The Consumer Demand Opportunity


Dave Yuan

Founder and Partner, Tidemark

Tilting at Windmills? Maybe. (Illustration by Picasso, 1955)

Extraordinary returns are always found in intimidating opportunities, if you are brave enough to make the move. For a Vertical SaaS Vendor (VSV), the consensus extensions are towards suppliers or employees. It is much rarer for a VSV to extend towards the consumer. 

I would argue that the consumer extension is the hero’s path: it is difficult and elusive, but unlocks massive amounts of TAM and blocks competitors. Tilting at windmills? Maybe. But I believe that every leading VSV should take a hard look at consumer for four reasons:

  1. The Ultimate Value Prop: Finding customers is the most important job for merchants.
  2. The Money: While most VSVs can charge ~1% of GMV in subscriptions, consumer marketplaces garner take rates of 15-30%, and even as high as 70% of GMV.
  3. Defense: For a well-positioned VSV, the only existential threat is a consumer marketplace moving vertically into software. This threat is existential because a marketplace can subsidize software costs with marketplace revenue, offering a price point a VSV just can’t match.
  4. Consumer Experience: Done right, having merchants and consumers (and other third parties) working together on the same software can remove a large amount of cost, risk, and hassle from the consumer experience.

The TL;DR is that a consumer extension is the most lucrative extension, while also warding off the only existential threat.

The good news is that you don’t need to extend all the way to a two-sided consumer marketplace for a consumer strategy to be successful. With a merchant-only offering, you can still help a merchant generate consumer demand.

If you do figure out how to extend all the way to a two sided-marketplace, you will have created one of the most valuable platforms and networks on the planet. Most importantly, you will have earned the admiration and gratitude of this essay’s author for proving his opinion correct. I would also like to invest in your business.

This topic is meaty enough that I’ve broken it up into four parts, aligned to our Vertical SaaS Knowledge Project (VSKP) framework:

First up, in Part 1, I will be covering front office apps. I focus on the applications that help a merchant solve its key jobs to be done: attract new customers and retain existing customers. I consider these applications not only in the context of their specific value propositions, but also for how they set up a VSV to create lock-in or value with the consumer.

In Part 2 (creating merchant-side demand), I describe how a VSV can create demand for a merchant without a consumer footprint. Part 3 (consumer apps) walks through the opportunity for the VSV to create direct engagement surfaces with the consumer. Part 4 (leap to marketplace) describes the when and how to make the big leap to consumer marketplaces.

Consumer Demand Series
Part 1: Merchant Front Office Apps - Setting the Foundation
Part 2: Creating Demand with Merchant Facing Apps
Part 3: Consumer Apps
Part 4: The Big Leap to Two-Sided Marketplace


Consumer Extensions
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Extend through the Value Chain

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The information presented in this post is for illustrative purposes only and is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by Tidemark or any of the securities of any company discussed. Companies discussed in these posts may include current Tidemark portfolio companies and/or prior investments made by Tidemark employees while at other investment firms. These companies identified above are not necessarily representative of all Tidemark investments, and no assumption should be made that the investments identified were or will be profitable. The information in this post is not presented with a view to providing investment advice with respect to any security, or making any claim as to the past, current or future performance thereof.

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