MBA Mondays: Revenue Models - Peer to Peer
We've covered advertising, commerce, and subscriptions so far in this series on business models. And while they are the big three of Internet business models, they all existed well before the Internet. They are not Internet native business models.
If there is one thing I have learned investing in Internet businesses over the years it is to pay attention to things you can't do without the Internet. And that describes peer to peer pretty well. Like the Internet, a peer network empowers the edges and devalues the middle. I like peer networks very much.
If you look at the revenue model hackpad, you will see a list of some interesting peer network businesses, including our portfolio companies Lending Club and Etsy. They all take a similar approach to revenue generation. They connect one or more people together to conduct a transaction and take a fee for doing so. In Etsy's case the transaction fee is 3.5%. In Lending Club's case, the fee is generally 4% to the borrower and 1% to the lender. In Kickstarter's case, the fee is 5% to the project creator if the project is successful.
But there are ways to generate revenue outside of the transaction fee in peer networks. Etsy is a great example. In addition to the 3.5% transaction fee, they charge a 20cent listing fee, a payment fee for payments processed on their direct checkout service, and they have an advertising marketplace so sellers can promote their items on Etsy. It is possible to sell on Etsy and share less than 5% of your revenue with Etsy. It is also possible to sell on Etsy and share more than 10% of your revenue with Etsy. It all depends on how many of their services you are using to run your business.
I like this approach very much. I think the basic fee for participating as a seller in a peer network should be as low as possible. This allows the marketplace to develop as much liquidity as possible. Increasing transaction fees will push sellers out of your market into other ones. The better approach to increasing revenues is value added services that sellers can avail themselves of but are not required to. If these services allow sellers to sell more or if they make selling easier, sellers will adopt them and your take rate can ultimately be much larger than your transaction fee.
The purpose of the revenue model in a peer network should be two fold. First it should incent as many participants in the peer network as possible (ie the lower fees the better). Second, it should produce enough revenue so that the business will produce significant profits at scale.
The thing about peer networks is most of the value is created by the participants in the network. The business doesn't do that much. It provides the basic infrastructure so that the market can work. It provides trust and safety and governance. And it provides customer service and support. The participants in the network do most everything else. That means these businesses can and should operate very efficiently at scale.
Craigslist is a good example of a peer network leveraging the power of the model. I have no idea how much revenue Craigslist makes and how many employees they have. But I would not be surprised if it were a $200mm annual revenue business with $150mm or more of annual profits. And yet it is capturing a tiny amount of the economics in its peer network. It should easily be the case that billions of dollars a year are transacted because of Craigslist. So what you see is a huge amount of transactional volume, a relatively small percentage of which is captured in terms of revenue, but a huge percentage of the revenue that is collected drops to the bottom line. That is what a peer network business model should look like.
And it scales really well. Because so much of what a traditional business would do is being done by the peers on the network instead of the company. Compare an online retailer with Etsy. An online retailer needs to have buyers and merchandisers. It needs to have inventory and warehouses. It needs to ship and track. It needs to spend a large percentage of revenues on marketing, customer acquisition and retention. Etsy doesn't spend much money on those things. Their sellers do. And as a result, their sellers keep more than 90% of the value of the transaction as opposed to giving up 50% as a wholesaler.
So peer networks are powerful businesses that when constructed well have great defensibility and staying power. The key is keeping the take rate as low as possible and incenting participants to transact with you instead of someone else. If you can do that, you can build a large and sustainable business with this model.
Comments (Archived):
“The business doesn’t do that much. It provides the basic infrastructure so that the market can work.” But these are critical P2P infrastructure services. Without them, it doesn’t work. eBay should fit that model too.
it does. the grandaddy of the model.
Credit cards are the great-great-great grand daddy.
eBay -my thought exactly as I read down the post.
Another big thing is establishing trust. Buyers need to trust that these small businesses will actually deliver.
Especially for individual sellers. Trust & reputation status is crucial.
So why has eBay been totally unable to transfer the reputation skills they have built up to other services? Likewise the trust/history/identity I have built up via PayPal? Why have they missed the chance to make this a service I can take across the web?Here in the UK, on the one hand eBay owns gumtree, a craigslist clone that is full of scammers. On the other hand via paypal they know exactly who I am down to my address, bank account, etc. Yet they seem totally unable to unite the two to free gumtree of scams.A very wasted opportunity.
paypal was critical for them. People used to mail cash. The fact that they can’t unify them is speaking more to their corporate politics than anything else
ebay is littered with shill bidding – I don’t recognize the reputation you speak of.
It’s interesting because I personally am more suspicious of sellers on eBay and haven’t really used ebay. On the other hand, I feel comfortable using Etsy. Not sure why that is.
Yes, of course.
Two nits—Etsy and Kickstarter fill the funnel, aggregate the customers for the merchants/projects that pay a piece of their ‘success’ to them. Customer acquisition is hard for niches, artists, passion projects and artisanal producers. I look at these marketplaces as the customer acquisition piece of the big puzzle. A big plus for why it pays to belong.-These p2p marketplaces are not social nets. That fascinates me. Sure now you can follow people and the like but socialization and ‘marketing’ by the consumers happens across the web, sharing on the big social nets like Twitter and FB.I’d love to see traffic and referral numbers from these two companies.Thanks Fred!
the referral numbers aren’t as high as you might imagine. pinterest is the biggest for Etsy and it isn’t as big as search.
Search–surprised but it’s logical as the products are categorically specific and unique. Thnx.
Etsy – doesn’t a 20% listing fee leave the door ajar for an ankle biting competitor to push open?
20 cent
oh, i thought it was one of your spellings 🙂
it could have been!
my interpretational bias on display. i’ve gotta watch for that.
one of the things that Fred has talked about in the past that are crucial to peer to peer is network effects. Without em, the peer to peer is dead.
