God bless the middleman!

A couple of months ago, Tom Goodwin from Havas Media wrote a notable article for Techrunch. Tom noted: “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening.”

Indeed, these online businesses, which also happen to be some of the most successful startups in the digital history with billions of funding and behemoth valuations, have achieved this status due to the way they affect consumer purchase behaviour.

In fact, this is particularly revelatory for how the Internet has become a powerful intermediary tool that has changed the process businesses and consumers interact between each other. In fact, online businesses are becoming increasingly successful in becoming the ultimate point of purchase for a particular vertical creating marketplaces where variety is much greater while stocking inventory is no longer required. Indeed, as observed online marketplaces are growing much faster than e-commerce.

Obviously, this is for several reasons. First, marketplaces are a lot more flexible as their operators do not incur additional overheads because of unnecessary inventory. Second, through self-regulation mechanisms such as consumer reviews and ratings marketplaces create trust and transparency that promotes higher confidence and purchase likelihood among users. Also, having variety from different vendors with different value offering accommodates broader user base creating greater network effects. While first-time users of marketplaces are predominently unhappy (from other vendors) users or consumers that couldn’t find this service elsewhere (thus what we call untapped demand), they seek to find what they are looking for there just because of the feeling of a community where everything can be shared. Moreover, marketplaces create an environment where great products or services could be widely praised through social levers via a great number of channels – an aspect that additionally increases the power of the middleman.

Marketplaces are increasingly becoming the focus of many major venture capital funds due to the high and quick returns, which these online businesses yield. As a result of the high interest from investors as well as relative ease of establishing quick traction, I am certain that we will hear about many other marketplaces startups in the future that will join the unicorn club. Also, I personally believe that these businesses, although contributing to the overall tech bubble because of crazy valuations and multiples, are going to be among the few ones that will survive the bubble burst because they simply add real value by bridging the gap between businesses and consumers.

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3 thoughts on “God bless the middleman!”

  1. Good analysis Nikolay. The interesting question that arises with service like magic, Alfred etc. etc. gaining more traction, is where the growth will come from. Directly from the end users or will we see a class of super user (ak. agents) who use the platforms for their clients. And thus in the end falling back in a more traditional middle-man of the middle-man scenario.

    Liked by 1 person

  2. Thanks, Ralf. That’s a good point. In my opinion services like Magic, Alfred, Go Butler will act more as enablers rather than classic middlemen in your example with super users and platform clients. The super users are actually the middleman as they OWN the end user and this is the MOST important aspect of trade.

    To illustrate, Aces of HotelTonight (http://techcrunch.com/2015/07/13/hands-on-with-hotel-tonights-new-concierge-service-aces/) offers concierge service, which easily can be outsourced to a service like Magic, Alfred etc. But at the end of the day it doesn’t matter what the backend solution is. It matters that the user uses HotelTonight for the on-demand concierge. And in travel it is all about owning the end user, so that companies can get their portion of the transaction not only now but also in the future.

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  3. Hi Nikolay,
    Impressed with your thoughts. I am in the process of designing a marketplace and find your blogs quite useful. Being from finance background I am lacking a tech expertise and now in search for some advisory persona to talk to and learn from. If this is what you may like, please email to me. Many thanks, R

    Like

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