Is Uber's Share of Ride Revenue Unfair?

It is easy enough to get an argument about the cost of using a marketplace such as the Apple App Store, Etsy or Uber. When Apple takes 15 percent to 30 percent of a sale, it can seem unfair to the seller. Uber’s take, said to be up to 50 percent in some cases, can seem usurious. 

But distribution, the roles in a value chain that move products or services from manufacturer to buyer, have a definite cost. 

And for some of us, a market maker or marketplace represents the cost of distribution. Seen that way, perhaps 30 percent is not unreasonable. 

Market makers, platforms and distributors all move goods between buyers and sellers. 

Function	Traditional Distributor	Marketplace / Market Maker (Uber, eBay, Etsy)
Takes ownership of product?	Usually yes	Usually no
Holds inventory?	Yes	No
Warehousing/logistics?	Major function	Usually little or none
Sets resale price?	Often yes	Usually seller sets price
Bears inventory risk?	Yes	No
Main asset	Physical network	Digital network
Revenue model	Gross margin on resale	Commission ("take rate")
Value provided	Physical distribution	Matching buyers and sellers
Scalability	Limited by physical assets	Highly scalable

A traditional distributor such as Sysco or McKesson buys products, stores them, transports them, and resells them.

A platform such as Uber, eBay, or Etsy generally does not own the underlying goods or services. Instead it creates a market, establishes trust, handles payments, provides discovery, and charges a fee.

The point is that platforms, market makers and distribution networks provide a similar function. 

From a value-chain perspective, both perform an intermediation function:

• "How do products get from factory to customer?"

• "How do buyers find sellers and transact safely?"

Both reduce search costs, transaction costs, and coordination costs.

The major innovation of digital marketplaces is that they perform many distribution functions without taking inventory ownership.

One could argue that Uber is a "virtual distributor" of transportation services, while eBay and Etsy are "virtual distributors" of goods.

So distribution represents a necessary part of any retail value chain. 

Research from the Reserve Bank of Australia found that for retail goods, roughly half of the final retail price reflects wholesale and retail distribution margins and costs. 

But distributor profits themselves were less than 10 percent of final sale price.

Final Retail Price = $100	Share
Manufacturing cost	$50
Wholesale distribution costs and margin	$15
Retail costs and margin	$35
Final consumer price	$100

Industry	Distributor Margin
Electronics	3%–10%
FMCG/Grocery	3%–10%
Industrial products	10%–20%
Medical products	20%–30%+
Apparel	15%–30%
source: Unanswered

Digital marketplaces usually charge commissions ("take rates") rather than earning resale margins.

Platform	Approximate Take Rate
Etsy	~6.5% transaction fee plus payment and advertising fees; effective cost often 10%-20%+ for sellers (Reddit)
eBay	Often around 10%-15% depending on category (Business Insider)
Uber	Company reports roughly 20%+ take rates, though some external studies estimate substantially higher in certain markets (Business Insider)

Looked at that way, take rates or distribution costs are quite similar. 

Role	Typical Share of Final Transaction Value
Physical distributor profit	3%-30%
Marketplace take rate	10%-30%
Combined wholesale + retail distribution system	Often 30%-50%+
Uber/eBay/Etsy platform fee	Often 10%-30% (50% in some cases for Uber)

Industrial Products	Digital Era Products
Scarcity = moving products	Scarcity = matching participants
Value = logistics	Value = network effects
Advantage = warehouses	Advantage = users and data

In economic terms, platforms replace physical intermediation with information intermediation.

So we move from:

Manufacturer → Distributor → Retailer → Consumer

to:

Producer → Marketplace → Consumer. 

As a result, a 10 percent to 20 percent marketplace fee can sometimes replace a traditional channel structure that consumed 30 percent to 50 percent of the final selling price.

source: Len Sherman 

In other words, a 30-percent take rate for sellers on a platform or marketplace might seem out of line, but might not actually be usurious.