There are a bunch out there (names elude me at this moment). Cheaper all around.To me it’s all about customer acquisition. If you can get found and transact for 10-20% at volumes that make sense, that’s worthwhile.And of course, I don’t think many of these are exclusive (?) so no harm in being in more than one place.
I think he said 20 cents for listing…not 20 percent.
he did – i got it wrong 🙂
Well stated. This model has always reminded me of the foreign exchange (currency) market. It historically differed from say Equities, in that there was no exchange. The major banks organized and put systems (software FTW!) in place. And a nominal fee per transaction was taken, but in essence, it’s peer-to-peer, but of the B2B flavor.Most folks think of peer-to-peer models in the consumer space. What other B2B P2P examples are there?
pollenware? workmarket?
Bloomberg.
Yep, Reuters was the grand daddy of peer networks in FX.
Yup, I was at Reuters early in my career.
Good example Jim. I am spamming the site today with credit cards – which I think predated electronic FX…..#p2pgenealogy
Interesting, I’ve started using http://transferwise.com/ which is very much C2C peer to peer at they give you mid market exchange rate and then do a swap for a nominal fee. Big saving on forex transactions
Yup. Transferwise is the future. If you are still doing it the old way, you’re doing it the wrong way.
And to think that I started a business in 2001 called PeerIntelligence.com to cover P2P companies & technologies. I was way too early.
being early sucks.
Being early is the same as being wrong. Been early/wrong a bunch of times.
It bothers me greatly that too early=wrong, and somehow that doesn’t sit well with invention and discovery for me in fields of science. Perhaps you mean wrong in marketplace.
Science and research are a different world.For what I do as a business person, it is indeed true. Although not in a pejorative sense of course.
only once for me (so far) but it almost killed me 🙁
I’ve been there more than once around video chat. Finally realized that I wasn’t early I was just wrong on that one…
It does. Timing is part of the success factors.
Fred, in a post back in Aug 2011 (http://www.avc.com/a_vc/201… you stated that valuations on such P2P marketplaces are a range between 1xGross and 20xEBITDA. Do you still stand by these multiples or has it changed in one direction or the other over the past year or so?
When they are growing at rapidly (doubling year over year or more), yes
Very efficient,No AR & Inventory riskLittle or no Working capitalI guess one of the largest expenses may be credit card / gateway fees.
Like credit cards – the first peer to peer network.
I don’t wish to come off nitpicky, but I am pretty confiden that there were peer to peer networks (non tech) prior to the internet? Not with the breadth of the internet, of course. In the midwest, we have a tradition of flea markets aggregated (rummage sales, not places to buy tiny insects) that are run by someone who leases out space to the individual sellers. Many churches have run similar arrangements where anyone can sell goods, with a portion going to the church (generally a fund raiser for mission work). How is craigslist different from a newspaper’s “classified”s)? Here in flyover country we had specialty classified ads that charged flat rates, charged a percentage, a mixture, etc.When I look at the revenue hack pad, I typically see “pre-internet” examples of the items: often small and not as efficient, but still present.Again, just a nitpicky point, as I learn a lot from your blog and appreciate the time you put into it.
yes, absolutelybut they can’t scale beyond local without the interneti should have been clear about that
Fred I am going to disagree. The Hawala money system is International, informal and been operating for a thousands of years. http://en.m.wikipedia.org/w….
Cool example. I will read up on it.
Montaigne had the idea (this quote is from his Essays) of a peer to peer network in the late 1500s, but never got Bordeaux to actually follow up on it. A man ahead of his time in many ways.”My late father, a man of a decidedly clear judgement, based though it was only on his natural gifts and his own experience, said to me once that he had wished to set a plan in motion leading to the designation of a place in our cities where those who were in need of anything could go and have their requirements registered by a duly appointed official; for example: “I want to sell some pearls”; or “I want to buy some pearls.” “So-and-so wants to make up a group to travel to Paris”; ‘”So-and-so wants a servant with the following qualifications”; “So-and-so seeks an employer”; “So-and-so wants a workman”; each stating his wishes according to his needs.It does seem that this means of mutual advertising would bring no slight advantage to our public dealings; for at every turn there are bargains seeking each other but, because they cannot find each other, men are left in extreme want.”
oh shit. i have to read up on this guy. thanks!!!
There is a great recent (and rightfully acclaimed) biography of Montaigne written by Sarah Blakewell. It’s where I learned of this amazing tidbit.http://www.amazon.com/How-L…
nice! thanks
great point. there is nothing new about the internet or about anything else. everything is old and boring. arguments that something is new only suggest history is being ignored. it’s also why i have a bias towards skeuomorphism.
Skype was the poster boy for this model and encouraged others to follow that suit.
I think an argument could be made that Amazon Direct Publishing for authors is peer to peer, perhaps larger than the examples mentioned here. Authors get 35-70% in exchange for a marketing platform and distribution. Those are good margins for digital content. Isn’t peer to peer defined as connecting a seller with a buyer? Wouldn’t any ecommerce store fall under that? Etsy is not one degree, they are still a middleman.I’m not sure I agree that this revenue model deserves a separate category.I understand that sellers ship direct to buyers with Etsy but that is the case with many Amazon transactions. They facilitate the connection.
Etsy doesn’t buy from the seller. The buyer does. Big difference. I like to think that Wattpad is building the definitive peer network in books.
I guess I’d say technically that Amazon Direct Publishing (the ebook self-publishing program) doesn’t ‘buy’ from the author. They don’t screen or choose (other than for inappropriate subject matter) and they don’t stock the product. Yes it sits on their servers as a downloadable file. They only take their cut if a transaction occurs. It that different? It is still necessary for the author to promote the product. Honestly, Amazon could easily replicate Etsy though I doubt the lack of scalability in handmade products would interest them as a business model. Digital products such as ebooks are infinitely scalable.And perhaps scalability should be an issue to consider with peer to peer as a model. Kickstarter certainly has a scalability problem as each ‘product’ is a one-off. Even with over $300 million in funds raised last year their margins are…marginal at 5%.
