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Why I like Marketplace-Oriented Business Models for Startup Success

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Heath Butler

Heath Butler

It’s no big secret that choosing the right business model for your startup can make or break you in the marketplace. It’s one of the first things investors will look at when evaluating your business potential and the level of risk your company presents.

One reason I was so excited by the opportunity to become an early investor in Upgrade Salon Inc (operating as Upgrade Boutique) is that the company had an impressive young founder, Britney Winters, with stellar credentials. The most important factor driving the decision was that Upgrade is based on a strong, marketplace-oriented business model. In this post, I’ll explain why that mattered to me, what a marketplace model looks like in action, and why I love them so much.

Although making sound investment decisions is always at the forefront of our LP fiduciary responsibility, it was equally important to me that by investing in Britney and her unique vision, I also was contributing to the long-needed rising economic tide in the black business community I discussed our last edition of StartupHeat. As a result, this investment has a special place in my heart and I’m excited to take everything I’ve learned over the past 30 years and willingly share it with Britney…when, if, and as needed.

What Is A Marketplace-Oriented Business Model?

Put simply, a marketplace brings buyers and sellers together. In the marketplace-based business model, your company serves as a mediator providing the platform where the exchange of goods and services can take place between both parties and receives compensation for that investment. Marketplaces can be:

  1. Gig/Freelance Economy – Pairs freelancers with a variety of one-off services/projects from individuals or companies who don’t want to hire full-time employees. Marketplace provider makes a commission from both buyer and freelancer (e.g., Fiverr)
  2. Peer-to-peer – Bringing together individuals instead of businesses (e.g., Airbnb)
  3. Business to Consumer (B2C) – (e.g., Amazon); or
  4. Business-to-Business (B2B) – (e.g., Alibaba, Upwork)
Why Are Marketplace-Oriented Models Great for Startups?

Essentially, marketplaces tend to have everything I look for in a startup business inherently built-in:

  1. Lower overhead costs – No inventory or facilities to manage for the platform provider offers far lower risk. The focus is on access rather than physical ownership. The company’s (limited) funding can be used to fortify other vital business functions.
  2. The Network Effect – The more people use your marketplace the more valuable it becomes and the more competitive advantage it gains. The more participants you have, the more they can benefit from each other.
  3. Product Diversity – More sellers = great product selection, choice, and higher customer engagement
  4. Brand Building/Recognition – Maintaining quality control and offering many sellers providing more products/services under your brand can build customer loyalty.

Marketplace Model in Action: Upgrade Boutique

Upgrade Boutique enables remote beauty services in a post-COVID-19 world and was the first to the market with on-demand, custom wigs crafted with high-quality hair and lace. The company operates within a $7.7B global hair extension market, which is growing at just under 10 percent annually and serves over 20 million women in the U.S. The industry is extremely fragmented, however, and generally provides consumers with an inefficient, technologically antiquated, and unappealing customer experience. This perfectly positioned to fill an industry need.

The Upgrade platform combines two traditional business models to form a managed B2C2B marketplace. The B2C side operates as a direct-to-consumer website, with customers using Upgrade Boutique to purchase high-quality, stylist-customized natural hair extensions or ready-to-wear wigs, select a certified stylist to tailor the hair/wigs to their liking, and then choose to have the wig shipped directly or visit a selected stylist for an in-person fitting after the online purchase.

Customers come to Upgrade’s platform for quality assurance, convenience, and access to top stylists across the country. Unlike the usual time-consuming and complex logistics involved in purchasing a wearable wig, customers who shop with Upgrade Boutique get the high-quality product and luxury experience they desire in an efficient and more affordable manner.

On the B2B side, independent stylists also come to Upgrade for quality assurance. The company provides stylists with an array of tools and resources to conveniently manage their businesses from their mobile phones, increase efficiency and clientele, supplement income, and broaden exposure to the market.

The Invaluable Wisdom of a Mindful Founder

Upgrade Boutique’s founder Britney Winters’ unique insight into the inefficiencies within the stylist’s community is one of the first things that made the Upgrade investment opportunity extremely compelling for me and my Mercury Fund partners.

Upgrade’s whole marketplace-oriented model focuses on increasing efficiencies and customer traffic for member stylists and thereby increases their loyalty and commitment to the platform. This reduces the historical and near-unavoidable marketplace risk of having sellers become motivated to cut out the platform “middle man” and move transactions offline to deal with customers directly. As a result, stylists leverage Upgrade’s marketplace to acquire new customers and deliver a luxurious customer experience, while minimizing administrative and non-styling time associated with logistics management of wig construction.

A Word About Marketplace Financial Models

According to Marketplace Academy, “One of the most common reasons why startups fail is that they pick a business model that does not scale to ensure long-term sustainability.”

Here are the six different models that most online marketplace-based businesses can use:

  1. Commission – Fixed or variable rate charged to buyers and/or sellers per transaction
  2. Membership/Subscription – Recurring revenue via set monthly fees
  3. Listing Fee – Charge for vendors to list their product in your marketplace
  4. Lead Fee – Sellers pay for access to and contact with buyers
  5. Freemium – A charge for upgrades to free products/services
  6. Featured Listings/Advertising – Revenue generate for ads and priority/higher-visibility placements.

Upgrade has a highly diversified financial model, which helps the company reduce risk, gives it access to multiple revenue streams, and provides higher margins than other marketplace model businesses. The company produces revenue from stylist member fees, customization processing fees, e-commerce, and, eventually, limited flagship stores and hair care products. Implementing limited flagship stores will increase sales because of added flexibility and convenience for customers and co-location with stylists.

Upgrade has plans to expand into hair care products for extensions and distribute these products through e-commerce and, eventually, its flagship stores.

Next time on StartupHeat, I’ll talk about the future of work in a post-COVID environment. Until then, stay curious, stay masked, focus on the signal, and make mindful decisions on your journey to success!

Until next time, stay curious, focus on the signal and make mindful decisions on your journey to success,

Heath👋

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