So I simplified it here but I usually distinguish between CM1 and CM2 where CM2 is less marketing expense. My general feeling is that marketing is a variable expense if it goes up with volume which includes a large share of most marketing budgets. That being said I mostly suggest CM1 for LTV calculations.
What are some of the key elements that contribute to variable costs in a marketplace ? Do you see emergence of AI and automation leading to fundamentally different dynamics in cost structures for marketplaces?
You spoke about some of the below
- Customer support,
- trust/safety, insurance, and
- acquisition costs can be massive costs for the business,
Great article! I noticed in the graph that the contribution margin in theory should be less than the gross profit. However, when I reviewed a company's data, I found that the contribution margin is consistently higher than the gross profit value. Could you explain what could be the reason behind that difference?
During a discussion with a colleage, I've understood that the key issue lies in the mislabeling of 'Gross Margin' as 'Gross Profit' in the graph. If we could update the graph to correctly display 'Gross Margin' instead of 'Gross Profit', that would indeed resolve the confusion. What do you think ?
A big under explored driver for COGs is the payment fee (credit, debit, etc.) as you mention, which can vary massively and make cost predictions difficult. I'm building out a product in just this space for markeptlaces and platforms at the moment and I'm seeing many payments resulting in a net loss, often to the surprise of our customers.
This is such a useful piece - thanks, Colin. I have a question...
Would customer support and developer costs be considered as COGS or variable expense? Or neither?
Typically neither are included.
Great read!
Wondering why you include acquisition costs in the contribution margin when they are closer to fixed expenses rather than variable / COGs? Thanks!
So I simplified it here but I usually distinguish between CM1 and CM2 where CM2 is less marketing expense. My general feeling is that marketing is a variable expense if it goes up with volume which includes a large share of most marketing budgets. That being said I mostly suggest CM1 for LTV calculations.
Great points!
What are some of the key elements that contribute to variable costs in a marketplace ? Do you see emergence of AI and automation leading to fundamentally different dynamics in cost structures for marketplaces?
You spoke about some of the below
- Customer support,
- trust/safety, insurance, and
- acquisition costs can be massive costs for the business,
.... and the list goes on.
The main cost is always acquisition costs outside of big ones like insurance and credit card processing.
Interesting reads on take rates for a marketplace business
https://tanay.substack.com/p/growing-platform-take-rates-via-distribution
https://www.lennysnewsletter.com/p/take-rates
Great summary!
Thanks!
Great article! I noticed in the graph that the contribution margin in theory should be less than the gross profit. However, when I reviewed a company's data, I found that the contribution margin is consistently higher than the gross profit value. Could you explain what could be the reason behind that difference?
The contribution margin doesn't include fixed overhead expenses and gross margin which could explain it. It really depends on the type of business.
During a discussion with a colleage, I've understood that the key issue lies in the mislabeling of 'Gross Margin' as 'Gross Profit' in the graph. If we could update the graph to correctly display 'Gross Margin' instead of 'Gross Profit', that would indeed resolve the confusion. What do you think ?
I don't think so, as "Gross Profit" is the $ amount which the circle represents and the "Gross Margin" is just the %.
Great article, Colin.
A big under explored driver for COGs is the payment fee (credit, debit, etc.) as you mention, which can vary massively and make cost predictions difficult. I'm building out a product in just this space for markeptlaces and platforms at the moment and I'm seeing many payments resulting in a net loss, often to the surprise of our customers.