ADP is vertical integration.Etsy is a leading marketplace. Big difference.
I understand the distinction between vertically integrated and a marketplace. But Amazon Direct doesn’t make the product, nor do they source it by looking for specific things. It is, in its own way a marketplace for writers and readers just as Etsy is a marketplace for makers.Frankly, I don’t think peer to peer is a revenue model distinct from the others. Either that or I don’t understand its parameters. Standing on a streetcorner selling things I made to consumers- peer to peer but not scalable. Selling my books via something like Amazon is as close to direct as I can get while optimizing my market for scalability.Ultimately what’s the difference?To be clear, I am not talking about Amazon as a whole, I am talking about the self-publishing program within Amazon.
Valuable lessons in this article. I especially appreciate the point about the purpose of a revenue model in peer to peer. Attract participants and allow businesses to profit at scale.I think you can further innovate an effective advertising model by monetizing buyer’s intent. Because every purchase is the execution of a buyers raw intent to purchase, By aggregating and consolidating those intentions at the same time, you can innovate new and more effective ways to monetize them.Kind of like how Square consolidates local transactions and uses that data to create a whole new experience whereas previously they were isolated events.
To use the term “peer to peer” here is probably a stretch, or a neologism at best, borrowed from technology yet having nothing to do with it, since it’s really a centralised network what we’re talking about.The classical term ‘economic rent’ would be more appropriate.
they are not centralized
i think a lot of the points fred makes are in the process of changing and becoming less true. but it is something i’m not sure about and don’t have as much confidence in relative to obvious things like 9/11 being an inside job.some thoughts:1. basically these platforms big potential value-add is bringing customers to the merchant. but i wonder if they are really doing this to a sufficient extent. in some instances — craigslist — they certainly are. for something like kickstarter, though, it seems to me the users are doing all the work and kickstarter is just processing the transaction. i think in such instances businesses that specialize in transaction processing — i.e. paypal, square, stripe, the virtual currency businesses whenever they choose to emerge, etc — are much better positioned.2. i believe these marketplaces will evolve towards greater vertical integration, in which they play a greater role in curation and product creation, own more of the customer experience (rather than being a mere transaction processor), and take a greater cut of a smaller pie. what amazon is doing, especially with kindle, i think is a better example. they get 30% of that. they have a huge market but i think that is an outlier scenario and in most instances the market share will be smaller. in fact i think amzn could get disrupted by startups that replicate the kindle experience but for a more targeted audience.3. if the views put forth in this comment are correct, i believe it will result in companies that are more profitable at an early stage, and rely less on the deficit spending growth model. this will impact their fundraising process significantly as well as exit options for shareholders.
I 100% agree with every bit of this comment.1) I’m not sure I’d compare Craigsist, which is in essence an online flea market (i.e. retailer) with Kickstarter who’s a crowdfunder. They’re both peer-to-peer, but drastically different businesses. However, the thing to point out is this: people will always actively look for new stores, flea markets, etc in wich to buy new products, so Craigslist (or Etsy, etc) will always add value to its sellers; conversely, very, very few people are actively looking for projects to randomly donate their money to, so few people have a reason to drop by Kickstarter unless driven there by a specific project they feel passionate about.2) Fab.com is the perfect example of one of the former examples that provides even more value through its marketplace, via a well curated listing of products. Additionally, that curated eye guides them towards sellers who can produce mass amounts of their products, so they can engage in a traditional wholesale/retail business model and take 50% as opposed to 5%.3) You already are right, and there already are examples of how companies have moved on to new ways of skinning this cat. Look at Fab.
Agree with Kid and Brandon. We are building a business at deliciouskarma.com with many qualities of Fab.com, but for healthy, sustainable, high quality foods made with real ingredients. Curation is the key. We have a panel of food experts we call Taste Gurus that help us select, taste, and provide serving suggestions including recipes for our products. We envision building a deeply engaged network of people that truly care about their food supply. We could have approached it with an Etsy style model, but this has failed with at least one other startup, foodzie.com.
1. Specializing in the financial transaction process simply means your market size is larger, eg: “all of it.” (potentially) Bigger risk, more competition – and therefore need something disruptive that will change user’s behaviour and how they transact – or have some advantages to do so2. Regarding your Amazon example: Big, well-run dinosaurs take time to disrupt. Everything will have to evolve and change at the same time. Amazon is going to keep their fees high as long as they can, and as long as it makes sense comparing it to other competition and offerings. The advantage they have of course is through economies of scale, and the data they have access to know and learn from user transaction behaviour on a very massive scale. Can this system be disrupted and replaced – does it even need to be? I think there are some issues with what Amazon is doing that need to be solved, though I’ll only know 2-3 years from now if I’ll have an opportunity to try.3. I agree. Lots of other positives that come from it.
i disagree 100% with this comment. and i have my money where my mouth is.
lol i love your passion for this subject! if there is a way where we can place a small wager on this (like really small, like $25), with the proceeds going to charity of the winner’s choice, i would be all about that. we could make it a community activity and raise money for donor’s choose that way. or perhaps my peeps up in nuru international! hahahhahaa
sure. i already have several hundred million (at current values) bet on this. what’s another $25?
