There are two main direct ways $MercadoLibre(MELI)$ monetizes the e-commerce marketplace:
- First-party sales (1P)
- Third-party sales (3P)
When MELI sells products that it owns and holds in inventory to customers, it acts as a first-party seller. In this scenario, MELI sources goods directly from the manufacturer or the distributor and handles the transportation and storage.
Most crucially, the company is in full control of pricing and recognizes the entire sale as revenue.
So, if they sell a blender for $60, they recognize the whole $60 as revenue.
Meanwhile, 3P is when a product purchased by the customer is sold by an independent merchant, not by Mercado Libre itself.
MELI charges the merchant fees for using the platform and recognizes said fees as revenue.
All the shipping costs, insurance, warranty, returns, and COGS are paid by the seller. For instance, in Mexico, the fees range from 12.5% to 22.5% depending on the product category, and whether sellers use any extra services. In other countries, fees might be different.
The economics of these transactions are quite different.
1P depends on their ability to negotiate a favorable price with a supplier and the customer’s willingness to pay for the product. In 1P, gross margins are low, sometimes as low as 10%-20%.
However, remember that in a 3P sale, the independent merchant is responsible for his own expenses. Mercado incurs the costs of maintaining and managing the platform, but as the platform has a massive scale, Mercado can achieve a very high gross margin on its 3P sales.
In the $60 blender example,
MELI would keep about $9 in 80% gross margin platform fees and recognize those $9 in revenue.
Then it would add shipping fees that have much lower or even negative margins.
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