The Hub and Spoke Model: The Future of the Marketplace



Marketplaces used to take a horizontal approach to transactions. It was all about quantity and servicing as many people as possible — regardless of demographic or industry. Craigslist is the epitome of a horizontal marketplace. The same can be said for Amazon. Both titans provide goods so diverse and expansive that they’re able to meet the needs of almost anyone.

But therein lies the problem. With such diversity in goods, it can become difficult to find what you’re looking for. And when you do, you’re not quite sure whether you’re getting those goods for a fair price — not to mention all those uncertainties involving quality and dependability. In other words, horizontal marketplaces lack the depth necessary for a quality purchasing experience.

It’s time to start thinking vertically. Some people are working this angle already, dissecting specific verticals in the Craigslist juggernaut and building their own marketplaces out of that niche. This is where concepts like the hub-and-spoke model come into play.

Connecting Verticals by Way of a Hub

The hub-and-spoke model takes on a more vertical approach to transactions. The “hub” is a platform that targets a specific sector or industry, while each “spoke” is a business that offers a full end-to-end service to one specific part of that sector. This model connects complementary verticals, with each service acting as a natural next step in the purchasing process for consumers. Each spoke has the opportunity to optimize to its own ability and create a whole that’s greater than the sum of its parts.

For example, maybe the hub is the travel industry. The spokes could then be all the things people need while traveling, such as transportation, food, and entertainment. In this case, optimizing and connecting verticals makes the entire experience more seamless for consumers from one end to the other.

You can also integrate complementary marketplaces by leveraging APIs and deep linking. Let’s say, for consistency’s sake, that your business is travel. You could use something like Button, which allows you to embed links to other commerce apps into your own app or site, to create a seamless and efficient customer experience.

Once users booked a hotel room, Button would allow them to access OpenTable, Uber, and Ticketmaster to make restaurant reservations, arrange for transportation, and secure tickets to a show without ever having to leave your app or site.

Besides seamlessness and efficiency, the division of labor can often drive better results. Each spoke becomes an expert in its field without losing out on the experience provided by the other spokes. Reserve, for instance, could continue focusing on the restaurant dining experience, but a partnership with Luxe would allow the company to optimize parking as well. It would never need to shift its focus to increase the value it offers consumers.

Leveraging Other Verticals

So how do you go about becoming a spoke (or a hub, for that matter) in a hub-and-spoke model?

  1. Seek out partnerships that fit with your company.

Don’t just partner with companies for the sake of partnerships. Find partnerships that actually make sense for your business. Start by looking at the natural flow of the customer experience, and ask yourself what the next logical step in the purchase would be. Or did something happen prior to the purchase that led the consumer to your door? Drill down on the sorts of goods or services often associated with your company, and go after those first.

  1. Look for those with advanced technologies.

Establish relationships with companies that are open with their APIs or SDKs to make it easier to integrate technically. You want to provide a seamless and efficient experience to customers. Without APIs or SDKs, it’s often not possible.

  1. Tackle highly outdated and inefficient verticals.

Verticals lagging behind the rest will likely provide the greatest opportunities, but be aware that you may have to actually provide them with the software to make your vision possible. For instance, OpenTable couldn’t offer a seamless customer reservation experience until all the restaurants were equipped with a compatible reservation software, so it designed one.

Horizontal marketplaces often have a tight hold on the marketplace, making it difficult for a newbie to make much of a disruption. Going vertical improves quality — by intertwining with businesses on the same wavelength, you create not only a deeper experience on your end, but also a richer one through your partners. You can now provide what those horizontal marketplaces can’t, increasing your chances of disrupting the space and taking a leadership position in your niche.



This article was co-authored by Arteen Arabshahi, a Senior Associate at Karlin Ventures, an L.A.-based venture capital firm that focuses on early stage enterprise software and marketplaces.

Image credit: CC by Justin Jensen

About the author: TX Zhuo

TX Zhuo is a managing partner of Karlin Ventures, an LA-based venture capital firm that  focuses on early-stage enterprise software and marketplaces. Follow the company on Twitter.

You are seconds away from signing up for the hottest list in New York Tech!

Join the millions and keep up with the stories shaping entrepreneurship. Sign up today.