I think these platforms big potential value-add is that they ‘make it easy to sell’.Part of that is probably bringing customers to the merchant, but there are a lot of other important parts too (making it easy to properly list your inventory, making it easy to set and negotiate a price, making it easy to collect payment, etc.).If ‘bringing customers’ is the big value-add, long term you are just a lead-gen. service and I think that’s a completely different business than a peer to peer network…in fact, I would actually argue that ‘bringing customers’ is merely a happy side-effect of a peer to peer and not at all the focus or intent…I believe the intent of peer to peer is to make the transaction ‘easier’ for both sides…but I do agree that starting with a vertical is the easiest/best path to growing out any platform…
“I think the basic fee for participating as a seller in a peer network should be as low as possible. This allows the marketplace to develop as much liquidity as possible. Increasing transaction fees will push sellers out of your market into other ones.”Fab.com has shown us that there are more effective and profitable ways to skin this cat.Fab is essentially peer-to-peer, playing middle man between independent designers and consumers the same way Etsy does, but Fab has a leg up because they work in a traditional wholesale/retail model. Read: more profits and easier scaling.Because Fab has buyers and merchandisers, it can chose its seller “peers” wisely. And part of the choosing process is filtering for designers who can provide at least $15k in inventory, ensuring a much easier path to scalability than a peer-to-peer model where the seller peers often don’t have enough business savvy to figure out how to make lots of of their product.I love Etsy, and they take the proven-to-work approach Fred seems to like so much, but we can’t deny that Fab is tweaking that approach and growing much more rapidly because of it.
great point. i think the days of these platforms accepting anyone and everyone are coming to an end; in the future/present, they’ll be far more selective, perhaps invite-only. fab is a great example as you’ve illustrated. another example is cureeo.com. they sell fancy art; they are very selective of the artists they promote. with that said, they do expect their artists to ship the product so they are not entirely integrated that way. but if they succeed, i think they will get to a point where the artists listed on their site will go up in value just by virtue of being listed there. sort of like how a company’s valuation goes up just by having name brand investors. that is an example of how these niche platforms can really deliver marketing power and go beyond being just a transaction processor. and it also illustrates how it is much easier to achieve the brand/marketing power when a targeted niche or clearly defined values are kept in mind.
fab also expects its designers to ship their own products, but fab sends them fedex labels that they pay for.fab also buys some products they hold as inventory and ship themselves. why? because in the end, while it comes with more work attached, owning inventory is the most profitable.fab is smart to see that their brand lies in their curation, and they can play with several different revenue models under one roof… and kill the competition.
Interesting discussion.Some Qs:-For Fab, who handles returns, customer service? For both hold inventory and pass through? I bet them.-Fab kicked from the beginning cause their addition to the brands they sold was the presentation. All original photography and the like. Are they controlling this as well as the curation in this marketplace model?kidmercury Etsy is a broad horizontal niche. Fab as well as a marketplace. Both seem more catalogue than marketplace honestly or maybe that is where it is all going, including Kickstarter.
i think the more horizontal you go, the more you are a data company and the more you are susceptible to an attack from google and amazon. if you go vertical, you can employ qualitative competences that are far more defensible in my opinion. perhaps it is possible to go horizontal and defend against data companies by carving out your own proprietary data set that is superior for the task at hand, though i am less comfortable/confident with this approach.
Hmm…this is the one topic that I always find myself taking your thinking away and reshuffling.The one vertical that complicates and deepens and makes this all interesting that no one (prove me wrong here please) is neighborhood.
yup local is the mother lode. i believe it is the same concept though, a company focused on curating, branding, and intermediating a single geographic location is much better positioned in the long run, and that a federation of these things is the proper way to scale. i believe craigslist is a rudimentary version of this. it’s why i’m a bit skeptical of foursquare; if you go big like they are, i think you play right into google/amazon’s hands because you enable them to leverage their data to compete.
Local is not the mother lode for technology companies. It is a load but it is a shit load in your pants if you think you are going to get money out of owners that can’t exist if they had to pay themselves wages that they would have to pay somebody to do their job and work their hours.
someone will figure out how to execute it. as for owners they will happily give up a percent of transactions they never would have had in the first place were it not for the proper online service. the poor owners will benefit the most as it is a chance for them to essentially hire an employee on a commission basis, thus removing fixed costs/salary risk.
You have to consider the sophistication of the users. Not everyone can do “the math.” The business has to make it easy for the users/consumers to realize that this whole approach is a real “deal.”
yes i agree. i think the big challenge is in marketing, communication, making it easy, etc. the technology is all out there, the challenge is directing it properly.
The challenge is selling it to them. When you say the “poor owners will benefit the most” guess what? They are “poor owners” they don’t have a clue and never will. Also when you say they “will happily give up percentage”…..they would sell their mother for a percentage.Go out and sell to small businesses (I have). It is absolutely brutal, its why Groupon needed 3,000 salespeople. I bet half burned out in the first six months.
i have sold to small businesses and i know the challenge of it — i am not disputing that. as you correctly observed they will sell their mother for a percentage and so they will give a percentage to anyone who can bring them a sale. as even poor folks have smartphones these days the sales process will be easier (though still very tough). so they will get a clue. small businesses were taking out ads in the yellow pages back in the day, once some startup finds the right process and product they can replicate the experience. it may take door to door knocking or some kind of viral referral mechanism or some kind of free giveaway (my favorite).
Two things. The only way they will give up margin is if you pre-buy. That was Groupon’s magic. I wrote about it two years ago. Yes if I come to you and say I will buy 50 of these but at a discount the only way I get the discount is to buy all today. So now I am a factoring company, in Groupon’s case the magic was the consumers were the factoring company.The Yellow pages had the best salesforce ever. They got killed when the companies realized I can Google Chesapeake City Plumbers and get exactly who I want. There is good money to be made making those websites and optimizing for search and payment but that is also done locally at the lifestyle mode because that is what works.
i agree it has to be a local thing, which is why i’m very skeptical of the horizontal software plays trying to go after every city at once. i do think there might be some kind of low margin opportunity that is scalable, but i think amazon or google will get it because they can leverage their enormous networks to do so.
