Firehose #194: ⚖️ Operating leverage. ⚖️

-A product-oriented marketplace should focus on driving more volume to cover fixed costs at scale, lowering overall unit costs.

Services-oriented marketplaces (e.g. FVRR, UPWK) primarily match supply and demand in services provided by humans. Because humans in a given field and market require a certain pay rate, less flexibility exists with respect to lowering the cost of a transaction (other than typical geo-based labor arbitrage). Instead, these marketplaces put an emphas... See more

Why does operating leverage matter? Because high leverage businesses show faster operating profit growth per dollar of additional revenue

Services marketplaces will eventually provide education and additional resources to help their workers “level up” to higher pay rates — perhaps in exchange for some sort of temporal exclusivity. The trade school of the future, in fact, may not be a school at all. It could be a labor marketplace with embedded education.

Operating leverage measures the degree to which a company can increase its profits by growing revenue. The split between variable and fixed costs in a business determines its ability to achieve operating leverage.

Product-oriented marketplaces (e.g. EBAY, TDUP*, Faire*) primarily match supply and demand in goods and then enable the payment for and fulfillment of those goods. The way these marketplaces achieve leverage is by driving the cost of the transaction down.

-A services-oriented marketplace should focus on both driving spend per customer up in a given customer cohort and investing in supply differentiation and capabilities.

In summary, operating leverage works differently for product- vs. services-oriented marketplaces: