Table of Contents


customer acquisition cost refers to the marginal spending on marketing and sales per customer added




Aggregators the following three characteristics:

  1. Direct relationship with users
  2. Zero marginal costs for serving users
  3. Demand-driven multi-sided networks with decreasing acquisition costs

Some notes on aggregators:

  • Generally speaking, any business that creates its customer value in-house is not an aggregator because its customer acquisition costs will limit its growth potential.
  • Aggregation is fundamentally about owning the user relationship and being able to scale that relationship.

This being said, there are different levels of aggregators.

Level 1 Aggregators: Supply Acquisition

  • Acquire supply
  • Market power springs from their relationship with users, but is primarily manifested through superior buying power
  • Industries: Typically operate in industries where supply is highly differentiated, and are susceptible to competitors with deeper pockets or orthogonal business models
  • E.g. Netflix:
    • Owns user relationship and bears no marginal costs in terms of COGS, distribution costs, or transaction costs.

Level 2 Aggregators: Supply Transaction Costs

  • Do not own their supply
  • Incur transaction costs in bringing suppliers onto their platform
    • Limits growth rate, absent the incursion of significant supplier acquisition costs
  • Industries: typically operate in industries with significant regulatory concerns that apply to the quality and safety of suppliers
  • E.g. Uber:
    • Owns user relationship and bears no marginal costs in terms of COGS, distribution costs, or transaction costs
    • Does not own cars; are suppleid by drivers
      • Incurs transaction costs in terms of money & time: background checks, vehicle verification, etc.
      • Limits supply growth which ultimately limits demand growth

Level 3 Aggregators: Zero Supply Costs

  • Do not own their supply
  • Incur no supplier acquisition costs (either in terms of attracting suppliers or on-boarding them)
  • E.g. Google:
    • Suppliers (websites) are not only accessible by Google by default, but in fact actively make themselves more easily searchable and discoverable
  • E.g. social networks:
    • Initial supply is provided by users (who are both users and suppliers)
    • Over time, professional content creators ad their content to the network for free
  • Industries: massive numbers of users, usually advertising based


  • Operate multi-sided markets with at least three sides:
    • Users
    • Suppliers
    • Advertisers
  • Zero marginal costs on all of them
  • E.g. Google and Facebook
    • Attracts users and suppliers for free
    • Self-serve advertising models that generate revenue without corresponding variable costs


"Lessons from Spotify"

Venture outcomes

(Example) Silicon-based chips have:

  • Minimal marginal costs
    • Cost of revenue that impacts gross margins
  • Large fixed costs
    • "under the line" and an operation cost that only impacts overall profitability

Fundamental economic rationale for taking on venture capital is the same: spend a lot of money up front to develop and build a product, and take advantage of minimal marginal costs to make up in volume

Spotify's operational costs

  • Most businesses care about COGS
  • Saas companies frequently spend $< 5-10%$ of their marginal revenue per customer on delivering the underlying service
  • Allows Saas entrepeneurs to almost ignore every factor of their unit economics except customer acquisition cost
    • Quick growth: can ignore expenses which does not scale with number of customers

The posts has a plot displaying how the different fixed costs vary together with revenue, showing that the revenue is increasing faster than the fixed costs.

Spotify's marginal cost problem

  • Royalities Spotify pays the music industry

Plot in post displays revenue and cost in same plot.

Spotify's missing profit potential

  • Spotify's margins are completely at the mercy of the record labels
  • Company is not just unprofitable, its losses are rowing (in an absolute euro terms)
  • Leaves two options:
    • Could try to lower operations costs: hard though, as they are already low (supposedly, he makes comparison to Dropbox)
    • Could grow revenue without increasing operation costs:
      • How though? (No answer)
    • Cut out label companies altogether (do "a Netflix", I'd say)
      • Problem: music labels have been strengthened by Spotify due to reduction in piracy