I agree with you more than yourself about how Amazon has absolutely kicked ass. My Wife and Dad who never liked the internet buy stuff they need and are shocked at the cost. Yesterday it was literally 50 batteries for tea light candles that cost the same as 3 at the local Walgreens.See my comments about hiring people for Google…..they could have 10% of their people and still make the same gross margin.
Ok. I should refine my crass comment. People get “local” mixed up. It’s not really local. There are many forms.1. You are a retailer providing convenience. Brutal. As you point out Amazon is a killer.2. You are providing a service where the person needs to be there in person or you need to go to their house. In this case you can’t expand past certain boundaries, so I can make you more efficient, I can help you out with SEO, I can try and redirect and get customers, but if you put your hand in my pocket, I will do everything to get around it. Example Locksmith. “Call me on another number and I will do it cheaper” So you can charge for lead gen, but that’s a tough business, because we all know you are not producing somebody that needs a lock fixed, or producing somebody that needs a toilet repaired. No you are not generating any extra demand you are scrapping for nickels.3. Restaurants and Bars: This is a category to themselves. Near and dear to every hipsters heart. Suffice to say these poor owners have been barraged by every scheme in the book. I could write a whole post, but lets summarize and say blood from a stone.4. Somebody who really does make something unique. Yup that was the beauty of Etsy. You are going to bring true incremental business, and you can get paid a cut.
So how can you deliver more for less, legitimately?I’m in a town where I have calculated that for every $1.50 item I pay about $1 more than if I drove 45 miles to a different grocery store. Ice cream — $7.99 locally, $3.50 in the town. Tomatoes: $2.99 vs. $1.49.Do you need better info on your clients’ demographics to market to them more specifically? I’ve actually wondered about a co-op in this town, because the prices are so insane.Yep, the businessowner who is subsidizing his machining operation by working himself as a machinist has to have a serious incentive to buy outside the usual chain. And, you have to have established trust — a big deal with a small business owner.
I don’t know where you live but maybe those are the costs.I have heard tons of people say wow I am getting ripped off, and when you talk to the business owner they aren’t making much money compared to the work they put in, and are loaded down with debt, or inherited the business.There positively are exceptions but they usually are reserved for somebody that really does have a unique offering/runs their business really well. Maybe your exception proves the rule.As I’ve said you have five quintiles in local business:Top 20% is great and is going ignore any scheme you propose because literally they’ve heard it all and as you say won’t trust you.Middle three quintiles range but they are tough, gutting it out, if their spouse and kids didn’t work in the business they’d probably be out of business.Bottom 20% is going away this year.
This is the big SMB issue.They are impossible to market to and challenging to build a product that they will pay for. And equally hard to build platforms that will create customer funnels.Do brochures under the door, tear offs at the coffee shop and chalk boards on the sidewalk work? They are most certainly still there and there is nothing ‘yet’ on the web that replaces them well.
The problem is that even if you can literally show them that it will increase sales if you take money out of their pocket, your churn rate will be insane. Maybe I’m jaded because I tried and failed. So I started selling pick axes to the miners and I watch miner, after miner fail as well, I just get more money out of them for a longer period of time. Just today, had a big local initiative crash and burn,
I’m deep into this now on my thelocalsip wine ‘project’–http://awe.sm/kCZDKI’ve discovered some platform dynamics that have legs but figuring out what to do and where revenue is coming from. More paid for events. A paid for listing by neighborhood.I know I can get this to be a ‘small biz’ and be self supportive but to make real money, not certain as yet but hesitant to not take a shot.
There are always going to be interesting subsets, and that is what you have to look for. For instance we found you could make some money at bars if you concentrated on events as well. The event being a band.There is a wine store that does events great near me: http://www.statelineliquors…Here is the problem I found however. If you go to StateLine and say I’ll help you with events, they will tell you politely to screw off. They know that is their secret sauce and they are not going to share it with you. So now you are left working with all of the idiots that really don’t care. They didn’t care in the first place and now you are trying to make them care, and get paid. In addition as JLM says we didn’t invent sex, State Line has a huge lead and when you bring your events to Cut-Rate (across the street) You are at a huge disadvantage with literally no runway.So in my mind actually the best way to make money being a technologist is to actually own the underlying business and use technology to put yourself head and shoulders above the competition.I know that defines a lifestyle business. But it can change your life. I know the owner of State Line has as much money as he wants and absolutely loves his job, They say the best bar in Cecil County is in the back of State Line and they are right.
Thanks Phil….I’m iterating forward and will keep this in mind.
If you are driving from NY to DC you will hit them at the state line of DE and MD. Give me a shout and we will go have a nice tasting. Although, I know that pesky car thing is tough for NYers 🙂
Zip car is my answer for cars nowadays.And when you are in NYC, dinner is on me.
I will be there tomorrow but already have plans…..I come at least once a month….I’ll give you a shout, but you pick the place and wine and dinner is on me.
Deal!
If we talk just about every day, and I share pictures of my dog with you, and ask you what kind of wine goes with lamb couscous, and you answer before my dinner guests arrive — we’re neighbors.Do you need a magnet that will create a neighborhood? How is your Mom, anyway? My mom is slipping, but still knows me. You and I know each other on that level. If your conversational/neighborhood magnet “knows” people on that level, the people will trust and come back and refer, and not think of any other source first.I think “neighborhood” is being re-defined through the internet, but we need to make the interactions immediate and personal. “How are you, Mrs. Smiley?” Can I get the door for you?”
There is no idea of neighborhood on the net really.Community certainly, neighborhood with location and proximity is absent.I can discover where to eat in Istanbul easier than I can locate a cat sitter down the block. I can aggregate lists of people who would care about the impact of global warming on alcohol content in grapes easier than I can find customers for a local merchant who are into non dairy cuisine and walk through a certain block at dinner time.Proximity is an grey axis on the web.
