Studying the North American e-commerce industry has triggered a series of deep thoughts for me

An interesting phenomenon was discovered in the study of the North American e-commerce industry. Combined with my country's e-commerce industry, it triggered a series of thoughts. If you want to know what it is, this article will give you the answer. If you are interested, you can take a look.

In the past year or so, I have studied the financial reports of North American Internet giants. First, the financial reports of domestic Internet giants lack in-depth research value (or, to put it more bluntly, lack highlights); second, the North American Internet industry (and even the entire technology industry) is unusually strong, which makes people unable to help but learn. Even if we do not consider the AI ​​big model storm that swept the world this year, and only consider the "traditional" consumer Internet sectors such as e-commerce, social networking, and streaming media, there are too many things worth learning from the North American giants.

The most effective way to study the technology industry, especially the consumer Internet industry, is of course to "learn from practice" - to use products and services, to talk to users, to find industry experts for research, etc. Unfortunately, I haven't been to the United States for about ten years, and I don't have the conditions to live in the United States specifically for research. So my research materials are mainly financial reports of listed companies and some credible third-party statistical data.

In the past month or so, I have been studying the North American e-commerce industry. After reading the financial reports of large platforms such as Amazon, I also read the financial reports of decentralized SaaS platforms such as Shopify and Square. I found an intriguing phenomenon (of course, many people must have discovered it long ago, I just realized it later):

The monetization rate of North American e-commerce platforms is much higher than that of Chinese e-commerce platforms. Merchants seem to be able to afford such high rates and pass them on to consumers. Why?

Let's take a look at the specific data first. The fees charged by e-commerce platforms to merchants generally include advertising fees, commissions, logistics fulfillment fees, payment fees, etc. The monetization rate of the platform is the "burden rate" of the merchants. Generally speaking, we can divide the revenue of the e-commerce platform by GMV to get its monetization rate. However, we need to pay attention to the following caliber issues:

1. The self-operated business of an e-commerce platform sells its own goods and manages its own inventory. It does not belong to the "platform business" and its revenue and GMV should not be included.
2. The types of services provided by major e-commerce platforms to customers are often different, and the fees are bound to be different. For example, some platforms do not provide logistics fulfillment services (or only provide a small amount of such services), some do not provide payment services (mainly rely on third parties to provide), etc. We need to compare the monetization rates of major platforms as much as possible under fair conditions.
3. The calculation methods of GMV of major e-commerce platforms are also different, some are looser, some are stricter. However, the methods used by listed companies in the same industry are roughly comparable, and there will be differences, but they will not be a world of difference.

We can first calculate the monetization rate of China's mainstream e-commerce platforms. Unfortunately, starting from 2022, Alibaba, JD.com and Pinduoduo will no longer publish GMV; however, data before 2021 can still be found in the financial reports.

JD.com's self-operated business is too large and is not a platform of the same type as the other two. We exclude it from the calculation. For Alibaba, we use the GMV of its "China Retail Business" business (Taobao Tmall) minus the direct sales business as the denominator, and the "customer management income" (including advertising and commission income) of the same business as the numerator; for Pinduoduo, we use the GMV of its direct sales business minus the direct sales business as the denominator, and the income of the online marketing business as the numerator (minus the payment fee). The results are as follows:

Taobao Tmall monetization rate: 4.4%

Pinduoduo monetization rate: 3.0%

(Note: Taobao and Tmall’s data are for the 2021-22 fiscal year, while Pinduoduo’s data are for the 2021 fiscal year. The former is one quarter later than the latter)

Please note that none of the above takes into account the payment fee rate. From the financial report information, Taobao Tmall merchants and Pinduoduo merchants bear similar fee rates, both around 0.55%. Therefore, the "gross monetization rates" of these two platforms are approximately 5.0% and 3.6%, respectively.

Of course, the actual costs that merchants pay to sell goods online are higher than the above figures. The calculated costs include: the cost of placing ads on third-party channels (such as social media); the operating fees charged by the agent operator; the fees for using third-party SaaS tools, etc. Some merchants may be particularly dependent on external traffic, so the actual burden rate is extremely high. However, these costs are very complex and lack unified and reliable statistics, so this article will not take them into consideration.

So, what is the burden rate of North American e-commerce sellers? Let's start with the lightweight platform Shopify - most e-commerce "independent sites" are built on Shopify, which is essentially a set of SaaS tools that also provides some payment, fulfillment and advertising marketing guidance services. Fortunately, Shopify still publishes GMV on a quarterly basis, so the latest (third quarter of 2023) monetization rate is easy to calculate:

Shopify monetization rate (including payment processing fees): 3.05%

Shopify monetization rate (excluding payment fees): no less than 2.3%

Please note that Shopify's own payment service does not charge merchants, and currently 58% of its GMV is completed through its own payment service. We can infer from the financial report that the proportion of Shopify's revenue coming from fees should be less than a quarter (or even lower); the above estimate of the monetization rate excluding payment fees is very conservative.

It seems that Shopify's monetization rate is much lower than that of Taobao and Pinduoduo in China. The problem is that Shopify is not a real "e-commerce platform". The main service it provides is a SaaS solution! Merchants can place ads on search engines and social media with the guidance and help of Shopify, but the money for the placement is calculated separately, and the money is collected by traffic platforms such as Google, Facebook and even TikTok.

Imagine if Taobao only provided merchants with website building, page layout, customer relationship management and technical services, how high would its monetization rate be? In fact, you don’t have to imagine it. Just look at the two major e-commerce SaaS platforms in China with similar positioning to Shopify - Youzan and Weimeng. If they can receive this proportion of fees, they will wake up laughing in their dreams!

