The 20/20/20 Rule for Marketplaces
As two-sided marketplaces are a core investment area for our fund, I’ve spent a lot of time thinking about what the underpinnings of a strong marketplace business model should look like. I came up with a very simple rule — the 20/20/20 model. Hopefully, this will help entrepreneurs and investors to structure their thoughts around building successful businesses in this space.
The quickest way to illustrate this rule is using actual companies’ examples. Many will say it is easy to pick a super-successful company and derive these rules retrospectively, so I’ve picked a well-known marketplace company (Uber) and a very promising young marketplace company (Laurel & Wolf) as examples.
Part 1: Build a Product / Service Providing Consumers With the Same Utility 20% Cheaper
There is a very interesting article by Business Insider from October 2014 that compares the cost of an Uber ride against taxis in major US cities, ranking them by the price differentials. I picked Columbus, which was right in the middle of the list, and the average price of a taxi was $15.42 (including a 20 percent tip), 50 percent more than the comparable Uber ride at $10.20. Case made.
Laurel & Wolf is a marketplace that makes interior design accessible to every household for less than $500 per room. Having gone through a home remodel recently, I remember getting quotes between $3,000–5,000 from interior design firms without even factoring in the actual furniture cost. In the spirit of eating my own cooking, or in this case using the services of my own portfolio company, I spent just over $1,000 for my entire house and got an amazing design from Laurel & Wolf.
Part 2: Help Service Providers Earn 20% More Than Their Usual Rate
I remember there being a huge controversy when Uber published a post stating the median wage for an UberX driver working full-time: $90,766 a year in New York City and $74,191 in San Francisco. While some might argue that this is overstated, it’s plausible that an Uber driver can make $50,000–55,000 a year. This is still over 20% more than the average salary of a taxi driver at closer to $39,000.
The average interior designer works a 40–45 hour workweek and makes $47,600 annually according to the bureau of Labor Statistics. On Laurel & Wolf, the best designers could easily make more than that or supplement their full time job by working for Laurel & Wolf in their free time. Wouldn’t it be great if you could work less and end up making more money?
Part 3: You Should Make 20% Margins After Satisfying Consumers and Service Providers
While Uber’s recent change in its commission structure — taking 30% commission from newer drivers — has had a very negative reception from drivers, there are still more and more drivers and consumers signing up for Uber every day. Drivers now think that the “old deal”, where they paid 20% in commission to Uber, was a great one. There are several conclusions you can draw from this story, but one thing is clear — Uber can command a 20% margin and still keep consumers and service providers happy.
Laurel & Wolf again falls into this same category, where they are able to charge a healthy 20% gross margin, yet give consumers access to interior design experts at a fraction of the normal cost. Meanwhile, designers have the freedom to work fewer hours whenever they want and make the same amount of money (if not more).
For all those trying to build successful marketplaces, I welcome your thoughts!