I would like to pick your brain some. Easiest way to get in touch?
google+ of course! the hot new social network taking the world by storm. you can email me at actolearn@gmail
Love your perspective.
fab actually doesn’t allow returns on many products; many items say “final sale” right on the website. on the ones they do, the customer has 14 days to return the item… which is before fab.com transfers funds to the seller. hint, hint.product photography on fab.com is sent in by the sellers, unless its a product fab owns inventory of. but they’re very helpful to designers, with guides on how to do the photos, write copy, and many other things. their customer service with designers is impeccable.
Makes sense.
-Fab kicked from the beginning cause their addition to the brands they sold was the presentation. All original photography and the like. Are they controlling this as well as the curation in this marketplace model?Exactly.Fab is one of those businesses that I have described before that basically takes things and repackages them (lipstick on possible pigs) in a way that makes them way more appealing and cool to the end user by having foksy marketing and sharp presentation. This is really no different than any traditional marketing of course, say sharper image catalogs. Even marketing of wine and liquors come to mind. The difference is some products that are sold this way actually are really better for the money you are spending. This depends on the competition of course because in the end the consumer, if there are enough of them, will figure out by wisdom of the crowds what the best product for the money is at least most of the time. (Autos are a good example of this. The best selling car in a category usually is the best value for the money in that category. Compare offerings of Honda vs. Volkswagon.)On Fab take this $124 (used) lamp as an example:http://fab.com/sale/15911/p…Imagine if you saw that on ebay or craigslist at that price.
fab is not a marketplace. they are a retailer.
Would you categorize The Fancy as a retailer as well?
i don’t know. do they select what is on there or do the users?
I am not entirely clear which is why I was asking. Users definitely select at least some of the products that are on the site using Fancy’s bookmarklet tool and I think merchants can bid for supplying products that are in demand from the users. So this sounds like a peer model to me.However, a quick look at Fancy’s website shows they handle shipping and returns so it would appear that they might have inventory as well which, if I understand your post above, would indicate a retail business model.Is this a hybrid model or would you clearly put it in the camp of one revenue model over the other?
sounds like a hybrid model. i wonder if that is sustainable.
Isn’t it a bit ironic that flash sale sites that are themselves retailers put a slash through the word “retail” when they show product reference prices to users?
yes
lv, inside the lines scoop
yes, i’ve been involved in some fab.com sales. incredibly enlightening process.
see my reply to Brandon. i think you are dead wrong about that. if you are a tastemaker you live and die by your taste. i wouldn’t want to be in that business.
lol i loved your reply to brandon! etsy and all other platforms are tastemakers in the sense that they must institute a governance policy. kickstarter for instance wouldn’t let me run a 9/11 truth fundraising project. this is fine and totally within their rights — but it reflects a taste, a value, a decision, etc. whatever you want to call it. something that is not algorithmic.i believe the importance of taste/governance/qualitative attributes/intuition — all the same genre of stuff in my opinion — is rising, while the big data approach (google and amazon) is an incumbent overshooting. i am not 100% confident in this view and maybe you are right; i agree with many of the points you make and there are certainly case studies in your favor which is why i hold the viewpoint i do with some hesitance. but i just don’t see how these companies can viably compete on a long-term basis against google or more focused startups.
you are so right about that kid
So, a middle ground?I used to have several serious wine guys at the local ginormous liquor store who would let me know about the very best wines they had under $…. At the time I was using the figure $3.99. Freelancer, recent student, financially challenged with a gourmet palate, I yearned for their help. I learned about all kinds of undervalued wines from around the world. Some were Portuguese, with astounding rounded flavor for pennies on the presumed dollar.By setting a high limit, but a measure of taste/quality, I bracketed a type of wine that I would buy. Does this kind of thing exist?BTW, for my daughter’s first wedding anniversary I bought her a $1000 formal gown that would only fit a model’s figure — for $35 at Plato’s closet.If you know what you’re looking at, if you know what you’re tasting, and if you have connections —that’s a market niche!
I’d go out for sushi any day of the week if Gotham Gal would order for me. I’m still recovering from the photos from Japan!
fab is only as good as its filter. I haven’t been sold on their design premise.
such is the nature of living in a vertical. you’re not catering to everyone.
and when fab loses touch with its customers it will be done. because it is a curator and a merchandiser. etsy is just a facilitator. i wouldn’t touch a traditional retailer with a ten foot pole for all the reasons i cited in my commerce post.
As a facilitator, Etsy is working with vendors who may not be as savvy as you might like. The numbers may be very fair, but you may want to do some work on educating the sellers on how to leverage Etsy to greater advantage. I know a jewelry maker who fits this category. Naive, but good product.
yes, that’s important and they are working on it.
Small businesses and many artisans are great at following a passion and knowing what they sell, but are by definition challenged marketers and not great at finding customers or presenting themselves well.Every day reality with my neighborhood project.
fab loses tens of millions of dollars a year whereas etsy makes a bundle (i don’t want to disclose that). but trust me, etsy is a way better business than fab. i have looked closely at both. and etsy is also growing as fast as Fab is at 5x the scale of the purchase volume.your facts are just dead wrong as is your conclusion from them.
tomorrow’s businessinsider headline: “fred wilson straight up disses fab, and brandon burns”
“fred wilson hints that fab isn’t profitable”i have to stop talking it seems. it gets me in trouble
the world needs a bit of trouble. :o)
hahahah
That is what sucks when you are high profile. You should be able to have your opinions and state them without getting in trouble. Oh well. You can tell from my comments I think it is very hard for technology companies to make money on “local” I think Etsy is a great company. I just point out its not local, its really allowing unique producers to transact with people that want to buy unique items.
etsy is not local. it aggregates something that is local offline into a global marketplace.
lol. i wish (the first part) really were tomorrow’s headline. think of the spirited conversation that would ensue!like you, kid, i love a good debate. and taking the contrarian side of it.
for sure, i love coming to avc for the spirited debates. commenting is boring without them!
the three of us can be counted on to bring attitude to the discussion. that’s a good thing.
amen!
