by TX Zhuo, managing partner at Karlin Ventures
Uber has been on fire lately. As Scott Reeder of the Chicago Sun-Times proclaims that ride-hailing service Uber and the sharing economy are here to stay, leaders from industries across the spectrum are trying to decipher the secret to the company’s success.
The short answer is relatively simple: Uber, unlike many startups, has already figured out how to make money. The company has created a product that can offer both value to consumers and strong margins for itself. Recent reports indicate that Uber’s next big move needs to involve providing the same game-changing benefits for its drivers. Luckily, it should be able to.
When you think about new marketplaces in the tech industry, you must consider how they affect the three key stakeholders in the equation: the consumer, the seller, and the marketplace itself. If Uber and similar companies are willing to push their business models to their best possible conclusions, they can not only survive but flourish.
With that in mind, I came up with a simple rule to determine whether a tech marketplace is built to last: the 20/20/20 rule.
Breaking Down the 20s.
The 20/20/20 rule illuminates a path to removing friction points for the consumer, the seller, and the marketplace. It states that a company should:
- Build a product that provides the same utility at a 20 percent cheaper cost.
- Enable service providers to earn 20 percent more than their usual rate.
- Reach for 20 percent margins, even after satisfying consumers and service providers.
Uber is already close to achieving this goal in a number of ways. By eliminating the need for large tips, Uber has already provided a better value to customers in nearly every major city in the U.S., in most cases hitting that 20 percent cheaper cost. And until recently, it was at exactly 20 percent when it came to landing commissions.
The only real question is whether its full-time contractors are making 20 percent more than they would driving taxis. According to Uber, they absolutely are, making an average of $90,766 a year in New York City. But these numbers don’t take into account the full costs of driving for the company.
Uber needs to take the service provider sector of 20/20/20 as seriously as the other two and ensure that drivers reap a true 20 percent advantage over working for a regular taxi service. It may cost Uber a little more, but at this stage at least, it seems clear that Uber can afford it.
Making 20/20/20 Work.
Sharing economy companies such as Uber prove that the 20/20/20 rule is a solid road map for sustainable growth, though implementing the guideline first requires some digging to determine whether your industry will support it. Keep these questions in mind when planning your big idea:
- Have you done your research on the industry to ensure there are margins to be made?
- Are you creating an entirely new revenue stream for suppliers, rather than competing with pre-existing business juggernauts?
- Could your offering be deemed cheap or high-quality enough to warrant customers abandoning the existing marketplace?
If you answer “yes” to all three, you’re on your way to a viable business with potential for expansive growth.
Uber and companies like it should not only take 20/20/20 to heart but turn it into a selling point. Use the numbers to show off your business as one that provides real financial benefits to the consumer, contractor, and company.
TX Zhuo is a managing partner of Karlin Ventures, an L.A.-based venture capital firm that focuses on early-stage enterprise software, e-commerce, and marketplaces. Follow the company on Twitter.
