The value chain

I was recently speaking with one of our marketplace entrepreneurs. They currently serve the supply which they receive from supply aggregators to end customers. So they have a direct relationship with end customers but only an indirect relationship with the individual sources of supply who work instead with supply aggregators.

A recent industry development gave the company an opportunity to start working directly with the individual sources of supply. By incurring the team and software development costs necessary to source directly from individual suppliers, the company can effectively become an aggregator itself, thereby avoiding the commission that it currently pays aggregators. The question, however, is whether this makes sense.

Serving as an aggregator moves the company from one part of the industry’s value chain (that which serves the end customer) to another part (that which is one step removed from serving the end customer). And depending on the industry dynamics (for example the competitive set of companies serving end customers, the competitive set of supply aggregators, and the negotiating power between supply aggregators and companies serving end customers), players at different parts of the value chain have different abilities to capture the value created by the industry. Supply aggregators may capture more value under certain industry dynamics and companies serving end customers may capture more value under different dynamics.

Before forwards or backwards integrating into a new part of your industry’s value chain, it’s important to evaluate just how much value there is to be gained from making such a move.

Originally published at Thoughts of a VC.