9/11 was a coincidence on all levels.( 😉 )
here, here!
amen to that
he had a great winning streak – they always come to an end
so harsh.
this WSJ article suggests fab isn’t profitable because they are aggressively expanding: http://online.wsj.com/artic…i believe they got sucked into bubble 2.0 and are aggressively expanding on the shaky foundation of an excessive valuation. but it seems to me if they took a more moderate approach to growth they could be enjoying double digit profit margins. if so this would suggest their business model is with merit, but their growth/scaling strategy and valuation strategy are the problem.
“[fab’s] business model is with merit, but their growth/scaling strategy and valuation strategy are the problem.’yup. exactly.
kozmo.com’s business model was sound. they made money in NYCopening new 18 markets in one year killed them
If it was sound, then how come it hasn’t been replicated since — even if just in NYC?
there are some out there but none seem to have gotten the market share or consciousness share that kozmo had. amazon is getting deeper into the local game. unless some startup aggressively focuses on just this opportunity, i think amzn will clean up.
it has
By whom?OT: check your @ mentions on Twitter. CC’d you on a tweet about a movie version of Snow Crash being in the works.
i saw that. i don’t reply as much on twitter as i should. but i do read it.
Someone bring back orange messenger bags to NYC!
I can usually provide a reference for my statements, but I’m stumped this time.I want to tell about the Colorado-based knife company, not a USG supplier, that was killed by its popularity, I believe, in the Iraq war.Volume does not necessarily translate into profit.”Losing a little on every job, but making it up in volume …”Growth that forces new manufacturing models that can’t deliver quickly enough to satisfy the current overwhelming demand …Business catastrophe.
fiery response!common ground: i also think fab is imperfect. i think their 600 employees in less than 2 years is insanity, and they’ll end up like groupon really quickly if they don’t watch it.but i don’t believe its fair to say fab is “losing” tens of millions of dollars. i haven’t looked at that side of their business, so i could be dead wrong, but what i do know is this: they’re scaling extremely quickly, and that takes money upfront. they will hit 600 employees this year. as i understand, etsy is at less than half that (i may be wrong on that, but that’s last i read). not that employee counts mean anything about the quality of a business, because they don’t, but comparing fab’s 600 employees in 2 years to etsy’s 200 or 300 employees in 7 or 8 years illustrates, and to a lot of people will justify, where all that money fab spends is going.i trust that etsy’s business is solid. i’m not dissing them at all. i also understand that you prefer facilitators over curators.however, different from etsy and the fred style of peer to peer, fab.com 1) curates and 2) operates in a traditional wholesale/retail pricing model. they’ve built a following around their eye, and 50% profits around their model. i think that’s worth looking at.
i you measure headcount as success you would think Groupon is the greatest business everi will take craigslist over groupon every dayheadcount for headcount sake is insanity
I could not, could not agree more.The stupidest question I hear out of people’s mouth’s is how many employees do you have? I always say I hope its as few as possible for how much gross margin you generate.The biggest liability companies have is adding headcount for headount’s sake. Mark my words, Salesforce will get bitten in the ass over this.
Very bad way to measure a business. I suppose it’s attractive because it gives you a sense of scale without having to disclose revenues. But it’s exactly the wrong metric.
Nuh-uh. Remember that the yearly budget is being allocated, and if you don’t spend it all, your budget will be cut. So you must justify as many employees as possible, and as much equipment as possible to succeed in your position as a G-??.If you don’t have more employees than last year, then your annual budget will be cut, for sure.Wait a minute. We aren’t talking about working for the government?’Scuse me.
Upvoted
+1. I love hiring great people but I intend to set a revenue per employee record some day.
I’d buy the coupon book from the sweet little BoyScout, or neighbor school girl, but why do I need to spend how much time (?) looking for deep discounts on sushi served from the belly of a female economics student a which university?I might use the pizza coupons from the book, but will I save $50 to drive 100-miles round-trip (or 2 hrs commuting) on a massage from an unknown when my favorite person is 5 minutes away and $70 on a bulk purchase?Groupon seems to me to be the same kind of “savings” as “For Sale By Owner.” A discount (?) off an unrealistic retail price.Craigslist offers, and sells at the price that the market will bear.
Quirky – Crowd sourcing, Seems to be a little P2P and eCommerce.I tune into their town hall meetings – #’s don’t look that strong
This seems to be about who is buying/selling luxury volume vs. economy one-ofs. Walmart has made a lot of money selling reasonable stuff, one item at a time. Mercedes can certainly sell at fleet prices, but who’s buying?
“fab loses tens of millions of dollars a year” – scary. who’s backing that?
Etsy’s Year in Review http://tinyurl.com/afftcfbEtsy CEO Chad Dickerson announced the handmade marketplace’s 2012 sales and user stats. Last year Etsy’s merchants sold $895.1 million in gross merchandize, representing a 71 percent increase over last year’s $525 million. The company added 10 million new members to its platform last year, bringing its total membership to 22 million.
I agree that, “the thing about peer networks is most of the value is created by the participants in the network”; and, the goal of these business models is to sustain the value. Value, fortunately or unfortunately, is more qualitative than quantitative in these networks. Through quality, comes quantity. The quality of these networks and peer to peer models will produce quantity, in relationships, in sales, etc.
Fred, as an entrepreneur, I always find it troubling to think about revenue in a vacuum. Can you go down a few lines of the income statement and speak to the cost side of scaling the revenue. Do you have a few scaling metrics for staffing, engineers and sales support needed per 1K transactions or some other metrics?
there aren’t any rules of thumb i can think of that are true from peer network to peer network
Also, could you come up your ideal monthly transactions number at which you would begin to take notice as a Series A investor? (Assuming of course it met other investment criteria.)