Just this year, Amazon launched the "Buy with Prime" service for independent e-commerce sites. This service allows independent merchants to enjoy Amazon's logistics and distribution system and to a certain extent gain Amazon's brand credibility. Shopify has cooperated with Amazon to launch "Buy with Prime" as an optional service to its customers. To be honest, its price opened my eyes:

• The basic service fee for Buy with Prime is 3% of GMV. Please note that it does not include any fulfillment or transaction fees, but only Amazon's brand endorsement and customer service support!
• If merchants want to use Amazon's logistics and distribution service (FBA), the minimum price is US$5.38 per piece (note: not per order), plus certain warehousing and logistics fees.
• If merchants want to use Amazon's payment service, the handling fee rate is 2.4% + US$0.3 per order; note that this is still a "preferential rate" and will be increased to 2.9% + US$0.3 per order in 2023.

The high cost of logistics and delivery is understandable. After all, North America is vast and sparsely populated, labor is expensive, and the level of development of e-commerce logistics cannot be compared with that of China. The problem is, can you charge a 3.0% fee just by putting an Amazon Prime logo and providing Amazon product reviews and customer service functions?

Payment services will be charged another 2.4% (2.9% after May next year)? Add in Shopify’s own fees (about 3%), and it can already account for 8-9% of a North American independent station seller’s revenue! This doesn’t even include the crucial advertising and marketing costs…

So, what is the burden rate of third-party sellers on the Amazon platform? This is difficult to answer because Amazon has long stopped publishing GMV, and quarterly and annual data do not exist. However, according to estimates by consulting firm eMarketer, Amazon's monetization rate for third-party merchants in 2021 is as high as 34%!

To be fair, about half of this is logistics and delivery costs; but after deducting the logistics costs, Amazon third-party merchants still pay the platform about 17% basic service fees and advertising fees (note that this figure still does not include the costs of third-party channels)...

If China's Taobao, JD.com or Pinduoduo platforms dare to charge sellers such high fees, even if the competent authorities do not intervene, merchants will flee overnight or even go bankrupt. Strictly speaking, even at the current monetization rate level, most merchants are already complaining bitterly, so this year all major platforms are emphasizing "giving benefits to merchants" and not exhausting all resources - whether this can be done is hard to say; but at least no one dares to significantly increase the rates. What exactly causes such a huge difference in rates between Chinese e-commerce platforms and North American e-commerce platforms?

Is it because the competition in North America is not fierce enough? Maybe it was in the past, but in recent years, the North American e-commerce market has become very competitive: Shein, Temu, and TikTok from China have expanded significantly, e-commerce independent sites have flourished, and more than one company can provide SaaS solutions. However, from the financial reports and statistics of major companies, we can see that the monetization rate of e-commerce in North America has not been "low" in recent years.

Is it because North American e-commerce platforms can provide higher value-added services? Obviously not. Whether it is Amazon or mainstream independent websites, their interfaces, technologies and services can only be said to be more in line with American tastes. Their functions are not stronger than similar platforms in China, and are even worse.

Is it because labor costs in North America are too expensive? For logistics and distribution, labor costs do have a huge impact. But even if logistics is excluded, the monetization rate of North American e-commerce platforms is still much higher than that of domestic ones. Shopify is a typical example: its 3.0% monetization rate contains almost no logistics services (it used to have a logistics network, but later sold it), and is only a SaaS solution. Can this be explained by labor costs?

In fact, from the perspective of economic principles, the fundamental reason why North American merchants can accept such a high burden rate and continue to operate is that they have the ability to pass on the costs to consumers. In other words, North American consumers have sufficient purchasing power to provide relatively generous profit margins for both e-commerce platforms and merchants. Although inflation in 2021-22 did erode the purchasing power of Americans, it turns out that it was only a superficial injury, and the US consumer market was not seriously affected.

This is also the fundamental reason why Chinese e-commerce applications such as TikTok and Temu mainly focus on North America: consumers there are very wealthy, and the "stay-at-home period" in 2020 has greatly promoted their consumption habits, entering the ideal state of "having both consumption ability and willingness to consume online."

Of course, the U.S. e-commerce market will inevitably be affected by economic cycles, but even if a recession does come, it will not change the overall situation that American consumers are very wealthy and can provide huge profit margins.

We may draw a conclusion:

The primary factor that determines whether an industry is "competitive" is not how self-abuse practitioners are, but how wealthy the customers are. If the customers (whether corporate customers or consumers) are rich enough and willing to spend money, who would be willing to roll to death?

Even if someone wants to gain an advantage by offering a "low-price" or "low-service" discount, it is a limited discount based on a high level, and will not make the entire industry unprofitable. In a market with consumption upgrades, the profit margins of most people are expanding; in a market with consumption downgrades, the opposite is true.

In short, it is the strength of terminal demand that determines the profit margins of suppliers and platforms, not the other way around. The capital market once believed that the purchasing power of Chinese consumers would quickly catch up with that of American consumers; in this way, the Chinese e-commerce market would enjoy both the benefits of "huge scale" and "high profits", and the monetization rate of the platforms would quickly increase to a level close to that of the United States.

Unfortunately, in recent years, the above judgment has been biased. The changes in the macro environment are directly reflected in the financial data and stock price performance of Alibaba, JD.com, and Pinduoduo.

Regardless, I still look forward to the day when the purchasing power of Chinese consumers matches that of American consumers—whether that happens in ten, twenty, or fifty years.

How long do we have to wait?

Author: Pei Pei, leader of the Phantom Thieves

Source: WeChat public account "Internet Phantom Thieves" (ID: TMTphantom)