing something, but you don’t know how they made their decisions. If you rely on them, you could be exposed to serious errors. Frauds like Ponzi schemes grow because new investors take comfort from and rely on the fact that other people decided to invest. People who evaluate opportunities independently are more likely to see things that are too good to be true for what they are.
I’m all for getting perspectives from others before making decisions, but I’m not a fan of poll decision-making.