$200k per month in gross transactions is a number that gets my attention
I might be wrong but Craiglist and Kijji both allow the seller to post their items and sell them completely independent of them. I believe Kijji (and probably craiglist) tries to make money by charging you to promote and/or feature the item for sale. This works really well for local and second hand markets especially as most of the transactions are cash and in-person. It is online version of a newspaper advertisements but I guess they could suffer the problem of scale. For artisan type of markets, the Etsy model works much better.
Great post. My appreciation for this model is growing. The hardest part: network effects. In Craigslist’s case, no buyers would be around if there weren’t sellers, and vice versa.Found a great post on addressing this challenge:http://brianbalfour.com/pos…In short, one method is to jump start the network by adding real value to one of the groups first (even if by brute force connecting to the second group), then the other group will show up (and of course, I’m sure it’s as easy as it sounds…)
big issue: finding the core need of one half of your equation without needing the other half is extremely difficult
Chicken / egg problem
Thanks for the link! Great read! I agree that focusing on a key niche group first to gain network density then expanding is crucially important. When I was at uni, most student groups used Facebook to announce meetings etc, so there was a real value to join Facebook. That’s why I joined, no other reason. Eventually everyone gets on Facebook and it becomes the default site for everything.
fred, can you differentiate between peer-peer and marketplace? or are they the same thing?
i generally use the words interchangeably
I think the basic fee for participating as a seller in a peer network should be as low as possible. This allows the marketplace to develop as much liquidity as possible. Increasing transaction fees will push sellers out of your market into other ones.A big advantage of low fees to begin with is also that works sometimes to keep competition away and allow you to gain market share. If your fees are high, competitors smell blood in the water and are more likely to open a competing company thinking that there is money to be made by providing a lower cost version of the same thing even if just doing napkin calculations.
I think the other advantage to low fees is that it insures that your buyers won’t try to circumvent you.People forget this. They think how much margin can I get short term. That works but there is defensibly in having low fees. If I’m selling $100k of stuff on Etsy and they take $20k, I have $20k to spend on the problem of disintermediating them. If they take $3.5k that’s a whole bunch less to spend.
yes, exactly
Because so much of what a traditional business would do is being done by the peers on the network instead of the company. Compare an online retailer with Etsy. An online retailer needs to have buyers and merchandisers. It needs to have inventory and warehouses. It needs to ship and track. It needs to spend a large percentage of revenues on marketing, customer acquisition and retention. Etsy doesn’t spend much money on those things. Their sellers do. And as a result, their sellers keep more than 90% of the value of the transaction as opposed to giving up 50% as a wholesaler.True but keep in mind that “hard” in business also equates to “difficult to copy” and “barrier to entry” for potential competition. Not everyone wants to deal with what you have described so if a particular business person has it figured out it can work to their advantage quite well. (Amazon as only one obvious example although that is really an elephant of an example as they lost money for so many years until they got to the point they are at today.)There is also the quality issue with controlling the point of distribution as well. And return policies and confidence in who you are dealing with.Also controlling the end customer with repeat business “a book of business” it would be called in other industries. Suppliers come and go.
This is a bit tangential to the argument, but relates to Craiglist at the end, you may find this piece interesting because it looks at the pros and cons of Craigslist becoming a platform to capture more value: http://techcrunch.com/2012/…
“Like the Internet, a peer network empowers the edges and devalues the middle.”Love this. The peer network replaces centralized decision-making with a distributed approach.Etsy empowers the smaller seller instead of the curator of a traditional retailer (or Fab per the discussion).Lending Circle empowers individual levels to make credit decisions instead of a centralized bank officer.Betfair replaces the bookie/oddsmaker with individual betters.Centralized decision-making tends to limit the supply side of the market. That may be a good thing or a bad thing. I think it’s good.
The nice thing about the business of being a peer-to-peer market rather than being a retailer or a proprietary supplier is that you make money from the flow of the business rather than taking positions that put your capital at risk.To make a comparison to Wall Street, it is why being a pure market-maker is a safer position for banks to be rather than taking positions in markets such as by holding onto a bunch of bad mortgage debt.
yessssss
Something that follows from thinking about it as the flow of business is that as the peer-to-peer network, your job is to work to increase that flow of business.a big part of that for me is not only making sure that customers are finding good product and experiences but also that you are empowering suppliers and drawing them into the market, many of whom wouldn’t otherwise be suppliers.That latter part makes these businesses IMHO even more rewarding.
Fred — This is slightly off-topic but… is it my imagination or have you stopped using the VoiceBunny service? I liked having that audio versions for your longer posts.
i didn’t stop. but i never did anything to make it happen. they did it. it looks like the last one was jan 8th.
I loved when you added that and already miss it. I think it was an API call through your Tumblr account.I think they should take their service to the next level and “automagically” package a podcast for you off of your blog stream.Even though I read more posts than I listen to, I find your longer posts, especially your MBA Monday posts, where you are imparting ideas and concepts, I like to listen to the audio because the information sinks in better for me.Well, I hope that gets fixed someway or another. It was especially cool — AND useful.
i sent your comment to them. maybe they don’t even know.
Thanks for doing that. Really glad I brought it up now. My first impression is that it was a choice. Have a great day.
You know what would be kinda cool — audio of the comment thread, in order (1 or 2 days after a post is published)
These are all very smart comments. We run a two-sided marketplace as well, http://www.UnBuyThat.com, and have experimented with several of these business models and concepts. There’s also a great opportunity in these types of businesses to form a model based solely on data aggregation and reselling. Charge very little to get as much liquidity as possible and then, if your target market or product is desirable in terms of consumption by investors, analysts, others, drive your engine in that way. There are quite a few dependent factors here, but it is one way to build some revenue.
Good post, thanks.
here’s a fun fact for you. actually several: it’s a report I found on CEOs with and without MBAs. Thought I’d share: http://www.pressdisplay.com…